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Anand Rathi Research India Equities
India I Equities
Sujan Hajra
+9122 6626 6720
Moumita Paul Samanta
+9122 6626 6743


10 October 2014
Industrial Production
Out of the blue
IIP growth came in a low 0.4%, belying our expectations.
Manufacturing contracted -1.4%, led by large contractions in
office machinery, consumer durables (radio, tv etc) and apparel.
On the positive side, electricity and mining growth are buoyant.
The low IIP figures point to a slowdown in 2QFY15 GDP growth;
achieving annual GDP growth of over 5.5% now looks
challenging. If inflation slows in line with our anticipation, we see
a 25-bps rate cut in Dec14.
Performance: IIP grew 0.4% for Aug14, same as Jul14.
Manufacturing sector (-1.4%) dragged down IIP growth, despite the
buoyant growth in mining (2.6%) and electricity (12.9%). There were
also large contractions in capital goods (-11.3%) and consumer goods (-
6.9%). Consumer durables (-15%) continue to be in a protracted
stagnation. With todays data, the ytd IIP figure is 2.8%, which is
comparatively better than the flat growth during the corresponding
period of FY14.
Assessment: Todays number was below expectations, especially since
the base was favorable. The consecutive contraction in manufacturing
hints at deep-rooted malaise in the sector, which would require policy
reforms. Despite being a volatile sector, the extent of fluctuation in
capital goods does sway the IIP numbers. The slowdown in exports also
had a notable impact. The continued contraction in consumer durables
and wearing apparel, despite softening inflation is alarming. The extent
of the contraction in durables seems to be much greater than what the
car-sales figures suggest. Upward revision of these is a distinct
possibility. On a positive note electricity grew at double-digit for the
third consecutive month.
Outlook: In this quarter industrial production has faced several
headwinds Supreme Court de-allocating 214 coal-blocks; unfavorable
(high) base and high policy rates. These factors are likely to keep IIP
low for the next month as well. However, we expect the situation to
improve in 2H. There are indications that things are moving in terms of
government clearances and other administrative measures. This is
expected to expedite investments in 2H. Inflation, which is now slowing
down is likely to revive consumption we expect durables and non-
durables to perform better in the coming months. The festive and new-
year season will also play a positive role. The favorable base would
accentuate the recovery.
Recommendations: The low IIP growth not only raises concerns about
the 2QFY15 GDP growth, which is likely to come in significantly below
the 1QFY15 GDP number, but also the FY15 growth. Achieving a
growth over 5.5% now looks challenging. While we await the inflation
numbers next week, if inflation softens in line with our expectation, there
will be heightened pressure on RBI to cut the policy rates. So we hold on
to a possible 25-bps rate cut in Dec14.
Fig 1 IIP growth stuck at 0.4%
Mar-13 Mar-14 Jul-14 Aug-14 YTD
IIP 1.1 -0.1 0.4 0.4 2.8
Mining -2.3 -0.6 1.2 2.6 2.5
Manufacturing 1.3 -0.8 -1.0 -1.4 1.7
Electricity 4.0 6.1 11.7 12.9 11.7
Basic 2.4 2.1 7.4 9.6 8.6
Capital -6.0 -3.6 -3.9 -11.3 4.3
Intermediate 1.6 3.1 3.0 0.3 2.5
Consumer 2.4 -2.8 -7.7 -6.9 -4.9
-- Durables 2.0 -12.3 -20.9 -15.0 -12.9
-- Non Durables 2.8 4.8 2.4 -0.9 0.9
Year ending

Source: Government of India (GoI)
Fig 2 Manufacturing drags down IIP growth
Source: GoI
IIP growth (Aug14): 0.4%
Manufacturing growth (Aug14): -1.4%
Fig 3 Mining & electricity remain buoyant
Source: GoI

10 October 2014 India Economy Industrial production Out of the blue
Anand Rathi Research 2

Fig 4 Growth in basic goods eclipsed by large fall in capital goods

Source: GoI
Fig 5 Durables in protracted stagnation, non-durables volatile

Source: GoI
Fig 6 IIP index fell in Aug14, next months base is unfavorable

Source: GoI
While capital goods
contracted -11.3%,
basic goods grew 9.6%
in Aug14
Durables has
contracted -19.9%
during Jun-Aug14
against -9.4% fall in
IIP grew 0.6% in
2HFY14. The
favourable base is
likely to help it grow

10 October 2014 India Economy Industrial production Out of the blue
Anand Rathi Research 3

Fig 7 The favorable base in mining index is over now

Source: GoI
Fig 8 Excluding Nov14, manufacturing will not get the support from base

