FORTUNE GROUP - Fortune Financial Services

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.
FORTUNE GROUP ­ INDIA EQUITY RESEARCH March 11, 2011
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