by NR INDRAN    /  INT

June Factory Output Beats Expectations – up 8.8%; 3mma Trends Indicate Weakness in Consumer Goods but Uptick in Cap Goods

Data Surprises Yet Again; Electrical Machinery the Outlier — While export andn excise collections have held  up; contrary to weak numbers reflected in the infrastructure index (up 5.2%), PMI and car sales, India’s June industrial output surprised on the upside rising 8.8%. (Citi: 5.9%, Consensus 5.8%).

On a MoMseasonally adjusted basis, production was 2% v/s -1.5% last month. Cumulative growth during 1QFY12 came in at 6.8% v/s 9.6% last year. Volatility in the IIP has been baffling with the RBI saying that this statistic is ‘analytically bewildering’ (see

http://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=582).

The outlier in thismonth’s data was electrical machinery, which was up 89%. Assuming last 12m average of ~2% in this index, the overall IIP would have likely come in at 4.8%.  Key takeaways: Consumer Goods Slow; but Cap Goods see an Uptick—n

– Sectoral Trends:

(1) Manufacturing rose 10%. Apart from abnormal electrical machinery data, sub-sectors that did well were food products, leather, publishing office/accounting/computer machinery, motor vehicles and transport equipment

(2) Electricity remained buoyant up 7.9%, resulting in 1Q growth at 8.2% v/s 5.4% in 1QFY11. (3) Mining continued to post lacklustre trends, up 0.6% reflecting the impact of environmental clearances and transportation bottlenecks. Consequently 1QFY12 trends came in at 1% v/s 8% in the same period last year. – Use-based classification: Trends in capital goods continued their roller coaster ride up 37.7% but as seen in Fig 8, trends on a 3mma basis appear to be picking up. This is in contrast to trends in consumer goods which have been steadily declining on a 3mma basis thus indicating that higher rates/inflation are beginning to bite. This is also corroborated by car sales data where the latest data saw growth in the red.

Policy Implications — Deteriorating global developments could result in most centraln banks taking an extended pause on the rate front. India remains a wild card – while we think odds are RBI will pause this year, persistently high inflation and RBI’s hawkish

tone raises the risk of a last 25bps hike in September.

Growth – Maintain our 7.6% estimate but global factors/agri pose a risk: Whilen June IIP numbers are better than expected, we maintain our FY12 7.6% GDP estimates on the back of (1) aggressive tightening (125bps in the last 3 months), (2)

structural policy issues (3) worsening prospects on the global front. While export growth is so far robust (1QFY12 growth at 46%), a further deterioration on the global front could shave off ~20bps from our full year GDP estimates. All this indicates that

the timeline for moving back to an 8%+ growth path is likely to get extended to FY13

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