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Published on 13/01/2020 5:11:13 PM | Source: Motilal Oswal Services Ltd

Maintain forecast of lower sequential real GDP growth in 3QFY20 - Motilal Oswal

Posted in Economy News| #Economy #Motilal Oswal

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IIP surprises positively in Nov’19

Maintain forecast of lower sequential real GDP growth in 3QFY20

* IIP growth accelerated to a four-month high of 1.8% YoY in Nov’19, as against a decline of 4.0% (revised from -3.8% earlier) in the previous month and growth of 0.2% in the year-ago period. Growth was much better than consensus of 0.3% YoY and our forecast of 0.5% YoY.

* The acceleration month-on-month in Nov’19 can be attributed to (a) 0.6% YoY growth in consumer goods after three consecutive declines and (b) a slower decline of 8.6% YoY in capital goods production after more than 20% fall in the previous three months.

* The reason for the deviation from our forecast was the surprisingly higher-than-expected growth in intermediate goods production and mining activity. While production of intermediate goods grew 17.1% YoY in Nov’19 versus our forecast of 9% growth, mining activity increased 1.7% YoY versus our forecast of a 5.1% decline.

* Industry wise data reveal better-than-expected growth in manufacturing (IIP weight: 77.6%) activity of 2.7% YoY in Nov’19. Power (IIP weight: 8.0%) generation, however, continued declining, albeit slowly.

* As mentioned earlier, higher-than-expected IIP growth was primarily due to better mining activity and intermediate goods production. However, manufacturing and capital goods production, which are the major components of growth, were not much different than our forecasts. Therefore, our EAI-GVA/GDP growth estimates for Nov’19 are revised only marginally upward from 5.0%/6.1% to 5.2%/6.2%. Thus, we continue believing that growth in 3QFY20 will trail that in 2QFY20 and then mark the bottom. In any case, for 3QFY20 real GVA growth to be higher than 2QFY20, EAI-GVA growth has to be more than 7% in Dec’19, which appears difficult at this stage.

* IIP at four-month high …: IIP growth accelerated to a four-month high of 1.8% YoY in Nov’19, as against a decline of 4.0% (revised from -3.8% earlier) in the previous month and growth of 0.2% in the year-ago period. Growth was much better than consensus of 0.3% YoY and our forecast of 0.5% YoY (Exhibit 1).

* ...driven by better growth in consumer goods and slower decline in capital goods production: While consumer goods production increased 0.6% YoY in Nov’19 after three consecutive declines, the fall in capital goods production moderated significantly to 8.6% YoY from more than 20% in the previous three months. What however came in as a surprise and also the reason for the deviation from our forecast was higher-than-expected growth in intermediate goods (Exhibit 2). Production in this category increased 17.1% YoY in Nov’19 versus our forecast of 9% growth. Infrastructure/construction activity and primary goods production continued declining in the month.

* Mining activity surprised positively in Nov’19: Industry wise data revealed 1.7% YoY growth in mining (IIP weight: 14.4%) activity in Nov’19 (our forecast: -5.1%) after two consecutive declines (Exhibit 3). Even manufacturing (IIP weight: 77.6%) activity grew better than expected at 2.7% YoY in the month after a decline of roughly the same rate in the previous month (Exhibit 4). Power (IIP weight: 8.0%) generation, however, continued declining, albeit slowly.

* 3QFY20 real GDP growth forecast remains unchanged: Higher-than-expected IIP growth was primarily due to better mining activity and intermediate goods production. However, manufacturing and capital goods production, which are the major components of growth, were not much different than our forecasts.

Therefore, our EAI-GVA/GDP growth estimates for Nov’19 are revised only marginally up from 5.0%/6.1% to 5.2%/6.2%. Thus, we continue believing that growth in 3QFY20 will trail that in 2QFY20 and then mark the bottom. In any case, for 3QFY20 real GVA growth to be higher than 2QFY20, EAI-GVA growth has to be more than 7% in Dec’19, which appears difficult at this stage.

 

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