FORTUNE GROUP - Fortune Financial Services

FORTUNE GROUP 

Industrial Production 

‘Reading The Tea Leaves / Pig Entrails’ 

Yogendra Singh, CAIA, ACSI 

yogendra.singh@fortune.co.in 

+91 22 4300 3824 March 11, 2011 

Fortune Equity Brokers (India) Limited 

Lawrence & Mayo Building, 3rd Floor, D N Road, Fort, Mumbai ‐ 400 001 

www.fortune.co.in

Agenda 

• Key Points 

INDIA 

ECON NOMICS 

• Detailed Analysis 

• Appendix 

• IIP Ex Capital Goods 

• 12 MMA Performance 


FORTUNE GROUP INDIA EQUITY RESEARCH March 11, 2011 

2

Industrial Growth Momentum Is Expected 

To Display Accelerated Cyclical Moderation 

INDIA 

ECON NOMICS 

• Making sense of the IIP numbers is becoming akin to reading the tea leaves / pig entrails to divine the future on account of the 

unprecedented volatility as well as significant revisions of the monthly numbers. The rolling 12-month volatility of the IIP has 

increased substantially since the start of the calendar year 2009; the volatility for the month of January 2011 came in at 5.3% - more 

than twice the long-term average of 2.3%; It is our opinion that this trends highlights the severe methodological / data collection 

issues surrounding the construction of these indices and raise significant questions regarding the veracity of the data 

• As the following points exhibit, the IIP numbers released today provide a lot of conflicting trends (quite like the behavior of the past 

data as well): 

• IIP for the month of January 2011 grew at the rate of 3.7% - modestly higher than our estimates of 3.0% and consensus 

estimates of 2.6% 

• The growth rate for the months of October 2010 and December 2010 was revised upwards from 10.6% to 12.1% and from 1.6% 

to 2.5% respectively 

• Bulk of the upward momentum in IIP is attributable to the 10.5% growth rate exhibited by the Electricity Sector; this sector 

contributed around 70 basis points to the aggregate growth rate of 370 basis points i.e. roughly 20% of the growth rate of the 

aggregate IIP came in from Electricity segment 

• Capital Goods continued their trend of sub-par performance with a YoY decline of 18.6% in January 2011 – significantly higher 

than the decline of 9.3% exhibited in December 2010 

• Roughly 87% of the incremental growth in IIP can be attributed to three segments – Basic Metals, Basic Chemicals and Transport 

Equipments – that have a combined weight of around 25% in the aggregate basket; The picture on the Demand-Side was much 

better with growth being distributed across almost all the segments except Capital Goods 

• However, there has been a significant acceleration in Core Industrial activity from the month of December 2010 onwards as the 

YoY growth rate of IIP – Ex Capital Goods has moved up from 2.0% in November 2010 (the lowest growth rate in the past 23 

quarters) to 5.3% in December 2010 and further to 9.1% in January 2011 

• There was some good news on the consumer front as well as growth rate of the aggregate consumer sector accelerated from 

3.7% in the previous month to 11.3% in January 2011 due to a growth of 6.9% exhibited by the Consumer Non-Durables – 

significant improvement over the 1.5% decline exhibited in December 2010 

• Even though the numbers present a conflicting picture, we would like to stick our neck out and forecast that the industrial production 

faces significant headwinds and is likely to display accelerated moderation in the near future. We reckon that the growth momentum 

lacks resilience due to the continued moderation in seasonally-adjusted terms, concentration of growth impulses in the supply and 

demand side and the accelerated slowdown exhibited by the Consumer & Capital Goods segments. 


3

Agenda 


INDIA 

ECON NOMICS 


• Appendix 





4

IIP Data Uncertainty Has Risen Manifold As 

Volatility Has Spiked Up In Recent Past 

INDIA 

ECON NOMICS 

7.0% 

6.0% 

5.0% 

4.0% 

3.0% 

2.0% 

1.0% 

0.0% 

Ma ar-96 

Oc ct-96 

Ma ay-97 

De ec-97 

Ju ul-98 

Fe eb-99 

Se ep-99 

Ap pr-00 

No ov-00 

Ju un-01 

Ja an-02 

Au ug-02 

Ma ar-03 

Rolling 12-Month Standard Deviation Long-Term Average 

Oc ct-03 

Ma ay-04 

Source: Ministry of Statistics & Program Implementation; Fortune Research 

De ec-04 

Ju ul-05 

Fe eb-06 

Se ep-06 

Ap pr-07 

No ov-07 

Ju un-08 

Ja an-09 

Au ug-09 

Ma ar-10 

Oc ct-10 

• Making sense of the IIP numbers is becoming akin toreading the tealeaves / pig entrails todivine i the 

future on account of the significant volatility as well as significant revisions of the monthly numbers. 

