The core drag

Feb data confirm downtrend in the infrastructure sector

There's no doubt about the slowdown in the infrastructure sector any more. The February data shows that the overall infrastructure index fell 0.6 per cent in February on a y-o-y basis.

The negative growth comes after two months of progressively declining rates of growth. To be specific, the growth rate declined from five per cent in November to 3.6 per cent in December to 1.9 per cent in January, before plummeting to -0.6 per cent last month.

This column had argued last month that a combination of a higher base and lack of excess capacity were responsible for the slowdown.

However, while the chief reasons for the slowdown in January had been negative growth in steel and refineries, the February data show that steel production increased by 1.7 per cent during the month.

The reason is simple""- steel production fell sharply in February 2004, and it's the base effect all over again, only this time it's positive. Actually, steel production last month was much lower than the January level, although that's partly because February has fewer days.

On the other hand, cement, which had grown by 9.6 per cent in January, improved by only 1.3 per cent in February. Four out of the six infrastructure industries had negative growth rates in February.

Moreover, the infrastructure industries' growth rate for the period April 2004 to February 2005 is now only 4.6 per cent, compared with the previous year's 6.5 per cent.

The infrastructure industries have a weight of 26.68 per cent in the Index of Industrial Production, and although IIP growth was a strong 8 per cent in January, the poor performance of the infrastructure industries will drag down growth.

United Breweries - Shaw Wallace

Will consolidation in the liquor business result in a re-rating for IMFL companies? To be precise, will the UB group be re-rated by investors now that it's the second largest liquor group in the world?

That seems unlikely in the near term, simply because the business has been traditionally plagued with excise and sales tax disputes which never seem to get resolved. Take Shaw Wallace, for which the UB group has just paid Rs 325 per share for a 54.54 per cent stake.

The company has funds worth about Rs 400 crore locked up in tax cases. The other reason is that the management always has to do some amount of wheeling and dealing to get licences and keep politicians happy.

That's probably the reason why the FII holding in McDowell and Shaw Wallace, according to December data, was low at 6.5 per cent and 8 per cent respectively. In any case, the McDowell scrip has gone up five-fold in the last nine months, which means upside could be limited in the near term.

Nevertheless, prospects for the industry are bright because there is a huge market in India waiting to be tapped. The demographics in this country are possibly the best in the world today for consumables.

The per capita consumption is just 0.6 litres per annum, among the lowest in the world. The organised segment did sales of 112 million cases in FY04 and is growing at an average eight per cent per year.

For growth to pick up beyond these levels, distribution has to be opened up. Secondly, price levels would have to trend downwards.

Metals: That Middle Kingdom shadow again

The fear of a slowdown in Chinese demand for metals has once again shown signs of raising its head and rattling the metals industry. Domestic metal stocks like Hindalco and Tisco weakened in Tuesday trading.

According to Australia-based Macquarie Investment bank, the y-o-y growth in Chinese demand for steel slowed to 5.4 per cent in Q4 CY04 from 28.4 per cent in Q1 CY04. Similarly, in the case of copper, y-o-y growth in Q4 CY04 slowed to 0.8 per cent from 21.8 per cent, while in the case of aluminium, growth in the last quarter of the previous year slowed to 15.5 per cent from 20.2 per cent.

Analysts point out that this slow down in Chinese demand could be attributed to the difficulty experienced by companies in obtaining credit facilities.

As a result, indications of 'destocking' were being felt amongst user industries in China. Grim warnings concerning the viability of the current strength in metal prices is not new-late last year Swiss-based UBS had downgraded the steel sector to neutral and it had cited concerns of rising Chinese exports of this metal, which could depress prices.

Meanwhile, with lending in China picking up after the end of their new year, growth in demand for metals is also expected to improve, going forward. However, for domestic metal companies the operating environment is still positive-steel companies have been reducing their emphasis on exports, in favour of booming domestic demand.

Domestic steel prices are about 5-7 per cent cheaper than overseas prices and hence, it's unlikely that domestic players would lose market share to overseas players.

Also, in the case of domestic smelters like Hindalco, the TC/RC rate is more relevant to growing profit-the spot rate is currently hovering at about 30 cents a pound versus 3-4 cents in June 2004.

With contributions from Shobhana Subramanian and Amriteshwar Mathur