The manufacturing story so far has been pretty simple—capital goods have been doing very well, while consumer goods have not. That fits in neatly with rising interest rates, because capital expenditure is less sensitive to interest rate increases than consumer discretionary purchases. While capital goods production expanded at an annual rate of more than 18% in February and March, consumer goods production trundled along at a much slower pace.
The index of industrial production (IIP) for April, however, tells a different story. Capital goods production continues to be robust, rising 17.7% over the year-ago period. But consumer goods production has been equally good, also rising 17.7%. Rather surprisingly, there has been a slight improvement in the consumer durables growth rate, but it remains at a low 5.3%. Consumer non-durables, on the other hand, have grown 21.9%, which should be music to the ears of all consumer goods firms.
Two distinct trends are now discernible. One is the strength of investment demand, seen from the capital goods production numbers, in particular from the item “machinery and equipment other than transport equipment”, which grew at 19.2% in April, compared with 14.2% during FY07. The other is the continuing vigour in consumer non-durables, the result of rising incomes.
Manufacturing growth in April at 15.1% is a clear evidence that there has been no slowdown. At the same time, it’s equally clear that the rate of bank credit is decelerating. There could be several reasons for that apparent contradiction: monetary policy works with a lag and the slowdown in growth will show up later; or corporates are substituting domestic borrowings with borrowings from abroad, which accounts for both slowing bank credit at a time when industrial growth is robust and for the rise in external commercial borrowings. If the last reason is correct, the Reserve Bank of India is in a predicament, because raising interest rates?won’t?solve the problem. Also, more borrowings abroad will lead to an influx of liquidity into the country, pushing the rupee up.
On the positive side, as Lehman Brothers’ economist Sonal Verma points out, “The capacity-enhancing investment boom, as well as strong business profits and productivity, is lifting India’s potential economic growth rate, which should help keep inflation under control.”
With capital expenditure a major driver of economic growth, NTPC Ltd has been a key beneficiary. The company is a play on the growth in the country’s power infrastructure and substantial benefits are expected to flow to NTPC’s bottom line over the 11th Plan.
While the company added 7,144MW of generating capacity during the 10th Plan (2002-07), it proposes to add 21,941MW in the next five years. The company’s installed capacity was 27,404MW at the end of March 2007, which means an 80% increase in capacity is being planned for the next five years. Nor is this just a pie in the sky: 10,860MW of this capacity is already under construction. Funding is also not an issue, with the company having a low debt-equity ratio and generating plenty of cash.
NTPC’s earnings per share for the March quarter was Rs2.11, an increase of only 11% compared with the year-ago period. The lower growth is due to factors such as higher staff costs consequent to the adoption of a new accounting standard for employee benefits; the impact of provisioning for a wage revision and the waiver of interest on debentures as a consequence of a settlement with the Grid Corp. of Orissa.
The good news is that the plant load factor for NTPC’s gas-based units has improved, thanks to increased gas availability. Unfortunately, all the positives are already priced into the stock, which has barely moved in the last two months.
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