• As the above chart shows eloquently, the rolling 12-month volatility of the IIP has increased substantially 

since the start of the calendar year 2009; the volatility for the month of January 2011 came in at 5.3% - 

more oethan twice the long-term average age of 2.3% 

• It is our opinion that this trends highlights the severe methodological / data collection issues surrounding 

the construction of these indices and raise significant questions regarding the veracity of the data 


5

IIP Growth Holds Up In January 2010 

16.8% 

IIP - YoY Growth 

15.1% 

INDIA 

ECON NOMICS 

Jan-10 

15.1% 15.5% 16.6% 12.2% 

Feb-10 

Mar-10 

Apr-10 

May-1 0 

12.1% 

7.2% 7.3% 

4.9% 

3.6% 3.7% 

25% 2.5% 

Jul-10 

Jun-10 

Source: Ministry of Statistics & Program Implementation 

• The first estimates of the Index of Industrial Production (IIP) for the month of January 2011 came in 

at 3.7% - modestly higher than our estimates of 3.0% and consensus estimates of 2.6% 

Aug-1 0 

Sep-1 0 

Oct-10 

Nov-1 0 

Dec-10 

Jan-11 1 

• As the above exhibit shows, this is a market deceleration from the growth rate of 16.8% in January 

2010 but modest improvement from the 2.5% growth observed in December 2010 

• Concomitantly, the estimates for the months of October 2010 and December 2010 were revised 

upwards. The second revision for the month of October 2010 entailed the increase in growth from 

the estimated level of 10.6% to 12.1%. Similarly, the first revision for December 2010 witnessed the 

increase in growth from the initial level of 1.6% to 2.5% 


6

... Due To Deceleration In Activity On The 

Supplyside (Except Electricity) ... 

INDIA 

ECON NOMICS 

7% 

13% 

8% 

7% 7% 6% 

5% 5% 

3% 

2% 

Mining Manufacturing Electricity 

Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 

Source: Ministry of Statistics & Program Implementation 

• Bulk of the upward momentum in IIP is attributable to the 10.5% growth rate exhibited by the 

Electricity Sector; this sector contributed around 70 basis points to the aggregate growth rate of 370 

basis points i.e. roughly 20% of the growth rate of the aggregate IIP came in from Electricity 

segment 

2% 

3% 

1% 

2% 

9% 

5% 

6% 

10% 

• As the above exhibit shows, activity continued to exhibit broad-based deceleration on the Supply- 

Side with both manufacturing and Mining exhibiting accelerated slowdown 

• Manufacturing activity continued to remain at low levels with a growth of just 3.3% in January 2011 

– modest improvement from the 2.0% growth rate observed in December 2010 

• In contrast, the Mining segment registered a sharp decline in growth rate to 1.6% - the lowest 

growth in the past 23 months 


7

... With Growth Being Concentrated In A Few 

Industrial Segments On Supply Side ... 

Contribution To IIP Growth 

INDIA 

ECON NOMICS 

Electricity, 20% 

Mining, 3% 

Manufacturing, 77% 

Source: Ministry i of Statistics i & Program Implementation; Fortune Research 

Transport 

Equipment, 41% 

Basic Metals, 26% 

Basic 

Chemicals, 20% 

• Roughly 87% of the incremental growth in IIP can be attributed to three segments – Basic 

Metals, Basic Chemicals and Transport Equipments – that have a combined weight of around 

25% in the aggregate g basket 

• In terms of distribution of growth impulses, this is marginally better than the performance in 

the previous month when roughly 117% of the incremental growth in IIP came from three 

segments that had a combined weight of around 21% in the aggregate basket 

• Transport Equipment – having a weight of 3.98% in the overall basket – grew at the rate of 

23.9% and contributed 40.6% to the aggregate incremental growth in IIP 


8

... But Distributed On DemandSide (Except 

Capital Goods) ... 

Contribution To IIP Growth 

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ECON NOMICS 

Capital Goods, - 

98% 

Intermediate 

Goods, 52% 

Consumer Goods, 

92% 

Basic Goods, 55% 


Consumer 

Durables, 51% 

Consumer Non- 

Durables, 41% 

• The picture on the Demand-Side was much betterwithgrowthbeingdistributed across 

almost all the segments except Capital Goods 

• As the above exhibit shows, Intermediate Goods, Basic Goods, Consumer Durables 

and Non-Durables had a contribution of around 50% each 

• However, the 18.6% decline by Capital Goods meant that it had a negative 

contribution of around 98% to the aggregate IIP growth 


9

... And Robust Performance of Core 

Industrial Activity (IIP Ex Capital Goods) ... 

