Profitability of firms will be healthy in second half of FY19

Impact: Industrial production (positive); Profitability (positive)

Brief: IIP number for September, 2018 recorded a healthy growth of 4.5% despite an unfavorable base. The sectors driving the industrial production growth are capital goods (8.7%), consumer (both durable and non-durable) (5.7%) and infrastructure/construction goods (8.7%). Softening crude oil price and bond yield along with stability in forex market will further strengthen the producers' confidence. We expect the profitability of firms to be healthy in the second half of FY19.

IIP number for September, 2018 recorded a healthy growth of 4.5% despite an unfavorable base. The index had registered 4.2% growth during the same period the previous year. For past eleven months, the industrial production has been expanding at rate of almost 6%. Therefore, in YTD terms, overall industrial production has been growing at 5.1% in FY19 as compared to 2.6% the previous year. Strong consumption demand (both in domestic and external market) and government expenditure are the pull factor for the industrial production growth.

The sectors driving the industrial production growth are capital goods (8.7%), consumer (both durable and non-durable) (5.7%) and infrastructure/construction goods (8.7%). Intermediate goods, on the other hand, have recorded just 1.4% during the reference period. Similarly, in cumulative terms, this category has been expanding at slower pace of 1.2% in FY19 when overall industry witness 5.2% growth. The trend shows that this category is not in line with the performance of overall industry. Therefore, external sector is filling the gap.

The industrial performance is well corroborated with the PMI index. The manufacturing PMI index also reveals that producers are receiving more number of new orders. Therefore, producers are optimistic about the future demand. On a positive note, softening crude oil price and bond yield along with stability in forex market will further strengthen the producers' confidence. Therefore, industrial performance is likely to further accelerate in coming months. In addition, deceleration in global commodity prices will lower the input cost. We expect the profitability of firms to be healthy in the second half of FY19.

Growth in Industrial production by Economic Activity:

  IIP Mining Manu Core
FY15 4.02 -1.34 3.75 4.94
FY16 3.33 4.34 2.9 2.98
FY17 4.58 5.33 4.32 4.76
FY18 4.38 2.31 4.6 4.28
Sep-17 4.15 7.64 3.8 4.73
Aug-18 4.3 -0.43 4.59 4.16
Sep-18 4.47 0.21 4.62 4.28

Growth in Industrial production Usage:

  Primary Capital Intermediate Infra Consumer Durable Non-durable
FY15 3.74 -1.13 6.11 4.98 3.9 3.97 3.86
FY16 4.97 3 1.52 2.84 2.94 3.33 2.58
FY17 4.9 3.18 3.32 3.91 5.67 2.97 7.98
FY18 3.69 3.94 2.24 5.6 6.03 0.66 10.4
Sep-17 6.56 8.69 2.15 0.48 3.56 -4.06 10.49
Aug-18 2.63 5.01 2.36 7.79 5.85 5.23 6.32
Sep-18 2.56 5.76 1.37 9.5 5.76 5.23 6.14

Source: MOSPI, Acuité Research

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