Source: GoI
Fig 9 Small rise in electricity index; helpful base translates to double-digit growth

Source: GoI

Mining grew 1.1% in
2HFY14. The
favourable base is
likely to help the sector
to grow further in

The manufacturing
index fell to 166 in
Aug14, the lowest in
nine months
The electricity sector
growth doubled to
11.7% in 5MFY15,
from 4.6% in

10 October 2014 India Economy Industrial production Out of the blue
Anand Rathi Research 4

Fig 10 Mining, capital and basic goods have contracted on both 3m & 6m basis

Source: GoI
Fig 11 TTM shows improvement in transport and basic metals, electricals worsen

Source: GoI
Fig 12 TTM shows no recovery is sight for durables

Source: GoI

All the sectors,
excluding non-durables
has grown on
annualized basis
Barring electrical,
transport and basic
metals posted double-
digit y-o-y growth
Motor vehicles growth
turned to negative in
Aug14, while radio,
TV contracted for the
and office,
accounting for 12


10 October 2014 India Economy Industrial production Out of the blue
Anand Rathi Research 5

Fig 13 Despite sharp fall, manufactured goods still accounts for 60% of exports

Source: GoI
Fig 14 Export growth flattening out

Source: GoI
Fig 15 Leading indicators suggest recovery in second and third quarter of FY15

Source: GoI

Manufactured goods,
along with petroleum
products, account for
over 80% of Indias
exports. This renders
foreign trade an
important determinant
of the manufacturing
sectors performance
The slowdown in
global growth has
impacted exports, it
has now decelerated for
two successive months
While the RBIs industrial
outlook predicted an
improvement in the economy in
2QFY15, the Jul-Aug14
IIP numbers suggest muted
GDP growth for the quarter

10 October 2014 India Economy Industrial production Out of the blue
Anand Rathi Research 6

Fig 16 Led by manufacturing, IIP loses pace

Source: GoI
Fig 17 Mining trend positive, electricity growth marches ahead

Source: GoI
Fig 18 Basic goods the only steady sector, volatility in intermediate & capital goods

Source: GoI

Given the large
volatility in capital
goods, we cannot get a
trend from the
The 3M/3M
annualised rate
(SAAR) shows
worsening trends for
IIP due to
The 3M/3M SAAR
suggest mining growth
is picking up

10 October 2014 India Economy Industrial production Out of the blue
Anand Rathi Research 7

Fig 19 Slowing down trend in both consumer durables & non-durables alarming

Source: GoI
Fig 20 Half the sectors grew, while the others contracted in Aug14
Mar-13 Mar-14 Jul-14 Aug-14 YTD
Food & Beverages 2.9 -1.1 4.1 8.5 6.8
Tobacco Products -0.5 0.9 -11.9 5.6 6.4
Textiles 6.0 4.4 2.1 -1.7 2.9
Wearing Apparel etc. 10.4 19.5 -7.4 -10.1 -8.7
Leather Products 7.3 5.2 4.8 10.9 8.4
Wood &Products etc -7.1 -2.2 5.9 4.2 0.8
Paper & Products 0.5 -0.1 -2.1 4.4 1.7
Publishing, etc. -5.1 0.2 -6.9 -6.1 -5.8
Coke, etc 8.4 5.2 -5.0 -4.6 -2.1
Chemicals & Products 3.7 8.9 6.1 -5.3 0.4
Rubber & Plastics Products 0.2 -2.1 7.5 5.3 3.4
Other Non-Metallic Mineral Products 1.9 1.1 12.0 4.6 7.9
Basic Metals 1.9 0.3 12.5 19.1 13.9
Metal Prod. ex Machinery & Equipment -4.7 -7.0 -2.2 -9.7 -0.8
Machinery and Equipment N.E.C. -4.7 -4.7 4.8 5.1 5.7
Office Machinery etc. -13.9 -15.7 -31.1 -43.9 -41.2
Electrical Machinery etc. N.E.C. 0.6 14.5 -6.2 -17.8 21.8
Radio, TV etc. 5.6 -27.3 -58.3 -48.8 -50.1
Medical Instruments, Watches etc. -2.0 -5.1 -0.8 1.8 -0.2
Motor Vehicles, etc. -5.3 -9.6 0.4 -2.1 -3.9
Other Transport Equipment 0.0 5.9 17.1 14.3 12.0
Furniture, Manufacturing N.E.C. -5.1 -13.8 -17.3 -0.5 0.9
Year ending

Source: GoI
SAAR data shows
instead of
improvement, consumer
durables contraction is
While basic metals had
highest growth, the radio-tv
segment had highest


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