INDIA 

ECON NOMICS 

12% 

10% 

8% 

6% 

4% 

2% 

0% 

Jan/10 

Feb/10 

Mar/10 

Apr/10 

IIP - Ex Capital Goods 

May/10 

Jun/10 

Jul/10 


• Since the Capital Goods segment has a low weightage (9.26%) but exhibits high volatility (around 

11% over the past 15 years as compared to around 4% for IIP), we have constructed the IIP Ex 

Capital Goods Index to gauge the sustainable trend of industrial production in the country 

Aug/10 

Sep/10 

Oct/10 

Nov/10 

Dec/10 

Jan/11 

• As the above exhibit clearly reveals, there has been a significant acceleration in Core Industrial 

activity from the month of December 2010 onwards as the YoY growth rate of IIP – Ex Capital Goods 

has moved up from 2.0% in November 2010 (the lowest growth rate in the past 23 quarters) to 

5.3% in December 2010 and further to 9.1% in January 2011 

• We expect that the growth rate would exhibit moderation in the near term on account of the various 

cyclical and structural factors operating in the economy 


10

… But Accelerated Moderation In Seasonally 

Adjusted Terms 

INDIA 

ECON NOMICS 

Month-On-Month Growth Rate • As the adjacent exhibit reveals, the 

6% 

process of cyclical moderation of the IIP in 

seasonally-adjusted terms started from Q4 

of FY10 

4% 

• Since then, the IIP-12MMA MoM growth 

2% 

rate has declined from around 1.5% in 

December 2009 to 0.3% in December 

2010 

0% 

• Similarly, the MoM growth rate of IIP- 

3MMA has declined from 5.0% in January 

-2% 

2010 to -1.5% in October 2010 before 

rebounding to 3.0% in December 2010 

-4% 

and then falling to 2.4% in January 2011 

Jan-1 10 

Feb-1 10 

Mar-1 10 

Apr-1 10 

May-1 10 

Jun-1 10 

Jul-1 10 

Aug-1 10 

Sep-1 10 

Oct-1 10 

Nov-1 10 

Dec-1 10 

Jan-1 11 

-6% 

IIP - 12MMA 

IIP - 3MMA 

Source: Ministry of Statistics & Program Implementation; 

Fortune Research 

• Even though the two series reflect some 

volatility, we reckon that the underlying 

trend remains that of cyclical moderation 

and we would expect the process to 

accelerate from February 2011 onwards 

FORTUNE GROUP INDIA EQUITY RESEARCH 

March 11, 2011 

11

Agenda 


INDIA 

ECON NOMICS 


• Appendix 





12

Jan-11 

Oct-10 

Jul-10 

13 

IIP Ex Capital Goods –YoY Growth 

16% 

14% 

12% 

10% 

8% 

6% 

4% 

2% 

Apr-10 

Jan-10 

Oct-09 

Jul-09 

Apr-09 

Jan-09 

Oct-08 

Jul-08 

Apr-08 

Jan-08 

Oct-07 

Jul-07 

Apr-07 

Jan-07 

0% 

-2% 



INDIA 

ECONOMICS

Jan-11 

Oct-10 

Jul-10 

14 

IIP (12 MMA) –YoY Growth 

14% 

S12% 

10% 

8% 

6% 

4% 

2% 

INDIA 

ECONOMICS 

0% 

Apr-10 

Jan-10 

Oct-09 

Jul-09 

Apr-09 

Jan-09 

Oct-08 

Jul-08 

Apr-08 

Jan-08 

Oct-07 

Jul-07 

Apr-07 

Jan-07 


FORTUNE GROUP INDIA EQUITY RESEARCH March 11, 2011

Jan-11 

Oct-10 

Jul-10 

15 

IIP (12 MMA) –MoM Growth 

1.6% 

1.4% 

1.2% 

1.0% 

0.8% 

0.6% 

0.4% 

0.2% 

0.0% 

Apr-10 

Jan-10 

Oct-09 

Jul-09 

Apr-09 

Jan-09 

Oct-08 

Jul-08 

Apr-08 

Jan-08 

Oct-07 

Jul-07 

Apr-07 

Jan-07 



INDIA 

ECONOMICS

Jan-11 

Oct-10 

Jul-10 

16 

IIP (3 MMA) –YoY Growth 

18% 

16% 

14% 

12% 

10% 

8% 

6% 

4% 

2% 

0% 

Apr-10 

Jan-10 

Oct-09 

Jul-09 

Apr-09 

Jan-09 

Oct-08 

Jul-08 

Apr-08 

Jan-08 

Oct-07 

Jul-07 

Apr-07 

Jan-07 



INDIA 

ECONOMICS

Jan-11 

Oct-10 

Jul-10 

17 

IIP (3 MMA) –MoM Growth 

6% 

4% 

2% 

Apr-10 

Jan-10 

Oct-09 

Jul-09 

Apr-09 

Jan-09 

Oct-08 

Jul-08 

Apr-08 

Jan-08 

Oct-07 

Jul-07 

Apr-07 

Jan-07 

0% 

-2% 

-4% 

-6% 



INDIA 

ECONOMICS

Disclaimer 

INDIA 

ECON NOMICS 

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