Growth pangs

RBI may not ease its tight monetary measures if industrial growth stays buoyant

The index of industrial production (IIP) data for February 2007 indicates that the economy is fine, though a decline in the growth rate of consumer goods is worrying.

The IIP may have slowed down compared with 15.8 per cent growth registered in November, but at 11 per cent y-o-y growth, it is still stronger than the 8.8 per cent increase in February 2006.

The government also revised the January 2007 IIP growth from 10.9 per cent to 11.4 per cent. For the eleven months ended February 2007, the IIP is up 11.1 per cent against 8.1 per cent in the previous corresponding period. The IIP growth is slowing down over the past three months, but at 11 per cent.

The mining and electricity sectors slowed down in February 2007 compared with their growth a year ago owing to a high base last year. But for the 11-month period, the mining index has grown by 4.9 per cent compared with 0.9 per cent in April-February 2006. The manufacturing sector, the largest contributor to the overall IIP, recorded a 12.3 per cent growth in February 2007 against 9.2 per cent a year ago.

In terms of industries, only jute and other vegetable fibre textiles except cotton and metal products, were in the red, but their combined weight is just 3.4 per cent.

The high-growth industries include cotton textiles (up 16.1 per cent) and basic metals and alloys (27.4 per cent). Even the heavyweight sectors such as food products (11.6 per cent), machinery and equipment (12.8 per cent) did well.

The growth rate in basic chemicals and other manufacturing industries was lower at 5.7 per cent and 6.8 per cent, respectively. While basic and capital goods are reporting strong production numbers, the growth in the consumer goods sector is slowing down, which is a worrying sign.

From a y-o-y growth of 13.5 per cent in November 2006, consumer goods production has slowed down gradually to 7.6 per cent in February. Within consumer goods, the growth in consumer durables fell to 1.6 per cent versus 9.8 per cent between April and February.

Except for the decline in consumer durables, the growth momentum remains strong. The central bank has already raised rates in March, and if production continues to grow at this rate, it is unlikely to relax the tight monetary stance.

Ballarpur Industries: Cost pressure

Ballarpur Industries' performance in the March 2007 quarter was adversely affected by rising input costs, which was not fully offset by higher product prices and the resulting pressure on operating margins.

Operating profit (excluding other income and amortisation) grew 11.8 per cent y-o-y to Rs 144.6 crore in the March 2007 quarter compared with 16.6 per cent growth in adjusted net sales to Rs 551.35 crore.

However, results of the last quarter are not strictly comparable with the corresponding period of the previous year owing to the merger of APR Packaging with the company, in addition to it hiving off the power business.

Nevertheless, operating profit margin fell 110 basis points y-o-y to 26.2 per cent in the last quarter. This pressure on margins was owing to adjusted raw material costs as a percentage of net sales rising 215 basis points y-o-y to 31.6 per cent in the last quarter.

Although, not strictly comparable but in the December 2006 quarter too, Ballarpur's operating profit margin declined 148 basis points y-o-y to 25.2 per cent.

The stock fell 0.45 per cent to Rs 109.6 on Thursday. Meanwhile, in the March 2007 quarter, Ballarpur's paper sales were 115,055 tonne as compared to 98,065 tonne a year earlier.

Its realisations were estimated at Rs 45,330 per tonne in the last quarter, about 5 per cent higher over the March 2006 quarter. Ballarpur had hiked prices of coated and uncoated paper in January 2007, but that was not sufficient to cover higher operational costs in the last quarter.

In the December 2006 quarter, realisations were estimated to have improved 4 per cent y-o-y to Rs 44,763 per tonne.

Going forward, a key focus of the company management would be on deriving synergies with its earlier acquisition of Malaysia-based Sabah Forest Industries, which provides the company a large raw material base.

In addition, Ballarpur has hiked prices of uncoated paper in April 2007 and this benefit will be leveraged in the June 2007 quarter. The stock trades at a reasonable 7.5 times estimated June 2008 earnings, excluding the acquisition of Sabah Forest Industries.