Signals from the economy are very puzzling. The Index of Industrial Production (IIP) has gone soft in May (+2.7 per cent year-on-year) after picking up in April (+3.3 per cent year-on-year revised). Credit growth has nosedived and stayed down.
Corporate profits were down in Q4, 2014-15 and many advisories from financial institutions project that it will stay down in Q1, 2015-16 as well. Exports have dropped for the last three quarters in a row. Auto sales are flat in Q1 and the SIAM expects sales to remain slow for the next two quarters. However, the rebased GDP numbers claim that the economy is already in revival and has in fact, been doing well for the last two years. This could be ignored as a statistical aberration except for one detail: tax collections have improved.
Indirect tax collections have climbed 37 per cent in Q1, year-on-year. That is a big improvement and it cannot be ignored because the indirect taxes collected have crossed above Rs 1,54,000 crore. Part of the rise in collection is due to excise hikes on fuel and also raising of the service tax rate.
However, it is estimated that the indirect tax collection is up about 14 per cent, even if rate hikes are discounted. Custom collections are up 20 per cent and service tax is up by 16 per cent while excise has delivered a stunning 80 per cent rise in collections year-on-year.
It is true that IIP is purely a measure of volume and higher excise collections could be a function of higher value items being produced, without the unit volume increasing much. The IIP has been positive now for five months in a row - that is a good trend even if the trend rate is low. While the IIP tells us that production is slowly improving, the tax collections suggest that those goods have, by and large, been sold without a major inventory pile up.
Where is that buoyancy coming from? It must be from relatively smaller listed and unlisted businesses because the earnings of listed businesses doesn't seem to have seen a commensurate rise. Where can an investor go in these circumstances? Not to export oriented sectors. Nor to sectors driven by rural demand such as tractors because those are expected to be soft.
Capital goods would be a possibility but after a strong performance in April, growth in this segment seems to have moderated in May. Again this is a puzzle - why would capital goods manufacture increase at a time when bank credit growth has hit the floor? An uptick in capital goods generally implies investment, while low credit growth implies the opposite.
Who is investing in capital goods and why are those investments not being captured in other data? There has been a fair amount of overseas borrowing so that might be a partial explanation if companies have gone abroad to source relatively cheap loans. Also anecdotally, if stalled infrastructure projects are indeed seeing a pick up, there is an explanation for a pickup in capital goods. Infra is long-gestation so those goods would not be generating revenue yet.
The BSE Capital Goods Index has done well, returning over 75 per cent since January 2015. In the past 12 months, it is up "only" 21 per cent so there has clearly been a surge since January. Individual companies such as AlstomTD (up 70 per cent in 12 months), BEML (+68 per cent), BEL (+60 per cent), FAG Bearings (+69 per cent), Mahindra CIE (+47 per cent), Sadbav Engineering, (+52 per cent) and Welspun (+47 per cent) have all outperformed the index itself. A momentum investor could focus on these businesses.
The author is a technical and equity analyst
