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India Institutional Equity Research | Economy IIP data alert Strong rebound in capital goods; outlook remains cautious

Event The factory output growth for the month June 2011 stood at 8.7%, which was way above the market expectation of 5.5%. However, May industrial output was revised on an upward trend from 5.6% to 5.9%. The growth in factory output was led by a robust growth in capital goods sector that increased from 3.7% in June 10 to 37.7% in June 11. Manufacturing sector having 75.5% weight in the index, grew by 10% against 6.1% in May 2011 and 7.9% a year ago. Improvement in manufacturing activities was strongly contributed by smart growth in capital goods segment. Mining continuous to decelerate; increasing marginally by 0.6%. Whereas electricity production accelerated by 7.9% against 3.6% y-o-y, but declined m-o-m. Buoyancy in consumption driven segments continued as consumer goods segment registered 5.4% growth against 4.3% in April and 7.4% a year ago. Basic goods grew by 7.5% while intermediate goods segment was at 1.8%. Within manufacturing space, industries such as food products & beverage, basic metals, auto, fabricated metal products, coke, refined petroleum products and furniture & manufacturing saw positive momentum. Textile industry still continuous to be sluggish; de-growing by 4.3% y-o-y. Out of 22 sub sectors in manufacturing space, 15 registered positive growth on y-o-y basis and 11 on m-o-m basis. Analysis Capital goods showed a strong growth this month increasing by 37.7% against 3.7% during the same period last month led by strong execution. However, we believe capital goods sectors growth is likely to stay subdued due to adverse macro environment and slower policy reforms in infrastructure space. Q1FY12 banks results indicate there is a moderation in the credit growth which reflects weak investment cycle and slowdown in consumption sector. Mining sector has been declining over the months due to regulatory obstructions. Electricity generation however increased 7.9% y-o-y due to the continuous investment in the sector. Consumption driven consumer goods increased marginally by 1% y-o-y due to the higher base effect, but however it improved m-o-m basis. Consumer non-durable stayed flat on m-o-m basis. On excluding capital goods, industrial output grew 4% y-o-y against 7.1% in May 2011; showing nervousness in investment due to the rate hikes and moderation in consumer demand. The index of eight core infrastructure sector, which has 37.9% weight in IIP, had grown by 5.2% in June 2011 versus 4.4% a year ago driven by sharp growth in steel production, electricity, crude oil and refinery. Natural gas and cement sectors continuous to remain laggards to the growth declining 11.7% and 0.8% respectively in June 2011. Going forward, improvement in crude production, refinery throughput and healthy growth momentum in electricity generation will be the key growth drivers for the mining sector, in our view. Rising interest rates, governance issues, policy related uncertainties and growing project execution risks are key reasons for the slowdown in investment activity. The impact of rising interest rates and fuel prices is tangible in consumption driven consumer goods. We expect industrial capex to pick up from H2FY12, as we believe inflation and monetary policy to peak out by then. Implications The industrial production is expected to slow down due to the upward trend in the interest rate, rising input cost, execution delays and uncertain political environment. However, government initiatives to take reform process forward would be a big booster for investment sentiment and equity markets, in our view. Post the US downgrade, correction in commodities prices especially crude oil price is positive for inflation management perspective at policy level. Sustained moderation in inflation will make a case for pause on rate hike cycle in our view. However, considering inflation and growth dynamics, we expect RBI to maintain their hawkish monetary policy stance in near term. August 12, 2011
Quick View CMP Sensex Nifty Bankex Capital goods
Source: Bloomberg

1m -8.5% -8.2% -7.7% -10.2%

3m -8.2% -7.5% -6.4% -2.8%

1Yr -6.8% -6.3% -3.3% -17%

16840 5073 11637 12166

(In %age) IIP Mining Mfg Elec.

Jun11 8.7 0.6 10.0 7.9 Jun11

May11 5.9 1.3 6.1 10.3 May11 7.3 6.1 6.6 5.2 7.9

Apr11 5.8 1.3 6.3 6.5 Apr11 6.9 7.3 4.3 3.7 4.9

Jun10 7.5 7.0 7.9 3.6 Jun10 3.8 3.7 13.3 21.3 7.5

Use Based production Trends

Basic Goods Capital goods Consumer goods Durable Non-durable


Source: CSO

7.5 37.7 1.6 1.0 2.1

Manish Ostwal manish.ostwal@krchoksey.com 91-22-6696 5429 Palak Shah Palak.shah@krchoksey.com Deepak Tiwari deepak.tiwari@krchoksey.com

www.krchoksey.com 91-22-6696 5203 91-22-6691 9569

KRC Research is also available on Bloomberg KRCS<GO>, ThomsonReuters, Factset and Capital IQ

IIP Update

Contribution Analysis
Exhibit 1: Industrial Production Sectoral

Jun11IIP
0.7% 8.0%

May11IIP
2.6% 15.9%

Contribution from manufacturing sector to factory output increased from 81% in May to 91.5% in June.
81.2%

91.5%

Mining

Elec.

Mfg

Mining

Elec.

