>HSBC India Manufacturing Purchasing Managers Index: New order growth strengthens to six-month high in December

Summary

The seasonally adjusted HSBC Purchasing Managers’ Index™ (PMI™) – a headline index designed to measure the overall health of the manufacturing sector – registered 54.2 in December, up from 51.0 in November, and indicated the strongest improvement in business conditions since June. Overall, the rate of increase was solid, but nonetheless remained weaker than the long-run series average.

Indian manufacturers reported a further rise in new business during December. The latest expansion in new work intakes was the thirty-third in successive months. Moreover, growth was strong and the fastest since June. Incoming new work from abroad also rose in December, with the rate of increase solid overall. The increase in total new business was attributed to stronger client demand.

Reflective of larger new order volumes, Indian manufacturers raised production in December. Output increased solidly, with the rate of growth accelerating since November to a four-month high. Nonetheless, backlogs increased for the third consecutive month. Stocks of finished goods were accumulated only marginally.

Monitored companies increased their input buying on average in December. Anecdotal evidence generally attributed higher purchase volumes to greater production requirements. Stocks of purchases were also accumulated during the latest survey period.

Lead times on inputs shortened during December, in contrast to the lengthening that had been registered in the previous three months. Respondents suggested that suppliers were processing orders faster during the latest survey period. However, the improvement in vendor performance was only marginal overall.

Employment in India’s manufacturing sector increased in December, ending the period of job losses that began in August. However, the rate of employment growth was only slight, with the vast majority of panellists keeping staff headcounts unchanged from November.

Input costs faced by Indian manufacturers rose further during the latest survey period. Raw materials and petrol were particularly mentioned as having increased in price. Overall, the rate of input cost inflation remained strong and above the long-run series average, despite slowing slightly since November. Firms partly passed on greater cost burdens to clients by raising their output charges in December. Average selling prices rose strongly, with the rate of increase the fastest in seven months.

Comment

Commenting on the India Manufacturing PMI survey, Leif Eskesen, Chief Economist for India & ASEAN at HSBC said:

"Activity in the manufacturing sector rebounded in December led by higher demand from both domestic and foreign clients, suggesting that the momentum in the sector is not quite as weak as official and more dated IP data would suggest. The rebound in growth added to the build-up in backlogs of work and also stabilized employment, which crawled back into positive territory. The solid demand from clients allowed manufacturing companies to increase output prices at an accelerated pace to pass on rising costs. While the sequential inflation of input costs decelerated slightly, it remained high by historical standards. All in all, these numbers suggest it's premature for the RBI to replace inflation with growth as the main concern."

Key points

• New work intakes rise strongly, reflective of greater client demand

• Output growth accelerates sharply since November

• Job creation for first time in five months

RISH TRADER

>Global recovery looks more prolonged in 2012 / Twin Pillars of Emerging Markets / Sectoral Outlook 2012

Recovery in advanced economies is likely to take longer time than initially anticipated. Forward looking indicators like Purchasing Managers' Indexes ( PMIs) have been declining; though there was a marginal uptick in case of the manufacturing sector in the U.S. where better prospects of recovery have been further reinforced by early Christmas Retail Sales data and a drop in the Unemployment Rate. By contrast, the European PMI has slid down to contractionary level providing strong indications of a recession in Europe in 2012.


In view of the prolonged slowdown in developed economics, reduction of debt levels would entail structural measures which, in some cases, may not be politically expedient. Both the indebted and the bailing-out' countries have to overcome some political resistance to take steps towards effective resolution of the problem and prevent credibility from weakening. In this scenario upcoming policy decisions are going to be the key towards the global economic outlook.


After the recent EU summit which has failed to reverse the negative market sentiments, European governments are likely to make a big step towards fiscal integration soon and that the U.S. Congress extends most of this year's stimulus. Failure on these fronts would risk a full-blown recession, with global GDP growth falling below the 2.5 percent recession threshold.


In case of emerging economies, policy tightening (as inflation has been a major concern in 2011) and falling external demand moderate economic activities In China GDP growth number is likely to come at around 9 percent YoY in 2011 against an average of 10.5 percent during 2000–07. In 2012 the scenario is unlikely to change much as global slowdown, domestic housing market weakness and limited room for policy stimulus will lead China towards registering a second year of below-trend growth in 2012.


OUTLOOK 2012
As we enter the NEW CY12 with lot of negative developments in CY11 and sharp correction in markets, we strongly believe that the ‘negatives’ are at their peak or near peak on the domestic economic front and corporate performance are at their bottom or near bottom The word ‘near’ should be read with a margin of safety for a quarter from where we may see reversals in bottom. near quarter, domestic macroeconomic and corporate performance. Fall in Inflation may prompt cut in interest rate, as indicated by RBI, IIP numbers may improve and corporate earnings may brighten from 2nd quarter of CY12. The major risk remains on the political front with elections in 5 key states, the result of which may determine the fate of the government and their reforms agenda.


We give less Weightage on global front, even though the chances of deterioration of global macroeconomic factors led by Euro Zone and US are higher which may create volatilities across asset classes. The reason we give less Weightage on global adverse developments’ impact on Indian market is because Indian markets have sharply under-performed Global markets, hence further downslide on adverse global factors looks minimal for Indian markets. But among the adversity, we may see prosperity as the rising crude oil price trends, the single most factor which remains a major risk to India’s growth may correct, although there are fewer indications of the same in the near term due to escalating tensions between US and Iran


On the earnings front, we expect 14% and 16% growth in Sensex and Nifty Earnings respectively for FY13 (E), with EPS of 1320 and 410 respectively. Nifty at close of CY11 was trading at 13.6xFY12 earnings and 11.60XFY13(E) Earnings estimates. Nifty is trading 19% discount to 10 year average PE and 30% discount to 5 year average forward earnings. This gives us confidence that the Indian market is likely to swing higher rather than going lower from current levels, unless there is further damage in fundamentals which may call for more downgrades on earnings. We expect the Nifty to trade between 4500-5950 levels in CY12, with a probable uptrend in the second half of the CY12 on factors mentioned above. The INR may trade between 48-54 in CY12 with more bias to settle down around 48 towards end of CY12. We may see FII flows to pick up this year, as they are not only poised for higher returns on compelling Equity valuations, the INR appreciation may further boost their returns from Indian markets.


