India Economy - Industrial production - 1H has been good: AnandRathi Financial Services

Mr. Sujan Hajra(Chief Economist - AnandRathi Financial Services) on India Economy - Industrial production - 1H has been good

In Sep'15 IIP and manufacturing growth slowed down, respectively, 3.6% and 2.6%. The slowdown was sharper than we had expected. Furniture, electrical machinery and automobiles were the major contributors to the growth. The contraction in consumer non-durables is now the biggest worry. Global excess capacity and poor credit-growth figures would lead to slow progress in the recovery. If the CPI meets the RBI inflation target, another 50- to 75-bp rate cut in 2016 is likely.

Performance: In Sep'15, IIP growth weakened to 3.6% vs. 6.3% in Aug '15, due to a slowdown in manufacturing growth to 2.6% from 6.6% the month earlier. Mining slowed to 3%, while electricity jumped to 11.4% (vs. 5.6%). At 8.4%, the growth in durables was resilient. Basic and intermediate goods also held to healthy 4% and 2.1% growth respectively. The only sector to contract this month was non-durables (-4.6%). Ytd IIP and manufacturing growth were, respectively, 3.9% and 4.1%.

Assessment: The IIP figure slipped below the consensus and our expectation. While the index did improve in Sep'15, the rise was less than anticipated. We also reckoned that the growth momentum would pick up, w hich did not happen. The good figures from furniture, electrical machinery and automobiles were major contributors to growth this month. On the negative side, we see the seasonally-adjusted data, showing that manufacturing is slightly decelerating, which could be a worry. On the other hand, the seasonally-adjusted data signal recovery in electricity and mining.

Outlook: The trend of betterment continues: in the past eleven months industrial production growth has averaged more than 4%. Despite the inherent volatility, capital-goods contribution has been the highest. From being in a protracted contraction, durables is now one of the best-performing sectors. The low inflation figures have been unable to prop up consumer non-durables. The poor monsoon is likely to keep rural demand muted. Sentiment for the next quarter is dull. On the high base, electricity growth is likely to slide.

Recommendations: On the favourable base, we are likely to see good IIP figures in the next few months. This is likely to nullify the impact of poor agricultural and banking-services growth in the Q2 FY16 GDP. As anticipated, the pick-up has been plodding, but improvement is evident. Global excess capacity will yet delay a full-fledged recovery and manufacturing capex revival is still a few quarters away. If the CPI behaves and falls in line with the RBI target, another 50- to 75-bp rate cut in 2016 is likely.

Source : Equity Bulls

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