Crunching numbers

Weak IIP data added fuel to fire on the Street

If the markets tanked another 400 points on Tuesday after Monday's fall, some of the blame falls squarely on the index of industrial production data. The growth in the index of industrial production slowed down to 6.2 per cent for the month of October.

This number was lower compared with the 10.9 per cent growth achieved in the first half as well as the 9-10 per cent growth that economists were expecting.

Despite a 4 per cent growth in mining sector and 9.7 per cent growth in electricity, the growth in IIP was weighed down as the manufacturing index grew just 6 per cent, which was lowest since April 2003 with the exception of July 2005, when the floods in Mumbai had disrupted industry.

On the other hand, the growth in the manufacturing index between April and September 2006 has ranged between 10.75 per cent and 13.76 per cent. In terms of industries, heavy weight food products posted 9.7 decline.

The other segments that pushed down the IIP were basic chemicals and chemical products (up 1.9 per cent), transport equipment (up 5.4 per cent) and other manufacturing industries (down 17.2 per cent).

Besides a high weight in the IIP (79.4 per cent), manufacturing has also posted the best growth in terms of the three sectors. So, a slowdown here always rings alarm bells. In November 2005 too, the IIP growth had slowed down to around 6 per cent, but it recovered in subsequent months.

There aren't enough indications that the corporate sector is slowing down, given the evidence of strong cement and auto sales in the past two months. So the chances of the low growth in manufacturing being an anomaly like in November 2005 are high.

SpiceJet: Smooth takeoff

With the capital infusion of approximately $80 million that the Delhi-based SpiceJet plans to retain of the $118 million offered to it by private equity investors""the Tatas, Texas Pacific Group, Goldman Sachs and Ishtithmar""the company's balance sheet will be become stronger.

The high quality of investors is an indication of Spicejet's credibility. Of course, Spicejet has done well to post one of the better operating performances in the industry, possibly owing to its small fleet and limited scale of operations""-it has just nine Boeing 737s flying 13 routes. At a time when fuel prices peaked , the company reported a loss of Rs 36.7 crore in the August quarter.  Goldman Sachs and Ishtithmar had earlier invested around $92 million in the company. At around Rs 51 a share, the issue of preferential shares for $80 million will mean a very large dilution of around 38 per cent on the present equity capital of Rs 184 crore.  However, at this juncture it is the business and not the dilution in the equity capital that the company needs to worry about. Luckily, aviation turbine fuel prices have come off "" the average price that SpiceJet has paid in the last couple of months is around Rs 39 a litre.  Assuming an ATF of Rs 38 and a dilution of 38 per cent, the estimated EPS FY08 works out to just under Rs 4.  At the current price of Rs 54, the stock trades at 13.5 times FY08, and while not expensive, it is not cheap either given that the airline is still making losses and is not expected to turn the corner till FY08.  With contributions from Shobhana Subramanian and Amriteshwar Mathur