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Momentum continues to pace up

* IIP growth moderated but remained solid at 11.5% in Jul’21 (vs. 13.6% in Jun’21) as the base effect waned. Activity levels appear almost close to pre-Covid levels, with the headline index now short of Jul’19 levels by a mere 0.3%.

* Sequentially, IIP growth picked up by 7.2% in Jul’21 (5.7% prior), led by manufacturing and electricity output. Mining output moderated a little. Manufacturing was driven by a pickup in motor vehicles, textiles, and electronics and electrical equipment. Use-based capex indicators showed mixed trends and slowed mildly but remained healthy on a sequential basis.

* While base effects are likely to fade, we expect the sequential growth recovery to persist broadly over the coming months. Led by traction in activity momentum, we maintain our upwardly-revised FY22 forecast of 10.1% growth.

IIP growth eases as base effect fades but improves sequentially

Industrial production grew 11.5% in Jul’21 (Emkay: 11%, Consensus: 10.1%), which was slower than 13.6% growth reported in Jun’21, partly as the favorable base effect faded. The YoY print looks healthy, with headline IIP growth now a mere 0.3% lower than the levels seen in Jul’19. Sequentially, IIP growth picked up by 7.2% in Jul’21 (5.7% prior), mainly driven by the gradual opening up of the economy, and as firms adapt to a new regime.

Sequentially, manufacturing and electricity output increased sharply, while mining output moderated a little. Jul’21 PMI and export growth were strong, while eight core industries, which constitute 40.3% weight in IIP, registered 9.4% growth YoY in Jul’21 (vs. 9.3% in Jun’21) and indicated a sequential improvement. The manufacturing PMI sliding to 52.3 in Aug’21 from 55.3 in Jul’21 and the fading base effect indicate a further easing in upcoming IIP prints on a YoY basis. But we expect the sequential growth recovery to persist broadly over the coming months.

Manufacturing sees sequential pick-up; Electricity shows resilience

On a sectoral basis, manufacturing production growth slowed to 10.5% YoY vs. 13% in Jun’21 but improved sequentially to 8.2% vs. 7.4% earlier, driven by a pickup in motor vehicles, textiles, and electronics and electrical equipment. On a YoY basis, within manufacturing, gains were seen in electrical equipment, vehicles-trailers, paper products, textiles and food products.

However, compared to Jul’19, key movers were medicinal chemicals (12.2%), textiles (1.2%) and food products (1.2%), while items that saw declines were beverages (35%), wearing apparel (34.3%) and transport equipment (28.8%). Mining grew 19.5% in Jul’21, lower than 23.1% in Jun’21, but sequentially improved to -0.9% in Jul’21 vs -2.3% de-growth earlier. Electricity grew by 11.1% YoY (vs. 8.3% prior) and by 9.2% sequentially (vs. 4.4% prior).

Use-based IIP shows mixed trends in capex indicators

Use-based classification wise, all use based sectors reported growth except consumer non-durables on yoy basis. Capex cycle indicators were mixed, with faster growth in capital goods (29.5% YoY in Jul’21 vs. 26.6% in Jun’21) and slower growth in infra goods (11.6% YoY in Jul’21 vs. 19.8% in Jun’21). However, sequentially, both segments moderated albeit remained healthy.

Sequential momentum improved for primary goods 5% (-0.2% prior), intermediate goods 7.8% (2.8% prior) and consumer non-durables 3.8% (2.9% prior). The consumer durables segment was 8.3% lower than the levels seen in Jul’19, while infra and construction grew 2.4% and intermediate goods grew 2% from Jul’19 levels. Seeing from prepandemic levels, infra goods are at 102% of their pre-pandemic levels, while capital goods, primary goods and consumer non-durables are close to their pre-pandemic levels. The consumer durables segment at 95% was a laggard amid a lagging durable consumption recovery.

Recovery to gain traction ahead

High-frequency data continues to hint at a sequential recovery. The faster vaccination pace, relative control over the Covid outbreak, still-strong external demand and continued easing of the curbs on movement have paved the way for industrial growth normalization. While base effects are likely to wither out, we expect the sequential growth recovery to persist broadly over the coming months- also helped by government capex. Led by traction in activity momentum, we recently raised our FY22 forecast by 110bps to 10.1%.

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