Twin Pillars of Emerging Markets



India and China registered Manufacturing PMI ( Purchasing Managers Index) value of 54.2 and 50.3 respectively for the month of Dec 11’. In CY2011 India’s PMI has outperformed China in
11 out of 12 months.



To read the full report: OUTLOOK 2012
RISH TRADER

>INDIA RETAIL: Expectations on on strong performances by JUBI, TTAN and BATA

Q3FY12 preview: A mixed bag 


We expect our retail universe to report a strong 21.8% YoY revenue growth for Q3FY12 on strong performances by JUBI, TTAN and BATA. At the same time, a key metric to monitor would be volume growth deceleration across categories due to high inflation, a spike in apparel prices and increase in gold prices. We maintain that discretionary spends would likely remain under pressure going forward, given the slowing GDP growth that would in turn pressurise margins. Our top pick in the space is BATA, and we remain UNDERWEIGHT on JUBI, TTAN and SHOP. v BATA to maintain strong growth trajectory: We expect BATA to report a strong 25% revenue growth led by robust double-digit volume growth, which would in turn be driven by space addition. We expect margin improvement for the company to continue with Q4CY11 margins likely improving 180bps YoY due to leverage on employee costs and overheads. PAT growth for BATA will be the strongest ever at 42% YoY to Rs 490mn.


■ TTAN to witness marginal slowdown in jewellery volumes, largely compensated by higher gold prices: We expect TTAN’s jewellery volumes to see a low single-digit drop led by high gold prices (up 39% YoY for the quarter); the business would see value growth of 37%. The Watches business would likely see 15% revenue growth (led by a 5−7% price hike). While EBITDA margins would likely contract ~70bps YoY due to lower margins in the watches business, PAT would see a strong 27% YoY growth to Rs 1.75bn.


■ JUBI to see marginal growth moderation: JUBI is likely to report a strong 40% growth in revenues with same-store-sales (SSS) growth at ~25% levels. We expect a gradual tapering off in SSS growth going forward, as the outlook on discretionary spends remains muted. EBITDA margins are likely to improve by 65bps YoY as the company has taken a ~5% price increase to counter input cost inflation. We expect
PAT growth for JUBI at 36% YoY to Rs 258 mn.


■ High interest costs to impact PF earnings: PF is likely to see a slowdown in SSS growth (2−3% levels) as Diwali sales have not been strong for the company. We expect PF to report a 13% YoY increase in sales led largely by space addition. While margins are likely to improve 60bps YoY, a 30% YoY increase in interest costs to Rs 1.4bn will impact PAT growth for the company (expect a 4.6% YoY decline in
PAT to Rs 451mn).


■ SHOP to report PAT of Rs 86mn in Q3FY12: SHOP’s Q3FY12 consolidated revenues are likely to grow 16.5% YoY to Rs 8bn driven by high single-digit SSS growth. Standalone sales are likely to see a growth 13% YoY while HyperCity sales 25% YoY. EBITDA margins, however, could dip by 60bps YoY on account of consolidation of HyperCity losses, while PAT would likely plummet by 48% YoY to
Rs 86mn.


To read the full report: INDIA RETAIL
RISH TRADER

>Infrastructure Project Status Analysis – Q3FY12 (Dec’11 Ending)

Trend in investment capex reflects stress in macro environment

■ Drop in new projects and announcements confirm our cautious view on the sector – Q3FY12 CMIE project data backs our view made in Q2FY12 note (link) that Indian construction industry was witnessing a slowdown in activity with ”New Projects” at Rs1,878bn, lower by 28% QoQ and 39% YoY. Announcements for the quarter at Rs55,413bn, showed a decline of 16% QoQ and 5% YoY. However, shelved projects for the quarter at Rs358bn, rose 70% YoY but declined 50% QoQ.

■ Quarterly average of completed projects drops.– One point to note from the analysis is that the quarterly average completion of projects stood at Rs284bn a fall of 53% QoQ and 50% YoY, lowering comfort on revenue growth capability of construction companies. Unless this part of the investment capex picks-up, it is difficult to take a positive view on the growth prospects for the sector.

■ Reasons for declining trend not new to investors - Macro headwinds (domestic and overseas), policy hurdles, fuel (coal) issues for power, delays in environmental clearances, land acquisition and high interest rates among others, have impacted the Indian investment capex. This can also be ascertained from the cautious to negative comments of industry players. The key triggers would be momentum in order-tendering of sectors (ex-Highways), stable government, and regulatory policies among others.

■ No comfort on revenue generation capacity of construction companies – From the investment capex environment analyzed above, we believe, near term challenges remain for growth of construction companies as it is the most linked sector. We too remain cautious on the revenue generating capacity of the construction sector as lower order-tendering and execution visibility pose risks to profitable growth. Our estimates are below consensus and we believe that near term pain (for at least 6months) will persist for the sector.

■ Maintain cautious stance on the construction sector with no triggers in the up-move of investment capex cycle - We are cautious on the impact of macro concerns on construction companies as it is directly related to the investment capex in India. We are evaluating revision in estimates of coverage companies &; ratings (post correction in stock prices) and this will be published in our Q3FY12 preview note.

To read the full report: INFRA INSIGHTS

RISH TRADER