The Hindu Business Line : IIP numbers resurrect concerns for India Inc

The slowdown in the growth of Index for Industrial Production (IIP) has resurrected concerns about lower growth in India Inc’s earnings, given that the manufacturing sectors account for a major portion of the Indian stock market capitalisation (over 60 per cent of S&P CNX 500).

The IIP numbers declared for March 2008 show a growth of 3 per cent over March 2007.

Growth a year ago (March 2007 over March 2006) stood at 14.8 per cent. The growth for the full year 2007-08 has also witnessed moderation.

While the slowdown in growth has been widely perceived to be a result of a higher base, other factors suggest that there is more to the slowdown than just a “base” effect.

Consider these factors:

One, the 3 per cent growth in March 2008 is the slowest year on year growth since February 2002.

Two, the slowdown in IIP numbers since October 2007 have been corroborated by a slowdown in India Inc’s earnings growth over the last couple of quarters. Three, the slowdown suggested by the IIP numbers are also supported by other independent indicators.

A recent survey by CII-ASCON for instance, suggests an increase in the number of sectors that have witnessed negative growth in 2007-08 as compared with 2006-07.

The survey has reported that out of 104 sectors under coverage, sectors with a negative growth have increased by 16.3 per cent in the recent year, compared with an 11.2 per cent increase in FY07.

Lower spending

Both the IIP numbers and the survey clearly indicate slowing output (and thus offtake) in the consumer durables sector. Steep increases in lending rates over the past couple of years appear to have moderated the demand for two and four-wheelers as well as electronic goods.

Current prime lending rates according to the RBI data stands at 12.75-13.25 per cent, which is a steep 200 basis points increase over rates that prevailed in March 2006. The IIP numbers reflect negative growth in the consumer durables segment for March 2008 and for the full year 2007-08. The survey also indicates that majority of the sectors that witnessed negative growth fall under the consumer durables industry. This is not surprising as two-wheeler and car- makers have reported lower growth in offtake during the fiscal.

Better show

While the basic, intermediate and capital goods sectors have also witnessed a tapering down in growth, they appear to have fared better than consumer goods. The survey, for instance, suggests that close to 50 per cent of the sectors that have witnessed production growth of over 20 per cent are from the capital goods industry.

Amidst pressure from higher raw material costs as a result of spiralling inflation, increased fuel costs and higher cost of borrowing, the core sectors appear to have put up a better show. This suggests that slowing offtake has not yet trickled down to the capital goods and other feeder industries; but the next few months may have to be watched on that.

The silver lining for India Inc, from this slowdown, may yet lie in the export-oriented sectors, especially IT services, as a rapidly depreciating rupee may bolster realisations for these sectors.

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