Manufacturing slows, but does better than rest of the world

Manufacturing slows, but does better than rest of the world

The ABN Amro India Purchasing Managers’ Index (PMI), a seasonally adjusted composite indicator designed to provide an overall view of activity in the manufacturing sector and a leading indicator for the whole economy, was at 57.3 in September, well below the levels of the previous three months, but very near the 57.4 reading notched up last May.

The growth of output has cooled somewhat in recent months as have output prices, but the big fall has been in new orders. The reading on the New Orders Index, at 62.6, hasn’t been so low since July last year. Lower growth in new orders ties in with anecdotal evidence of a slowdown in order growth in sectors such as capital goods and in exports.

More importantly, since today’s orders are tomorrow’s sales, the slowdown in new order growth could be an indication of continuing deceleration in manufacturing, says Gaurav Kapur, senior economist with ABN Amro.

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The fall in new orders is also related to the low reading on the Quantity of Purchases Index. At 58.3, this index is down sharply from the levels in previous months. Coincidentally, this is also the lowest reading since July 2007, so the correlation with the New Orders Index is clear, as manufacturers cut back inputs as new orders declined. It’s another indicator of lower production in the future.

Nevertheless, a reading of 62.6 for the New Orders Index also indicates that,despite some slowdown, growth is still robust. (A reading of PMI below 50.0 indicates that the manufacturing economy is generally declining; above 50.0, that it is generally expanding. A reading of 50.0 signals no change. The greater the divergence from 50.0, the greater the rate of change signalled by the index.)

The overall PMI reading of 57.3 is also very good, compared with similar readings in other parts of the world. In August, when PMI for India was at 57.9, indicating substantial expansion of manufacturing activity, the PMI indices of the US, Japan, China, the Eurozone and the UK were all below 50, signalling a contraction in manufacturing activity, although the China index may have been affected by the slowdown on account of the Olympics.

The global manufacturing PMI was at 48.6 in August, indicating a further deterioration in the overall economic health of the worldwide manufacturing sector. This index recorded its lowest reading since April 2003, reflecting weakening conditions across the Eurozone, the UK, the US, Japan, China and Russia.

Panacea Biotec gets a beachhead in US biodefence

News about vaccine maker Panacea Biotec Ltd taking a stake in US biodefence producer PharmAthene Inc. didn’t enthuse investors much, with the stock rising just a tad. That wasn’t surprising, considering that the company paid $3.50 (Rs164.50) per share, a 90% premium to PharmAthene’s closing price on Tuesday, for acquiring a 14.5% stake.

The deal has been done by Panacea through subsidiary Kelisia Holdings Ltd, which also receives 12-month warrants to purchase approximately another 5.5% of PharmAthene at an even more elevated price of $5.10 per share.

Panacea benefits from getting a beachhead in the attractive US biodefence market, since PharmAthene is at an advanced stage of developing an anthrax vaccine.

PharmAthene gets access to Panacea’s strong research and development portfolio in areas outside anthrax vaccination. If all goes well, it could also get a low-cost manufacturing base.

Analysts say that both Panacea and PharmAthene have bid for a tender worth $250 million from the US government for the manufacture of anthrax vaccines. Also, the US National Institute of Allergy and Infectious Diseases has awarded PharmAthene a multi-year contract worth up to $83.9 million for developing an anthrax vaccine.

The other immediate opportunity for the company lies in pentavalent vaccines, a combination of five vaccines providing immunization from early childhood diseases.

The firm has already received an order worth $35 million from Unicef to supply these vaccines, and it has received the World Health Organization’s (WHO) pre-qualification for them. A research note by Kotak Securities also says that the health ministry plans to replace its single-shot vaccines with pentavalent vaccines from 2009, which will benefit Panacea. The report estimates that Panacea will be able to capture around $50 million of the $700 million global market for these combination vaccines in fiscal 2009.

The Panacea stock has corrected sharply—partly on the basis of reports that WHO is not approving vaccines from India because the Indian regulatory system has failed to meet its quality benchmarks, but this has been denied by the Panacea management. At the Rs240 level, the stock trades at around 15.5 times its expected fiscal 2009 earnings. But analysts point out that the market is also concerned about the management hedging one-third of its export revenues for the next three years at Rs40 to the dollar.

Given the recent depreciation in the value of the rupee, that is sure to hit earnings growth, which the Kotak report puts at a negative 19% for fiscal 2009.

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