Numbers often don’t tell you the entire story. Even as HSBC’s Purchasing Manager’s Index for India improved and auto sales continued to be robust, many in India Inc are concerned by signs of a slowdown, tightening monetary policy and rising interest rates.
Consider this: Steelmakers like SAIL, Tata Steel and JSW reported 18-40 per cent drop in volumes for the quarter ended June, while cement sales hit a 57-month low, but demand grew at 2.51 per cent, even as prices have declined 10 per cent.
The slowdown was reflected in the core sector figures released last week. Growth in six infrastructure sectors decelerated to a 10-month low of 3.4 per cent in June. Coal, electricity, steel, cement, refinery and petroleum reported lower growth than June 2009.
Analysts say this is crucial, as the core sector represents 26.6 per cent in the Index of Industrial Production. Seshagiri Rao, deputy MD & group CFO, JSW Steel, said tight monetary conditions are impacting growth, as traders with seeking higher credit periods.
Steel traders, who get 30-45 days of credit period, are now seeking a 90-day credit period, often seen as the first signs of tight monetary conditions. Meanwhile, auto sales are also showing signs of slowing as the base effect wears off.
Two-wheeler sales, for instance, have started coming down on a higher base in the same period last year. Venu Srinivasan, CMD, TVS Motors, feels the automobile sector cannot continue to grow at 30 per cent-plus. ‘‘There will be a gradual slowdown as the base effect wears off, and growth will correct to 10-15 per cent.”
“Inflation in double digits is putting a burden on disposable incomes of families and interest rates are going up. So, there will be a slowdown. But what concerns me more is the low growth in cement,” Srinivasan added.
Cement despatches grew only 2.51 per cent in June — the lowest since September 2005.
A L Kapur, MD, Ambuja Cements, attributes the sudden dip in demand due to the rains, when demand drops 10-15 per cent due to lower construction activity. Interestingly, cement despatches had shown growth of 13 per cent in June 2009. “If it continues to be like this (post-August), it would be a cause for worry,” said Kapur.
He said it is too early to draw a conclusion based on the dip in demand in the last two months. He points out that the cement industry is on a much higher base today (250 million tonnes) and may still be able to clock 11 per cent growth during this financial year. The industry, however, been hit by rising imports and the inventory de-stocking cycle.
Essar Steel CEO Malay Mukherjee said there had been a 35 per cent jump in imports in the last two quarters as against the previous two. “When prices start moving up, there is a tendency to bring down the inventory. Both these factors impacted sales. There’s some sort of a slowdown and demand is not as robust as anticipated.”
What is however not clear, is whether this is just a reduction in apparent demand (de-stocking) or a reduction in real demand, which will be worrying, said JSW’s Rao. Stocks of cement and steel companies have been hammered 15-29 per cent.
With the June quarter results failing to meet investor expectations – in a study of 50 companies by Citigroup, 24 failed to meet investors expectations – earnings estimates are being revised downwards. Citigroup now expects earnings to grow 20.8 per cent in 2010-11, down from its estimate of 27.36 per cent a month ago.
