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How to read manufacturing data
Every month, the government releases the index of industrial production or IIP data. This gives an idea of how the manufacturing sector performed. However, stock markets are all about future growth and expectation. In this context, a survey that projects the trend in manufacturing could be more relevant. The Federation of Industrial Chambers of Commerce in India or FICCI recently released quarterly survey on manufacturing for fourth quarter to March 2014. FICCI has an indirect reach of 250,000 companies in India.
Here are some takeaways:
Marginal improvement in sentiment:
The proportion of respondents reporting higher levels of production in the fourth quarter of 2013-14 has further increased to 56% as compared to 52% in quarter 3 of 2013-14. It was much lower at 48% in Q-2 of 2013-14. This is the highest proportion since the last eight quarters. This indicates that there could be a steady improvement in demand. Companies seem to have pushed up production at their units.
An important metric to track the manufacturing sector is the demand for goods. The survey highlights that the demand condition seems to be unchanged with 44% respondents reporting higher order books for January-March 2013-14 quarter same as the quarter to December 2013. This has grown steadily as previous surveys indicated a much lower number in 30s. To say that there is a recovery, more respondents need to say that the demand for their goods is improving.
In the manufacturing sector, the inventory data is an indicator of the brisk or low nature of your business. “Looking at the inventory levels, currently around 32% respondents reported that they are carrying more than their average levels of inventories (as compared to 24% in Q-3 and 26% in Q-2 of 2013-14). Another 52% are maintaining their average levels of inventories (as compared to 53% in previous quarter),” the survey said. This could be a cause of concern as it could manufacturers may slow down production till the inventory is sold.
The export outlook for the manufacturing sector remains positive and seems to have improved somewhat in the fourth quarter. The proportion of respondents expecting higher exports has improved to 58% as compared to 48% in previous quarter to December 2013. “Overall, export scenario is showing some improvement in current quarter as compared to previous quarters,” the FICCI survey said. Clearly, manufacturers are banking on an economic recovery in US and other rich countries to push exports of their goods.
The manufacturing sector is expected to create more jobs for people in India. The survey reveals though that over 70% of the respondents are not likely to hire additional workforce in next three months. “Though this proportion is less than that of the previous quarter (75%) but overall the manufacturing units are not expected to add significantly to their existing workforce in coming months,” the survey said. This is no good news. The economy needs additional job creation to sustain a high growth rate. This is because more jobs to people mean more demand for goods and services.
As many as 72% of respondents pay around 11% per annum interest rate, the survey said. It is unlikely that the Reserve Bank of India will start reducing borrowing rates soon. This is because consumer price inflation continues to remain elevated. RBI plans to focus on consumer price inflation more than wholesale price inflation it has traditionally relied upon.
Based on expectations in different sectors, the survey pointed out that seven out of 13 sectors were likely to witness low growth (less than 5%). Only two sectors, (leather and textiles) are expected to have a strong growth of over 10% in January - March 2013-14 and rest all the sectors likely to witness moderate growth.
The textile sector is showing signs of revival after many years of underperformance. Almost 91% of textile firms are expecting to have either same or higher number of orders in March 2014 quarter as compared to October- December 2013. Average capacity utilization is hovering around 83% in the textiles sector with 39% of the respondents operating at a capacity more than that of last year. But, majority of respondents (74%) are not planning to increase their capacity in next 6 months, the survey adds..