Investor's Eye
[March 12, 2013] | | |
| Summary of Contents
PULSE TRACK IIP grows at 2.4% in January 2013 -
In January 2013 the Index of Industrial Production (IIP) rose by 2.4%, which was above the market's estimate. The growth was contributed by a better than expected performance from the manufacturing and electricity segments. The IIP growth for December 2012 has been revised marginally upwards to -0.5% from the provisional estimate of -0.6%. Therefore, based on the three-monthly moving average, the IIP growth for January 2013 stands at 0.4% as against 3.2% in January 2012. -
The manufacturing sector, which constitutes about 76% of the IIP, showed signs of recovery as it increased by 2.7% year on year (YoY) as against the decline of 0.7% YoY witnessed in December 2012. The mining output remained bleak as it declined by 2.9% in January 2013. But the electricity output witnessed a growth of 6.4% vs a growth of 5.2% in December 2012. In the use-based category, the basic goods and intermediate goods increased by 3.4% and 2.0% respectively. The consumer goods grew by 2.8% as compared with a decline of 3.6% seen in December 2012. The capital goods segment showed a decline of 1.8% YoY as compared with a dip of 0.6% in December 2012. -
On a sequential (month-on-month [M-o-M]) basis, the IIP increased by 1.3% in January 2013 to an absolute figure of 181.8 (179.4 in December 2012). The manufacturing, mining and electricity segments increased by 1.3%, 1.4% and 2.0% month on month (MoM) respectively. In the use-based category, the basic goods increased by 1.8% MoM whereas the consumer goods segment reported a 3.6% M-o-M increase led by a 4.1% M-o-M increase in the consumer durable goods segment. However, the capital goods segment reported a decline of 3.8% on an M-o-M basis. -
The IIP growth numbers have re-entered the positive territory after a gap of two months, led by a pick-up in the manufacturing segment. Based on the three-monthly moving average, the IIP growth is +0.4% but it may improve going ahead. While the decline in the trade deficit (in February 2013) gives some comfort, the rise in the Consumer Price Index (CPI) inflation could prevent aggressive monetary easing by the Reserve Bank of India (RBI). However, the market expects the RBI to reduce the repo rate by 25 basis points in the coming mid quarter policy review (on March 19, 2013) in view of the slowing economy and the tight fiscal deficit targets set by the government in the Union Budget for 2013-14.
SECTOR UPDATE Fertiliser Fertiliser stocks deserve a second look Key points -
Factors that affected growth of fertiliser sector: The fertiliser sector has underperformed the benchmarked index, ie the Sensex, in FY2013 so far mainly due to an unfavourable demand environment driven by erratic monsoon rains and a surge in retail prices of complex (non-urea) fertilisers. The sharp increase in the prices of complex fertilisers has resulted in the demand shifting to urea/single super phosphate (SSP). The price of urea is still controlled by the government and kept low. Another reason for weakness in the fertiliser stocks is the increase in the interest burden due to a jump in subsidy receivables pending with the government and the cost push from the depreciation of the rupee. Consequently, the fertiliser companies are facing pressure on the margins and a surge in interest cost which are leading to a weak financial performance. -
Situation likely to improve from hereon: The situation is expected to normalise on account of a lower than expected reduction in the subsidy for the complex fertilisers despite the recent easing of the raw material prices which should aid the margins. Moreover, the government is expected to revise the urea prices and narrow the gap between the retail prices of urea and the prices of the complex fertilisers (caused by keeping urea out of the nutrient-based subsidy [NBS] scheme). It should boost the demand for complex fertilisers and improve the volume offtake. The margins are also likely to show an improving trend from the second quarter of the next fiscal. We understand that the government would also release Rs5,000 crore of pending subsidy payment to the fertiliser companies. -
Valuations undemanding; positive bias for Chambal Fertilisers, Coromandel and GSFC: The valuations have turned attractive after the significant correction and de-rating of the fertiliser stocks over the past 12 months. Going forward, the improvement expected in the financial performance and the growing government focus on reviving investment in the sector would result in the re-rating of the stocks. The larger players have robust free cash inflows and also offer the safety of healthy dividend yields. In this note, we have briefly covered three fertiliser stocks that are trading at attractive valuations and are among the leading players in the industry.
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