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Industry: Industry on road to recovery; grows 1.4 per cent in April

	June 15, 2009

Green shoots of recovery have started to sprout on the landscape of India’s industrial output.

It is now comfortably above the October 2008 low; though still marginally below the peak recorded in March 2008. Giving early signs of economic recovery, industrial production grew 1.4 per cent in April after contraction for months together since September when global financial crisis deepened.



The 1.43 per cent annual rise in the Index of Industrial Production (IIP) in April – against 6.22 per cent during the same month last year – has been led mainly by electricity and mining. These two sectors have grown by 7.06 per cent and 3.8 per cent, as compared with their corresponding April 2008 year-on-year increases of 1.39 per cent and 6.14 per cent respectively.



The somewhat-decent growth rates for electricity and mining have, however, been offset by the continuing poor performance of manufacturing.



Manufacturing, which has a weight of around 80 per cent in IIP, grew by 0.7 per cent from 6.7 per cent. Mining grew by3.8 per cent in the month compared with 6.1 per cent in April, 2008.

The best one could say about the sector is that it has “bottomed out” and improvement is in sight.



Within manufacturing, it is ‘consumer durables’ that has notched up an impressive 16.89 per cent growth rate in April (against 3.25 per cent for the same month last year). The sub-sector had grown by 8.18 per cent in March, 5.83 per cent in February and 2.06 per cent in January, indicating that it is clearly out of the woods now.



However, the ‘capital goods’ index fell year-on-year for a second successive month by minus 1.28 per cent in April and minus 8.39 per cent in March (it had risen 12.43 per cent last April). Decline in production of capital goods is indicative of slack investment demand among corporates, the revival of which will probably require a sustained economic recovery.



Among other ‘use-based’ sectors, the index for ‘basic goods’ went up by 4.56 per cent in April (versus 3.99 per cent in April 2008), with these correspondingly standing at 7.12 per cent (3.09 per cent) for ‘intermediate goods’ and minus 10.39 per cent (9.96 per cent) for ‘consumer non-durables’.



Individual industry data at a two-digit level of the IIP shows textiles, leather, food products and paper to be the worst-performing. Production of cotton textiles was up by only 0.8 per cent in April (after the minus 2.1 per cent average for the 2008-09 fiscal), while the corresponding amounts were minus 34.4 per cent (minus 9.5 per cent) for food products, minus 12.4 per cent (minus 6.9 per cent) for leather products and minus 2.3 per cent (1.6 per cent) for paper.



On the other hand, ‘machinery & equipment’, ‘transport equipment & parts’, ‘non-metallic mineral products’ and ‘basic metal and alloy industries’ have grown by 9, 6.3, 10.2 and 5.1 per cent, respectively.



As many as 11 out of 17 industry groups showed a growth. However, food products continued to contract drastically by 34.4 per cent in April. Production of another employment generating sector, leather decelerated by 12.4 per cent.



Economists also attributed better than expected industrial figures in April to pay hikes of government employees and predicted that May and June will give better numbers as a result of increased spending during elections.



Several sectors to beat the slump!

In what could be seen as a positive sign in a recessionary phase, corporate India looks set to deliver a mixed bag when it declares results for the fourth quarter ended March 2009.



According to research analysts at domestic and foreign broking houses, Banks, capital goods, engineering, fast moving consumer goods (FMCG), software services, oil marketing, power, two-wheelers and telecom companies are expected to lead the sales and profit growth of India Inc in the fourth quarter. Besides, cement, construction and infrastructure and oil and gas firms are likely to maintain their year-on-year (y-o-y) profit.



These analysts, however, anticipate companies in sectors such as auto ancillaries, automobiles (heavy, medium as well as light commercial vehicles), hotels, media, metals, pharmaceuticals, realty, shipping, sugar and textiles to post poor results in the fourth quarter. FMCG, power and retail firms too are likely to show a modest rise in operating margins in the quarter.



The depreciation in the value of rupee is expected to benefit software services and pharmaceuticals companies, but mark-to-market (MTM) losses on hedging of export revenue and translation losses on foreign currency loans are likely to impact the net profit of these two sectors. While software services companies may post a marginal decline in margins, the fall for pharmaceutical firms is expected to be a sharp 435 bps.



According to the analysts, metals (ferrous and non-ferrous) and realty firms are likely to post poor results due to the fall in realisations and decline in demand. In fact, ferrous and non-ferrous metal companies are likely to post a sharp decline in sales and profit during the quarter.

Operating margins of non-ferrous metal firms may decline sharply by over 1,500 bps, while steel companies may report a 1,000-bps fall. The drop in demand for houses and commercial space is likely to hit realty firms, which are expected to show 1,200-bps fall in margins.



Aluminium, copper and zinc producers such as Hindalco, Hindustan Zinc and National Aluminium are expected to post a 37 per cent decline in net sales, while their net profit is likely to plunge by 66 per cent. On the other hand, integrated steel firms such as JSW Steel, Steel Authority of India (Sail) and Tata Steel are expected to post a modest decline in net sales, but the fall in their net profit is likely to be in the range of 25-70 per cent.



Pharmaceutical companies are expected to report a 14 per cent increase in net sales and 35 per cent decline in net profit due to a general slowdown in the domestic market and the high-base of the fourth quarter of 2007-08. A pharma analyst at Motilal Oswal Securities (MOSL) expects Dr Reddy's Laboratories and Ranbaxy to show net losses. Merrill Lynch Research too echoes the MOSL view and indicates a net loss for both the companies.



Capital goods and engineering firms such as Bharat Heavy Electricals (Bhel), Crompton Greaves, Jaiprakash Associates and Larsen & Toubro (L&T) are expected to post over 20 per cent growth in sales. According to an analyst, one of the major concerns that have dragged the net sales of capital goods companies has been the slowdown in private capital expenditure and slower order inflows.



Construction and infrastructure firms are expected to report a sales growth of over 27 per cent on the back of strong revenue growth from GMR Infra, IVRCL Infra, Lanco Infratech, Madhucon Projects, Patel Engineering and Simplex Infra. However, GVK Power and Unity Infra are expected to post slower growth.



According to the research analysts, oil marketing companies are likely to have a bumper quarter with no inventory losses and over-recoveries in auto-fuels. Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) are expected to show net profits in the range of Rs 2,000-4,000 crore, while Indian Oil Corporation (IOC) is likely to post a net profit between Rs 2,200 and 9,000 crore.



The decline in crude oil prices from $120/bbl in the first half of 2008-09 to $45/bbl in the fourth quarter has significantly improved the working capital requirement of oil companies. That apart, oil bonds of Rs 16,100 crore, issued at the end of the third and fourth quarters has also helped oil marketing firms tide over working capital requirements.