Economy
Industrial production weaker than what meets the eye, says Nomura

The uptick in capital goods output growth has been driven by the volatile rubber-insulated cables category. Excluding this, capital goods output growth continues to contract. Intermediate goods demand also remains weak, Nomura believes

 
India’s industrial production (IP) growth rose to 2.5% y-o-y in March from a downwardly revised 0.5% in February, in line with expectations (Consensus: 2.4%; Nomura: 3.5%). On a seasonally adjusted basis, it is estimated that IP contracted by around 1.6% m-o-m in March, reversing a 1.3% expansion in February. Plugging in the latest IP reading Q1 CY13 GDP growth is estimated at 4.7% y-o-y (4.5% in Q4 2012). These observations were made by Nomura in its research note.
 

IP growth in March was largely due to base effects. The underlying momentum has weakened and the pickup is not broad based, the brokerage noted. The uptick in capital goods output growth has been driven by the volatile rubber-insulated cables category (up 247% y-o-y). Excluding this, capital goods output growth continues to contract. Intermediate goods demand also remains weak, Nomura believes.

 

According to Nomura, IP growth has been bottoming out for over a year now and with base effects turning positive, a slight rise in y-o-y growth rates will not be surprising. However, a real recovery remains elusive as of now. The brokerage is comfortable with its below-consensus real GDP growth forecast of 5.6% y-o-y in FY14 (Consensus: 6.0%) versus 4.9% in FY13.
 
Key takeaways from the March IP growth
Capital goods in positive territory but due to rogue item: Capital goods output growth remained in positive territory for the second consecutive month. But a detailed look suggests that this is due to the volatile rubber-insulated cables category (247% y-o-y in March up from 189% in February). Excluding this, the underlying trend in IP seems to remain weak, suggesting that the pickup in IP is not broad based.
 

Supply-side bottlenecks still persist: According to Nomura, the growth in mining and electricity output remains sub-par as policy issues pertaining to these two sectors are still unresolved. This suggests that part of the slowdown in production is due to supply constraints.
 
Consumer demand remains weak: Consumer durable output contracted for the fourth month in a row, indicating that consumer discretionary demand remains weak likely due to a sharp cutback in government spending, a bleaker income outlook and deteriorating consumer confidence.
 
Weak growth in intermediate goods (-0.2% y-o-y in March), which is leading indicator for final demand, suggests that final demand remains subdued.
 
IP growth has been bottoming out for over a year now and with base effects turning positive, a slight rise in y-o-y growth will not be surprising. However, there is still no sign of either domestic demand or external demand starting to accelerate. Leading indicators of the industrial cycle, such as intermediate goods output growth and commercial vehicle production, all suggest that the worst in terms of y-o-y growth may be behind us, but a recovery remains elusive as of now. “We remain comfortable with our below-consensus real GDP growth forecast of 5.6% y-o-y in FY14 (Consensus: 6.0%) versus 4.9% in FY13,” said Nomura in its concluding remark.
 

 

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Railways minister Pawan Kumar Bansal resigns

Bansal’s resignation comes after his nephew Vijay Singla was arrested last Friday for allegedly trying to fix the promotion for a member in the railway board 

 
Beleaguered railway minister Pawan Kumar Bansal has resigned from his post on Friday. The move comes after his nephew Vijay Singla was arrested last Friday for allegedly trying to fix the promotion for a member in the railway board. 
 
Political sources said labour minister Mallikarjun Kharge is likely to be appointed as the new railway minister.
 
Singla, son of Bansal’s sister and one of the leading businessmen in the region, was picked up by a CBI team from New Delhi on Friday evening. He was at his residence at Panchkula, near Chandigarh at the time.
 
CBI sources have said that the agency will soon interrogate Bansal to follow up on allegations of his involvement in the case. The sources said the agency is acting on “grave suspicions”.
 
Bansal's name has allegedly been mentioned in several of over a 1,000 phone calls that the CBI has tracked over the last few months in its investigation of alleged bribery and corruption in the Railways. The CBI also alleges that the man who sought to bribe Mr Bansal's nephew for a transfer, Mahesh Kumar, has said during interrogation that he negotiated the alleged deal with Singla at several meetings held at the railway minister's official residence in Delhi.
 
