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October 19, 2011
October 25, 2011
Also Inside This Issue:
Textile Exports To Miss Target
High Costs, Demand Slowdown Hit Ceramic Products Output
Rupee Fall May Lead To Higher Domestic Polymer Prices
Hopes Pinned On Festive Demand
October 19, 2011
Hopes Pinned On Festive Demand
Amid gloomy domestic and global economic prospects, Corporate India has pinned its hopes on the current festive season to boost its
financial performance that has been weakening this year. Demand for consumer products is typically high during October-December
when a number of festivals like Dussehra, Diwali, Eid, Christmas and New Year are celebrated. Consumer centric industries — includ-
ing food and beverages, consumer durables, automobiles, travel and tourism and precious metals — are hoping the festive demand will
provide a fillip to their bottomlines.
Following is an overview of industries that are expected to witness a rise in sales this season.
Food Products
Higher prices of food products including sugar, edible oils,
dairy, bakery and packaged food stuff indicate demand has
increased so far this season.
Sugar: Prices rose `50 a quintal in September from the previ-
ous month, following heavy buying by stockists to meet festi-
val demand.
Bulk consumers, such as soft drink and ice-cream makers and
retailers, were the main buyers ahead of the festival season.
Edible Oils: Depreciation of rupee versus dollar and festive
demand is believed to have pushed up domestic prices of palm
oil.
Nearly 50% of India’s edible oil needs are met through imports. Palm oil constitutes 80% of India’s edible oil imports, and domestic
prices follow global markets. However, local prices have firmed up despite a fall in Malaysia, a key palm oil producing country. Prices
of other variants of edible oils including vanaspati have also registered an increase.
Consumer Durables
Sales of consumer durables goods — including washing machines, refrigerators and televisions — typically rises during this season.
Source: CMIE, Dhanbank PRU
Source: CMIE, Dhanbank PRU
October 19, 2011
Companies are expecting ―smart‖ devices to boost sales in urban centres this year. These premium segment devices are expected to
offer WiFi connectivity and a touchscreen interface that will enable users to communicate with them.
On the other hand, demand for mass products is likely to be driven by rural markets. A good monsoon is expected to result in to higher
farm incomes. This together with increase in non-farm incomes are likely to boost rural consumption.
Automobiles
Growth in sales of automobiles has recorded a sharp deceleration
this year. While it is believed there may be an uptick in volumes in
October and November, as has been the case traditionally during
the festive season, sales across various segments may differ.
Two-wheelers and commercial vehicles are likely to perform bet-
ter compared with passenger cars. Demand for cars in the compact
segment, which is sensitive to interest rates and fuel prices, has
been weak in the past few months. It is estimated only 30% of two
-wheeler sales are on credit. Hence, sales of two-wheelers will
continue to be healthy in the next few months.
Gold, Silver
Buoyed by ongoing festive demand and firm international prices,
both gold and silver recorded an increase in domestic prices. India's
gold demand is expected to be strong during this festive season of
October-December, despite high prices.
Traditional demand for jewellery has not been the only factor driv-
ing gold sales in India in recent times. In April-June, demand for
gold bars and coins that forms a key component of investment de-
mand, surged 78% from a year ago. This trend is likely to continue
this quarter.
Travel And Tourism
Travel and tourism industry across the globe witnesses a
sharp growth during October-March as it is the peak travel
season. Chart 5 shows that growth in foreign tourist arrivals
increase during this period each year. This results in higher
hotel occupancy and higher demand for air travel.
Sale of houses also rise during the festival season that fall in
this quarter. Owing to high prices and interest rates, realty
companies offer freebies and discounts to home buyers to
push sales. Demand for cement also starts rising by Septem-
ber, which also marks the end of southwest monsoon in In-
dia.
Source: CMIE, Dhanbank PRU
Source: Bloomberg, Dhanbank PRU
Source: CMIE, Dhanbank PRU
200000
300000
400000
500000
600000
700000
800000
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
Chart 6 : Foreign Tourist Arrivals in India
2009-10 2010-11 2011-12
October 19, 2011
Sectors that indirectly get a boost from higher festive consumption include steel (used in production of automobiles and consumer electronics), automobile ancillary and textiles.
Dampening The Festive Mood
While festivities have begun, weak global and domestic economic factors are likely to weigh on demand. High inflation is one such
factor that may affect demand for products as a large number of Indian consumers are price-sensitive.
