In May 14 the IIP jumped to 4.7%, surpassing our expectations. Leading the recovery was manufacturing growth, rising 4.8%. Notwithstanding the favourable base, signs of recovery are apparent. We expect the momentum to continue, which augurs well for 1QFY15 GDP growth and the market at large.
Performance: IIP and manufacturing growth in May 14 picked up momentum to 4.7% and 4.8%, respectively, from 3.4% and 2.5% in Apr 14. Electricity once again had the highest growth rate (6.3%). Mining growth accelerated to 2.7% in May 14 (from 2.6% in Apr 14). After its Apr 14 high growth (14.3%), capital goods decelerated to 4.5% in May 14. Non-durables was back on a growth path (3.9%) after a surprise drop the previous month. Consumer durables surprised by rising 3.2% in May 14 after contracting for 17 months.
Assessment: Acceleration in IIP growth surpassed expectations. While the favorable base is aiding most sectors, we see some green shoots. Manufacturing growth was the highest in 19 months. Being the most volatile segment, deceleration in capital goods was not surprising. Overall, high export growth in May 14 aided Indian industry. Domestic demand also seems to have picked up.
Outlook: The pickup in industrial growth is reassuring and we expect the trend to continue. While manufacturing is thawing from its protracted period of stagnation, electricity is buoyant while mining has already bottomed out and back to an expansionary phase. With seasonal fluctuations in inflation, particularly high fruit and vegetable prices, and the continuation of a sub-normal monsoon, modest demand destruction or deferral are likely for durables; consumers, too, are unlikely to be completely unscathed. Yet, positive sentiment on account of the political regime change at the Centre, efforts of Budget FY15 to restart the capex cycle through, inter alia, restarting stalled projects, aggressive PSU investments and improved capex funding would help the industry. Our IIP growth target of 4.4% for FY15, which appeared stretched some time ago, now appears easily achievable.
Recommendations: While IIP growth in the next few months would be aided by a favorable base, the ongoing reforms and the cooperative, rather than adversarial, approach of the new government towards industry would propel future growth. With the other macro-economic fundamentals already improving, acceleration in GDP growth would complete the picture. This augurs well for the equity market as we expect better earnings in FY15. The resurgence of IIP growth does not alter the RBI s monetary-policy perspective. The course of the monsoon and that of food prices are at the top of the RBI s watch list. We expect no rate action before Oct 14.
Source: Lokesh Shastri