Mfg

Exhibit 2: Industrial Production User based sectoral contribution

Jun11IIP
1% 2% 16%

May11IIP
15% 6% 1%

81%

78%

BasicGoods IntermediateGoods

CapitalGoods Consumer Goods

BasicGoods IntermediateGoods

CapitalGoods Consumer Goods

Exhibit 3 : Industrial Production and Ex Capital Goods industrial production


16.0% 14.0% 12.0% 10.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 10.0%

Improvement in capital goods indicates strong project execution. Excluding capital goods, factory output grew 4%.

8.0% 6.0% 4.0% 2.0% 0.0%

Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11
IIP IIPExCG CG

2.0% 4.0%

20.0% 30.0%

KRC Equity Research

IIP Update

Sector based output growth Broad Trends


Exhibit 4: IIP growth and 3m moving average trend
16.0 14.0

Exhibit 5: Manufacturing growth y-o-y trend


18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0

May IIP growth was revised upward to 5.9% from 5.6%.

12.0 10.0 8.0 6.0 4.0 2.0 0.0

Jun-10

Aug-10

Sep-10

Feb-11

Nov-10

Dec-10

Mar-11

May-10

May-11

Jun-11

Jul-10

Apr-11

Jan-11

Oct-10

Exhibit 6: Mining Industry Y-o-Y trend


12.0 10.0 8.0 6.0 4.0 2.0 0.0

Exhibit 7: Electricity Growth Rate (Y-o-Y)

12.0 10.0 8.0 6.0 4.0 2.0 0.0

Jun-10

Aug-10

Sep-10

Feb-11

Nov-10

Dec-10

Mar-11

May-10

User based output growth Broad Trends


Exhibit 8: Basic Goods Growth Y-o-Y Trend
14.0 12.0

May-11

Jun-11

Jan-11

Apr-11

Oct-10

Exhibit 9: Intermediate Goods Growth Y-o-Y Trend


20.0 15.0

10.0 8.0 6.0

10.0 5.0

4.0 2.0 0.0

0.0

Aug10

Dec10

Oct10

Nov10

May10

Sep10

Feb11

Apr11
Apr11

Jan11

May11
May11

Jun10

Jul10

Mar11

Aug-10

Jun-10

Jan-11

Apr-11

May-10

2.0

May-11

Sep-10

Feb-11

Nov-10

Dec-10

Mar-11

Jun-11

Jul-10

Oct-10

5.0 10.0

Exhibit 10: Capital Goods Growth Y-o-Y Trend


70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0

Exhibit 11: Consumer Goods Growth Y-o-Y Trend


35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0

Sep10

Feb11

Apr11

Jun10

Mar11

Aug10

Dec10

Oct10

Jun11

Jul10

May10

May11

Aug10

May10

Nov10

Dec10

Nov10

Jan11

Sep10

Oct10

Jan11

Feb11

Jun10

Jul10

Mar11

10.0 20.0 30.0

5.0 10.0 15.0

KRC Equity Research

Jun11

Jun11

May10 Jun10 Jul10 Aug10 Sep10 Oct10 Nov10 Dec10 Jan11 Feb11 Mar11 Apr11 May11 Jun11

Jul-10

May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11

IIP Update

Exhibit 12 : Break up of manufacturing sub-sector growth

Manufacturing Break Up Manufacturing Food products and beverages Tobacco products Textiles Wearing apparel; dressing and dyeing of fur Luggage, handbags, saddlery, harness & foot Wood and products of wood & cork except fu Paper and Paper Products Publishing, printing & reproduction of record Coke, refined petroleum products & nuclear f Chemicals and chemical products Rubber and plastics products Other non-metallic mineral products Basic metals Fabricated metal products, except machinery Machinery and equipment n.e.c. Office, accounting & computing machinery Electrical machinery & apparatus n.e.c. Radio, TV and communication equipment & ap Medical, precision & optical instruments, wat Motor vehicles, trailers & semi-trailers Other transport equipment Furniture; manufacturing n.e.c.
Source: CSO, KRChoksey Research

Weight 755 73 16 62 28 6 11 10 11 67 101 20 43 113 31 38 3 20 10 6 41 18 30

Y-o-Y June 2011 10.0% 6.7% 9.6% -4.3% -5.5% 15.7% -0.3% 6.2% 11.1% 4.2% -1.0% -0.3% 3.2% 17.7% 12.0% 2.2% 19.1% 88.9% -10.1% -10.3% 14.5% 18.6% 10.3%

M-o-M June 2011 5.0% 3.9% -2.4% 1.1% -3.5% 0.8% -5.1% -1.3% -3.1% 1.1% -1.6% 1.8% -1.8% 1.2% 7.9% -2.6% 30.3% 73.2% 12.1% -21.7% -3.7% 2.8% -3.1%

KRC Equity Research

IIP Update

Rajiv Choksey Anuj Choksey Naveen Fernandes Kunal Dalal

Director Head-Institutional Equities Head-Institutional Broking HeadInstitutional Research

rajiv.choksey@krchoksey.com anuj.choksey@krchoksey.com naveen.fernandes@krchoksey.com kunal.dalal@krchoksey.com

+91-22-6696 5555 +91-22-6696 5500 +91-22-6696 5554 +91-22-6696 5574

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