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Published on 12/07/2020 2:43:51 PM | Source: Motilal Oswal Financial Services Ltd

Third consecutive high double-digit IIP decline in May 20 By Motilal Oswal

Posted in Economy News| #Economy #IIP #Motilal Oswal

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Expect real GDP contraction of ~20% in 1QFY21

* IIP contracted 34.7% YoY in May’20, broadly in line with our expectation and market consensus. This decline is slower than the 57.6% YoY contraction seen in Apr’20 (revised from 55.5% decline earlier) and growth of 4.5% YoY in May’19.

* Just like the previous two months, IIP decline in May’20 was led by across-the-board contraction in all major components. While manufacturing activity declined 39.3% YoY (v/s -67.1% in Apr’20), mining activity fell 21% YoY during the month (v/s -27% a month ago). Power generation contracted 15.4% YoY in May’20 (v/s -23% in Apr’20).

* The total 15-sub industries group (accounting for ~58% weight in the index) within manufacturing declined 30% YoY in May’20 from decline of ~58.7% YoY in Apr’20. However, within this group, pharmaceutical production actually rose 2.5% YoY during the month. The growth in pharmaceutical production is in fact better than the average growth of ~1.1% during Jan-Feb’20.

* Additionally, infrastructure/construction activity and capital goods production continued declining in the range of 40- 60% YoY in May’20. While consumer goods production declined by more than a third in May’20, primary and intermediate goods declined by 20% and 44.1% YoY, respectively.

* As detailed in our EAI-GVA/GDP report, May'20 continued to see sharp decline in economic activity. While Jun’20 appears to be a far better month followed by the government’s ‘Unlock 1.0’, which might have led to a gradual pick-up, we expect IIP to decline for another 3-4 months. IIP is expected to contract 20-30% in Jun’20. As for real GDP, we expect a contraction of ~20% in 1QFY21 and decline of ~5% for full-year FY21.

 

* Third consecutive high double-digit IIP decline in May’20…: Broadly in line with our expectation and market consensus of ~38% fall, IIP declined 34.7% YoY in May’20. This decline is slower than the 57.6% YoY contraction seen in Apr’20 (revised from 55.5% decline earlier) and growth of 4.5% YoY in May’19 

* ...driven by across the board contraction: While manufacturing activity declined 39.3% YoY in May’20 (v/s decline of 67.1% YoY in Apr’20), mining activities contracted 21% YoY (v/s -27% YoY in Apr’20). Additionally, power generation fell 15.4% YoY during the month (v/s -23% a month ago) (Exhibit 2). Within manufacturing, growth in 15 sub-industries (accounting for 58% weight in the index) declined by 30% YoY in May’20 compared to a decline of 58.7% YoY a month ago and growth of 6.5% a year ago (Exhibit 3). Notably, production of pharmaceuticals (accounting for ~5% weight in the IIP index) grew 2.5% YoY in May’20 after declining in the range of 23-54% YoY in the previous two months. Growth in pharmaceutical production is in fact better than the average growth of ~1.1% during Jan-Feb’20.

* Infrastructure/construction activity and capital goods production still posted huge declines in May’20: While infrastructure and construction activity declined 42% YoY, capital goods production plunged 64.3% YoY in May’20 as against a contraction of 84.7% and 93.6% witnessed in Apr’20, respectively. Moreover, primary/intermediate goods production also declined 20%/44.1% in May’20 v/s a decline of 26.6%/65.4% a month ago. Fall in consumer goods production nearly halved to 36% YoY in May’20 v/s decline of 69.1% YoY in Apr’20

* Maintain our forecast of ~20% decline in 1QFY20 real GDP: As detailed in our EAI-GVA/GDP report, May'20 continued to see massive decline in economic activities. While Jun’20 appears to be a far better month followed by the government’s ‘Unlock 1.0’, which might have led to a gradual pick-up, we expect IIP to decline for another 3-4 months. IIP should decline 20-30% in Jun’20. As for real GDP, we expect a contraction of ~20% in 1QFY21 and decline of ~5% for fullyear FY21.

 

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