Bansal had reportedly offered to resign a few days ago, but top Congress leaders had decided to wait until after investigations in the case were over. The new allegations had, however, made it untenable for the minister to continue.
 

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COMMENTS

Arun Mehta

4 years ago

Rly Board with a massive Budget needs a special scrutity at all levels Right from Chairman to the postings at the 'manned' railway crossings/Khalasi's and class four employees.There is premium to be paid in 'Cash' or 'kind' for each appointments..What and how much depends on the 'Laws of Demand and supply" at any given time.MP's will never ask for a probe as long their extended families get the free A/C Passes to roam the country.

anantha ramdas

4 years ago

We need to ask Canara Bank Board how come they chose this new director? What were the considerations?

Why not ask all banks to identify what their special considerations for choosing an
"independent" director? Should s/he be "related" (close, distant?) for this?

What was RBI doing? An appointment of this nature does not require some sort of clearancce by higher authorities?

REPLY

ashwin bahl

In Reply to anantha ramdas 4 years ago

These guys need to go thru -

Know Your Director and Board just like we the aam admi have to undergo red tape with KYC always!

ashwin bahl

4 years ago

we are also waiting for many other cases for a logical and conclusive end like Kalmadis, Rajas, Kripa Shankar Singhs, Kodas and god knows how many more !

This will also drag on and fade away and he will be brought in thru the back door again as clean chits will be given out or no proof found.....lage raho.

p.s. the only case having some moments is the Jagan Reddy case, and dont we all know why ?
If he falls in line, this will also fade away

PRABHAT

4 years ago

INVESTIGATION MUST BE DONE FOR ALL THE POSITIONS HOLD BY BANSAL , FROM THE BEGINING ITSELF AND ALL THE ASSETS OF HIS FAMILY AND CONNECTED RELATIVES BE SEIZED .

Arun Mehta

4 years ago

What an waste of an opportunity for Congress party,when they got the Rail Bhawan after nearly 10 years only to be occupied by a "dud' coin of minister whose only qualification was of being loyal to the party.

Gopalakrishnan T V

4 years ago

At last wisdom has dawned on the PM and the Railway Minister Stands sacked. Corruption and Nepotism cannot be and should not be tolerated. Now there is an urgent need to further follow up. How Mr Bansal could appoint his Accountant as nominee Director in Canara Bank. Is there no fit and proper criteria in appointing nominee directors to PSBs? The Loans sanctioned by Canara bank to the firms associated with the Nominee director and Mr Bansal need to be probed as in terms of Section 20 of BRAct 1949, connected Lending is prohibited and from this angle detailed Scrutiny is called for.

Vaibhav Dhoka

4 years ago

Let us hope Bansals case is taken to logical end in view of recent observation of Supreme Court on CBI-Caged Parrot.

Are poor quarterly results of Jubilant Foodworks an indication of saturation?

Jubilant Foodworks, which owns the Dominos and Dunkin’ Donuts brands, has fared poorly throwing up questions on whether the quick service restaurant (QSR) has saturated or not. Edelweiss has recommended a ‘Hold’ call to its clients

 
Jubilant Foodworks (JFL), which runs the Dominos and Dunkin’ Donuts brands in India, has reported second successive poor quarterly results, which puts a question mark on the possible saturation of the quick service restaurant (QSR) sector. Its March 2013 quarterly profit barely rose to Rs32.71 crore for when compared to Rs29.33 crore for the same quarter last year. Its net sales stood at Rs365.75 crore for the reporting quarter compared to Rs282.95 crore for the corresponding period last year. Margins have also taken a beating in the last few quarters. Total expenditure in Q4 FY13 was at Rs319.75 crore when compared to 240.72 crore in the same period last year. A rise in raw material and total expenditure reflects the increased operations in both Domino’s Pizza and Dunkin’ Donuts. 
 
 
Edelweiss has recommended a ‘Hold’ on the stock and pegs the target price at Rs1,034 per share, compared to the current price of Rs1,028. It has said in its report, “JFL will benefit on recovery in consumer sentiments over the long-term. However, same store sales (SSS) growth slowdown is a concern in the medium-term.” Edelweiss also expects inflation to remain higher than 10%, which only further will dampen discretionary spending. 
 
