IIP numbers suffer due to persistently high inventory levels in the system

Brief: India’s industrial production for April’ 17 expands by 3.1%; Capital Goods as well as Consumer Durables are recording below expectation performance due to excess inventories in the system; Sector wise, performance of Pharmaceuticals and other FMCG items resonate well with the overall expansion of Consumer Non-Durable category

Impact: Neutral

India’s industrial production for April’ 17 has recorded 3.1% growth. Growth rate in industrial production is primarily driven by pharmaceutical, steel, machinery equipment, and electricity. The pharmaceutical product, which shares 5% in overall IIP has recorded solid growth of 29% in April, 2017. A highly export intensive industry with nearly 60% revenue driven by external demand, the pharmaceutical industry has been adversely impacted due to increased US scrutiny on drugs. Despite the situation, the industry has witnessed record growth in FY17. Increase in health consciousness among Indians has boosted the performance of the industry significantly. SMERA believes that this strong domestic demand has offset the fall in exports. The Consumer Non-Durables category now expanding at 8.3% is a case in point while considering the pharmaceutical sector along with other FMCG item groups. Emerging out the quagmire of Demonetization, Construction & Infrastructure sector recorded an expansion of 5.8%, a fivefold increase compared to the previous quarter.

Similarly, the textile industry that recorded de-growth in FY17, has posted 2.1% expansion with the uptick in external demand. However, motor vehicle, one of the high performing sectors in FY17, has contracted by (-) 15.6% in April, 2017. Sale of automobiles has been disrupted by the impact of demonetization. Fall in the sales of automobiles has built up inventories in the system. Additionally, new emission norms enforced by the Supreme Court have impeded production in the industry. A contraction of -1.3% in Capital Goods category, now following the value add approach signals poor confidence levels of corporate India. Also, due to the inventory buildup, Consumer Durable category recorded a contraction of nearly -6%, which is directly inverse to the double digit growth prevalent in FY17 overall. Noting these realities, a sharp contraction in the production cycles has been noticed in automobiles as well as other sectors. Going forward, SMERA however believes that production of automobile (and related sectors) will remain healthy in FY18.

Sector

Weight

Overall FY ‘17

Apr '17

Food product

5.3

-5.5

-4.4

Textile

3.3

-1.6

2.1

Petroleum product

11.8

4.7

1.5

Chemical product

7.9

2.6

0.7

Pharmaceutical

5.0

32.1

29.1

Basic metal

12.8

5.1

7.4

Machinery equipment

4.7

7.5

9.5

Motor vehicle

4.8

7.4

-15.6

Mining

14.4

5.4

4.2

Steel

7.2

10.7

9.3

Manufacturing

77.6

4.9

2.6

Electricity

8.0

5.8

5.4

Overall IIP

100.0

5.0

3.1


Our exciting journey started in 2005 with rating of bank borrowers most of whom were small and medium enterprises. At that time, credit rating was a concept known only to large issuers of capital market instruments. Since then, like a caterpillar transforms itself into a beautiful butterfly, we transformed to rate bonds, bank facilities of large corporates and issuers across industries. Along came many achievements - SEBI Registration in 2011, RBI accreditation in 2012, 50,000 ratings in 2018, 5,000 Bond and Bank Loan Ratings in 2017, launch of India's first Android and iPhone app to disseminate rating, tamper-proof QR-code-enabled rating rationales, and SMERA Terminal to name a few.

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