Economy_IIP Update: IIP Turns Positive in Jan’14; Performance to inch up Further in Feb’14

On Mar 13, 2014

Analyst: Kruti Shah, CFA, +91-22-6184 4320; kruti.shah@karvy.com

§ Jan’14 IIP witnessed a positive growth of 0.1% YoY (our expectation of (0.6)%) after posting three months of consecutive decline. Industrial production contracted by 0.9% in Q3FY14, compared to 1.9% growth in Q2FY14 & (1.0)% in Q1FY14. 12MMA IIP further slumped to 0.4% from earlier bottom of 0.5%.

§ Capital Goods declined by 4.2% YoY, third month in a row. Majority of high negative growth items are from Capital Goods sector. Slowing down of investment activity by the Government coupled with growing pessimism and uncertainty concerning election results is likely to further stall the investment activity in Mar’14 & Jun’14 quarters.

§ Apparel has grown sharply in last two years. Wearing Apparels Index has expanded by 182.2% from Apr’12 to Jan’14 with 50.1% YTD expansion in this fiscal. Favourable currency and revival in international demand aided in pushing the growth in this sector. Wearing Apparels sector witnessed the sharpest expansion in last two years, compared to other manufacturing sectors.

§ Headline figure for Dec’13 & Oct’13 have been upwardly revised by ~40bps to (0.2)% YoY & (1.2)%, respectively. Revision in Dec’13 IIP figures is mainly due to 1.3% upward revision in Food products and 1.5% upward revision in Textiles sector, while 3.2% sharp revision in Basic Metals led to upward revision in Oct’13 IIP figures. This revision in Food products & Basic Metals was clearly stated in our previous month’s report.

§ IIP performance is expected to further improve in Feb’14. This improvement is indicated by 4.4% YoY in Auto production, 10.5% growth in Electricity generation and robust pace of expansion indicated by PMI. Increasing coal availability and higher reservoir levels improved the electricity generation in Feb’14. IIP performance in Feb’14 is likely to be positive led by positive growth in Basic Goods & Consumer Non-Durables sectors.

§ According to HSBC PMI, manufacturing activity further improved in Feb’14 to 52.5 from 51.4 in Jan’14. New orders especially from abroad picked up at the most pronounced rate, indicating exports growth is likely to pick up from the current subdued growth. Overall expansion in production volumes was centered on Consumer goods. Raw material shortages at vendors’ end resulted in longer supplier delivery times. Mainly due to capacity constraints, unfinished work levels augmented.