Strong IIP numbers, hopes increase for rate cut: Emkay

Emkay Global Financial Services has come out with its report on Industrial Production (IIP) for October 2012. The research firm believes rising cost structure and weakening demand will keep the inflation growth friction alive. Strong IIP data along with renewed hardening of inflation numbers leaves little headroom for RBI to reduce policy rates.

IIP sees the steepest rebound this fiscal-

IIP growth for Oct’12 at 8.2%YoY came in as a significant upside surprise against our expectation of 4.1% and consensus estimate of around 5%. The growth rate is the highest recorded this fiscal. The sharp upside is in contrast to the downward revisions for Jul’12 and Sep’12 both lower at -0.1% and -0.7% respectively from 0.1% and -0.4% provided earlier. The Oct’12 IIP witnessed a sharp 4.9%MoM rise on seasonally adjusted basis, which implies that Oct’12 IIP print got boosted by both a weak base year growth and sequential inventory build up. Cumulative YTD growth for Apr-Oct now stands at 1.2% vs 0.1% seen till H1FY13. 

IIP numbers indicate significant pre-festival inventory build up-

• The greater than expected bounce in the IIP growth rate is indicative of stronger than expected inventory stock up ahead of the festive demand for Diwali in Nov’12. The trend is reflected in consumer categories that witnessed a sharp growth, viz. textiles (11.6%), apparels (12.5%), plastic products (10.8) and sugar (95.5%). This also reflected in robust growth in consumer durables including telephone instruments & accessories (20%). Strong growth for passenger cars growing at 37.4%, tracks base effect attributable to Maruti’s production data.
• The core data exhibited strong performance in Coal (10.9%), Refinery products (20.3%) and Cement (6.8%). The growth in coal and cement has supported a good performance in the Basic goods whereas the refinery products aided strong growth in Intermediate goods.
• The Capital goods at 7.5% has seen a positive growth for the first time this fiscal. The rise was in line with the 27.4% growth seen in Electrical machinery and apparatus (22% weight in capital goods). This component remains highly volatile with Oct’11 growth being (-) 59%. Machinery and equipment grew by just 0.1%.

Outlook: Downside risks remain; December policy to abstain from rate easing-

• The Oct’12 IIP data brings in a temporary spike up built on expectation of very robust festive demand. However, such buoyancy remains questionable tracking subdued demand during Diwali suggested by anecdotal data.
• Muted festive demand will likely result in inventory pile up. Forward looking indicators for Nov’12 point at such a scenario. Truck sales (5-49 ton range) contracted 33.1%. Overall commercial vehicle sales contracted 7.3%. Huge truck inventory, lower realization/resale rates, falling truck rentals all hint at lower truck production demand.
• According to data released by SIAM, passenger car sales contracted by 8.25% in Nov. In addition, two wheeler sales grew at a meager 1.2% hinting at a demand slowdown. Vehicle sales act as a strong lead indicator for future production. Industry sense on Cement production in Nov too remains subdued.
• Apart from lead indicators, base effect also remains unfavorable (with IIP jumping to +6%YoY in Nov’11 from (-) 5% in Oct’11). Overall, there is high likelihood of FY13E IIP growth to remain very modest.

Our conviction of no rate cut has strengthened-

Overall, we believe rising cost structure and weakening demand will keep the inflation growth friction alive. The strong IIP data along with renewed hardening of inflation numbers leaves little headroom for RBI to reduce policy rates. This strengthens our expectation of no rate cuts on Dec 18, next week. Higher CPI inflation for Nov’12 at 9.9% provides upside risk to the expected WPI inflation of 7.5% for the month. The evolving growth-inflation dynamics constrain scope for monetary easing. 

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