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CEOs say industrial production is not falling

A large number of CEOs and analysts do not agree with the falling industrial production data for October and say the data are an outlier and they do not see this as a sign that growth momentum is weakening again. The CEOs say the data are under-estimating the real industrial cycle, and this anomaly will be corrected only when the final data are released or corporate results start pouring in from next month.

CEOs say consumer and business sentiment remains high, and the recent fall in inflation and commodity prices should both benefit discretionary demand and expand firms? profit margins.  “The IIP data for consumer products is showing a sharp fall for October… but we do not agree with this based on corporate results for September quarter.. this may change when the final figures come in,” says an analyst with Motilal Oswal Financial Services.

A CEO of a leading consumer goods company said they have not witnessed any significant fall in the sales or production of TVs or other electronics products in October.  

But in an interaction with analysts last week, leading lighting and consumer products maker Havells India reduced its sales growth forecast from 13-15% in FY 2015 as compared 18-20% earlier. The growth is lower versus earlier expectations as sales momentum in first half of the FY15 as the first half sales  got a boost from pent-up demand,  and the pace of pick-up in economy has been slower versus expectations and, finally, product pricing for Havells has likely suffered on account of price cuts to pass on price correction.

Another CEO of a TV company said its cheaper to import electronics products from China and Taiwan instead of producing in India hence this may be the reason for falling industrial production.

In a report, Morgan Stanley said even though industrial production growth decelerated to 1.4% in quarter ended September as compared to 4.5% in quarter ended June, real corporate sector revenue growth for 3,736 Indian companies was up 4.1% in quarter ended September this year versus 3.6% in Quarter ended June.  

“Since the industrial production data has become less reliable for assessing the underlying growth trend, we believe that the trend in corporate sector revenue growth for the broad market will be a better proxy for assessing the underlying trend in economic activity. In this context, we will be closely tracking the trend in corporate revenue growth for December quarter to assess underlying momentum of growth recovery,” says Morgan Stanley in a report dated December 13th.

As per industrial production data, overall consumer goods output continued to contract in October on a year basis and falling by 18.6%.  This is the highest contraction since the industrial production series based to fiscal 2005 began in April 2005.  The subcategory had been contracting since May-13 (excluding Sept-13 and May-14). The steep contraction was due to contraction in both consumer durables and non-durables.  

The decline in consumer durables was due to contraction in gems and jewellery (contracted 49.8% YoY),  telephone instruments (contracted 78.3% YoY mainly due to closure for Nokia plant in Chennai) and wood furniture  -which declined 30.7%. These three items alone reduced overall consumer durable goods growth with gems and jewellery accounting for the majority of the decline by virtue of its higher share in consumer durables (at 20.9%).

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