The poor showing was due to decline in SSS growth, which stood at 7.7% in the March 2013 quarter—the lowest level in the past four years. The management has guided for 10% SSS for FY14, which is not that impressive. SSS is the figure used to measure sales performance without considering new stores which otherwise would distort comparison. Slowdown in consumer discretionary spending on account of economic uncertainty was an important factor. The trend in SSS growth rate is worrying not just for JFL but for the entire QSR industry as well. A lot of money from private equity funds is betting on the QSR business. A look at the chart below is a possible sign that the market has saturated. 
 
A slowdown has prompted the company to spend more on advertising and promotions, including discounts and offers. Additionally, its Dunkin’ Donuts stores have not delivered as hyped earlier. The brand has made losses during the quarter which impacted EBIDTA margins by roughly 80-90 basis percentage points, according to Edelweiss report. At the moment, there are only 10 Dunkin’ Donuts stores. It remains to be seen whether Indians take to Donuts.
 
Furthermore, changes in service tax is expected to dampen demand and SSS further. According to Edelweiss, “Amendments in service tax will be applicable from 1 April 2013, and the same will be passed on to customers. The same appears as a separate line item in the bill. As per the management, the service tax hike can impact SSG.” 
 
JFL is one of the early movers into the QSR segment which is now being highly sought after by venture capitalists and private equity firms. Rabobank expects the segment to grow at 30% per annum till 2015, while Technopak Advisors expect it to grow 25% per annum till 2017. Yet, these rosy predictions will be under cloud following the slowdown at JFL. If the sluggish growth persists, it would be a cause of concern for several venture capitalists and private equity firms who have poured several millions of money in recent years in several startup chains, with the expectation cashing out later on. 
 
It is not just JFL which is performing poorly. Even Yum Brands, which runs Pizza Hut and Taco Bell chains, has fared poorly as well. Consider the chart below drew up by Edelweiss:
 
Experts say that it typically takes around 5-10 years to establish a strong foothold and around 500 stores to be a leading player with brand recognition in an otherwise extremely fragmented and competitive market dominated by the unorganised sector. JFL is one of those players which has done well and has 576 stores across the country, a feat that took over 17 years. The economics of setting up a fast food chain is not favourable, as it is characterised by high capital requirements, including high real estate costs in metros and high training costs to deliver consistent and exemplary service. Scaling up is a hit-or-miss affair and entirely depends on brand loyalty and consistency of SSS. If market leader JFL has displayed poor showing in the two quarters could be the first indication that the market for QSR is not such a sure thing?
 

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COMMENTS

Veeresh Malik

4 years ago

Fast food as defined by excessive maida, salt, sugar and reconstituted meats/veggies, industrial sludge passed off as cheese, and all sorts of cooking mediums, is also turning out to be too costly and far more expensive than its low-end image justifies. Word is also out with more and more people that this is unhealthy stuff, avoid, especially the "free" soft drinks thrown in every so often.

It does appear as though India will follow the Colombia example, where branded fast food companies left in the face of competition from local food providors, a similar growth is visible in India too if one sees how South Indian vegetarian aka Udupi food is now standard fare available all over the country, and where a thaali still costs between 50 and 100 rupees.

Personally, I am glad to hear that these purveyors of bad health are making losses and are likely to vanish.

anantha ramdas

4 years ago

Pizzas and doughnuts are for the rich, but what Jubilant faces today is serious competition from full-fledged restuarants.

If a detailed market survey is taken, the main consumers may be found in Mumbai, Delhi (NCR) and Bangalore. With Amma Jayalalithaa's newly introduced idly centres, Chennai would go for these and not for Pizzas. Hyderbad would not be far behind.

Jubilant has come to stay and it is more of a quick-bite stuff, least messy and a status symbol to order pizzas. In the long run, they will make money, though it will lead to obese people all round who will get addicted to this sort of food habbit!

REPLY

Suiketu Shah

In Reply to anantha ramdas 4 years ago

their real growth now comes from small cities like vapi,etc.The mtros are more or less saturated.Thank God we have Dominos,etc as the standard fo fast food in India has gone upto world standards last 15 yrs.Its good to have once in a while.Expect their share price to be much much much higher in 3 yrs.

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