When the Index of Industrial Production (IIP) data was released in January, there was alarm because the IIP for November 2012 was 0.12 per cent lower than in November 2011. The December 2012 IIP estimates are now out and the November IIP has been revised. November 2012 actually saw a greater decline of 0.84 per cent year-on-year (YoY). December 2012 preliminary data shows IIP was down 0.55 per cent YoY versus December 2011.
The conclusion would be that there was no discernible recovery in Q3, 2012-2013. The use-based component IIP indices indicate a decline in consumption. Consumer Durables were down over 8 per cent YoY and Consumer Non-durables were down 1.4 per cent.
The inflation numbers, which were also released last week, aren’t cheery either. Retail inflation as measured by the Consumer Price Indices was running at 10.8 per cent YoY in January 2013. The Wholesale Price Index has decelerated however, and that is good news.
The WPI rose at 6.62 per cent in January, which is a three-year low. Core WPI (minus food and energy) was running at about 4.2 per cent. Food, clothing and housing costs - roti, kapda and makaan - were however, all rising at double-digits in January. Given CPI trends, the RBI’s caution in making minimal rate cuts in its January Credit Policy was understandable. It will have a delicate job stimulating growth without letting prices spiral up.
Reinforcing official data, the auto-industry association, SIAM (Society of Indian Automobile Manufacturers), has said Indian auto sales would show unit decline in 2012-13. Vehicle sales have declined YoY for three months in succession between November 2012- January 2013. Between April 2012- January 2013, sale in units dropped 1.8 per cent compared to the April 2011-Jan 2012 period. That’s a far cry from the 9-11 per cent rise in unit sales that SIAM optimistically projected in July 2012. Tata Motors’ Q3 results, where net profits have halved, reflects the gloom.
Auto-industry data is a reliable barometer of industrial activity. The industry is capital-intensive and the value chain extends to cover everything from basic commodities (metals and plastics), to high-end electronics and financial services. It also generates plenty of direct and indirect employment.
Based on auto-sales data, I’d hazard a guess that the IIP didn’t pick up much in January 2013 and overall consumption may have slowed even more. The IIP–Nifty relationship is interesting, given recent data.
The stock market leads the real economy and, hence, the Nifty-trend usually leads the IIP-trend. The lead relationship is not consistent in terms of time. The Nifty may led by a month or two, or by several months. The market is also fallible: bulls may bet shareprices up, hoping for an economic boom, which doesn’t happen.
The market has trended up since August 2012, while the IIP has been rangebound. This is a four-five month lead for share prices versus the IIP and the “gap” in terms of time is wider than normal.
Is this a false rally? If economic activity doesn’t pick up in January 2013, tired bulls may start unloading stocks. This is a distinct possibility. The market has corrected through the first two weeks of February, which may be an indication of changing sentiment.
On the positive side, we do have an uptick in the HSBC Purchase Managers’ Index (PMI), which suggests that consumer activity did pick up a little in January. There is of course, the Budget, which is a powerful influence. Hopes of a decent Budget could keep prices buoyant till end-February at least. But if the Budget doesn’t enthuse and the next set of IIP and inflation data released in mid-March isn’t markedly better, the trend will get more bearish.
Auto-stocks would be among the worst-hit segments in another downturn. The industry had hopes of an uptick in the business cycle in early 2012-13, as the SIAM projections indicated. The stock market performance of auto shares also reflects ebbing hopes. The CNX Auto was up about 17 percent YoY by mid-January 2013. It has dropped 6.5 per cent in the past month. The decline is more than twice as much as the overall market correction.
If this logic is right, investors should be wary of increasing auto-sector exposures and maybe cut back on the sector in the next four to six weeks. Of course, the Budget may hand out some sops to the sector. Rate cuts should also help. Cuts reduce the interest burden on the auto-industry and they also drive sales as and when passed on in car-finance rates. But this may not be enough if the sentiment changes.
