The industrial production numbers for March clearly indicate that despite the Reserve Bank of India’s best efforts at slowing the economy, the momentum in domestic manufacturing continues. Consider the figures for manufacturing growth: November—17.2%, December—14.5%, January—12.1%, February—11.9%.
The data seemed to be pointing to a slow, but steady moderation. But the March data breaks the trend, with manufacturing growth up again at 14.1%.
Are the March numbers a blip? After all, interest rates have hardened and surveys show that business confidence is down. On the other hand, results for the March quarter have been good and the seasonally-adjusted Purchasing Managers Index has shown an improvement in April (although it did show deceleration in March).
The industries that have shown a sharp acceleration in growth in 2006-07 include metal products and parts, wood and wood products, jute and other vegetable fibre textiles, and paper and paper products.
One clear trend is the slowdown in consumer durables production, where growth was a mere 2.7% in March, much below the 9% average for 2006-07 as a whole. “Growth in the consumer durables industry has been tepid for quite a few months, no doubt the result of higher interest rates,” says Gaurav Kapur, senior economist with ABN Amro Bank.
The other slowdown has been in capital goods, which saw growth of 13.2% in March, well below the 2006-07 average of 17.7%. Kapur points out that the trend is not because of any slowdown in investment, but because manufacturers are sourcing their capital goods from abroad. With an appreciating rupee and lower interest rates abroad, that also helps the bottom line.
With its volumes for the March quarter rising 10.8%, Hero Honda Motors Ltd has been able to grow its market share. Its revenues rose 17% compared with the March quarter of 2006. There were as many as eight new product launches in 2006-07, boosting the top line. But growth has been achieved at a high cost, with net profit down as much as 27%. Operating margins are lower by a huge 590 basis points compared with the same period last year. Rising input costs and cut-throat competition have contributed to the squeeze. Steel and nickel costs, in particular, and the promotional costs for the cricket World Cup did their bit to wreck the bottom line. Of course, everybody knew that the firm would take a hit on margins and post much lower profit, but the extent of the damage has been more than the street expected.
Will the price pressures continue? There seem to be few doubts on that score, with steel companies planning for another round of price hikes. Further, growth in the overall two-wheeler market has slowed. Interest cost as a proportion of running costs is high for motorcycles, which makes them highly interest-rate sensitive. That is amply brought out in declining year-on-year sales for motorcycles in April. Hero Honda, however, showed an 8.8% volume growth in motorcycles in that month and the company continues to claw back market share. But it has been pushing sales through discounts and that has been hurting margins.
With current industry trends continuing for the immediate future, the stock, which has moved up ahead of the results, is likely to come under pressure.