Wednesday, May 13, 2009

[Investors Please Listen] IIP - touching the bottom

IIP records the sharpest dip

The Index of Industrial Production (IIP) during March 2009 declined to -2.3% Y-o-Y, below expectations (Edelweiss: -1.0%; consensus: -0.7%). There is no instance of any comparable contraction in IIP since the introduction of the new series in 1994. The current figure puts the overall FY09 IIP number at 2.4% vis-à-vis 8.5% in FY08. The FY09 number is largely in line with our expectations.

 

The February IIP number has been revised up to -0.7% from -1.2% reported a month back.

 

Continued contraction in intermediate goods, consumer non-durables

As per use-based classification, except for basic goods, all major components contracted. Intermediate goods continued to remain negative (Y-o-Y) for the eighth consecutive month, bringing the average Y-o-Y growth for FY09 to -2.8% from 9.0% in FY09. This component is one of the major lead indicators to the overall IIP growth. Typically, it leads the IIP growth by 2-4 months. Consumer goods also declined to 0.8% Y-o-Y, primarily on the back of falling non-durables, which declined 3.6% Y-o-Y in March. Capital goods, which had been extremely volatile in the recent past, recorded a sharp decline, largely reflecting a very high base.

 

As per classification by economic activity, electricity grew by 6.3% Y-o-Y against 0.7% in February. March numbers reflect the highest growth for electricity in FY09. There was a sharp decline in manufacturing growth numbers to -3.3% Y-o-Y, largely owing to fall in production of food products (-35.8% Y-o-Y). Mining activities on the other hand showed some improvement.

 

IIP close to bottom

Concerns over the industrial sector have not faded for the near term. Global concerns of slowdown in demand have led to a decline in exports for the sixth consecutive month. Outlook for exports remains bleak on the back of weak global demand, and high cost of credit. Textiles, leather, chemicals, and metals are likely to stay under pressure. Media reports suggest that exports were down ~33% Y-o-Y in April.

 

Intermediate goods, a lead indicator for IIP and its production, is on a declining trajectory for the eighth consecutive month. Moreover, ~7% of the total IIP is actually measured in value and not in volume. With prices falling for most industrial goods, this fact may contribute further to the fall in IIP in the coming months.

 

In the medium term, however, improvement in credit scenario since Q4FY09 and stimulus packages announced by the government and RBI may support industry growth. We believe, with the current set of numbers, IIP growth is close to its trough, if it has not hit it already. We expect the IIP numbers to start recovering in Q2FY10. The decline in intermediate goods production should come under check by Q1FY10.


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