Business Daily from THE HINDU group of publications
Wednesday, Dec 13, 2006
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Stock Markets Industry & Economy - Economy Markets - Insight Aarati Krishnan
The markets needed an excuse for a correction after the rally over the last six months and the poor IIP readings probably served the purpose.
For a market that was ripe for a correction, the Index of Industrial Production (IIP) released on Tuesday came in handy. If the RBI's decision to hike the Cash Reserve Ratio triggered Monday's meltdown in banking stocks, unexpectedly weak numbers on the IIP were the cue for the markets to pummel a range of cement, construction and capital goods stocks on Tuesday. The IIP numbers certainly offered enough grist for nervous markets, with the expansion in the overall IIP slowing from a robust 11.4 per cent in the preceding month to a sedate 6.2 per cent in October 2006. The plunge in manufacturing growth, in particular, to six per cent in October 2006 (12 per cent in September) appears to have raised hackles. But here are a few factors to hearten optimists. While sustained trends in macro indicators such as the IIP do have a bearing on India Inc's earnings, you certainly shouldn't read too much into numbers for a single month. Monthly numbers can easily be influenced by one-off factors such as seasonality of certain businesses and the timing of festivals. Diwali this year was in October, which means that production for the festival season must have ramped up in September. Last year, Diwali was in November, which would mean production peaking in October. Therefore, industrial output of October this year compared to last year could appear moderate, on a base effect. Incidentally, a break-down of the IIP does show that "consumer goods" and "food products" have indeed been among the laggards weighing down the October IIP. Then, the composition of the index also makes for a rather tenuous link between the IIP numbers and India Inc.'s performance. Segments with significant weights in the IIP may not be well represented in the universe of listed Indian companies and vice versa. Cotton yarn, sugar, wheat flour, nitrogenous fertilisers and PVC pipes are some of the heavyweights in the "manufacturing" basket of the IIP; hardly darlings on Dalal Street! Similarly, "scooters and mopeds" account for a higher weight in the index than commercial vehicles, while sugar gets a much higher weight in "food products" than biscuits or chocolates. This much is clear: the markets needed an excuse for a correction after the rally over the last six months and the poor IIP readings probably served the purpose.
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