Rising cost of credit is another factor that may affect consumption of products. These include financing driven sectors such as automo-
biles and consumer durables.
Economic slowdown in the US and Europe is likely to affect export-oriented sectors. A recent newspaper article quoted producers of
gift items stating that demand for expensive gifts usually purchased by the information technology industry is being replaced by cheaper
gifting.
Depreciation of the Indian rupee also makes imports expensive, thereby resulting in fall in demand.
Growth in consumption needs to be supported by investment growth that seems to be lagging currently. In 2003-08, gross investments
in India rose substantially, with gross capital formation-to-gross domestic product ratio rising to an all-time high of over 38% in 2007-
08. However, investment rate in India has not picked up since then. While consumption has remained high, the lack of a matching
growth in investment activity results in capacity constraints, which then exerts inflationary pressures in the economy.
———————————————————
October 19, 2011
Textile Exports To Miss Target
Textile Exports To Miss Target Despite Weak Rupee: Textile and garment exports are likely to miss the $33-billion target for this
financial year set by the government, despite a weakening rupee and shipment incentives announced in the foreign trade policy, as fi-
nancial crisis in top buyers — the US and Europe — has crimped demand, compounding worries of mills that are struggling to pass on
huge raw material costs to consumers (Financial Express, October 21).
PRU Analysis
According to the Confederation of Indian Textile Industry, textile exports in 2011-12 (April-March) are likely to miss the $33-billion
target set by the government. This is attributable to demand weakening in top export destinations — the US and European Union —
due to economic uncertainty.
Indian textile exports have witnessed ups and downs in the past few years. Global economic crisis hit textile exports in FY10, but it
recovered and remained slightly above the FY11 target of $25 billion. The country shipped out textile products and garments worth $28
billion in FY11.
Apparel/readymade garments constitute about 40% of the total textile exports from India. According to the latest data released by Ap-
parel Exports Promotion Council, apparel exports in April-June reached $3,581 million (approximately `15,824 crore), a growth of
31.74% from a year ago. As per data released by the commerce ministry, cotton yarn and fabric made-up exports have also risen by
22.5% to $3.4 billion in the first six months of this financial year compared with a year ago.
But, growth in exports of apparel (value terms) has been driven by higher realisations. Export volumes have remained flat and are likely
to decline in the future as the US and EU account for 70-80% of total apparel exports from India.
Textile exports to EU and US that accounts for 65% of the total exports are expected to decline due to the adverse impact of the debt
crisis, which in turn has weakened demand. Despite rupee depreciation, Indian textile exporters are finding it difficult to get new or-
ders. Chances of export being driven by higher realisation look bleak in the future as exporters are finding it difficult to raise prices in
overseas markets due to poor demand.
Currently, textile mills in India have a huge inventory pile-up of cotton yarn produced with cotton procured at high prices prior to Feb-
ruary this year. Mills have already incurred losses of close to `6,500 crore due to cotton and cotton price fluctuations in the market.
Recently, a 2% interest subvention on credit for garment shipments credit was announced by the government. But losses on raw mate-
rial costs far outweigh any such concessions.
Table 1: Textile Exports (`Crore)
2008-09 2009-2010 2010-11(p)
Readymade Garments 47,112 47,608 48,355
Cotton Textile 21,795 27,016 38,038
Manmade Textile 15,090 18,783 21,125
wool and woollen 2,199 2,224 1,955
silk 3,107 2,819 2,708
Handicrafts 4,949 4,548 5,445
Jute 1,375 1,033 2,076
Coir 680 759 689
Total (` crore) 96,311 106,045 122,056
USD Billion (approx) 21.75 22 28
% Growth over previous Year -2 0.11 25
October 19, 2011
High Costs, Demand Slowdown Affect Ceramic Products Output
High fuel prices are eroding profits of the lucrative ceramic industry. Constant increase in gas and fuel prices in the past one year has
resulted in lower profits for ceramic product–makers including HSIL Ltd, Kajaria Ceramics Ltd, Nitco Ltd, Somany Ceramics Ltd and
Asian Granito Ltd.
A look at the Top Three companies that declared their financial results for July-September reflects a contracting profit performance.
Power costs have risen from April-June. In the June quarter, sales of 16 companies whose financials were available grew by a robust
30%. However, aggregate power and fuel costs rose at a faster pace of 40.6%.
Rising costs have resulted in production shutdown at 40% of the 500 units located in Morbi area in Gujarat. There are nearly 700 ce-
ramic manufacturers across the country, generating a turnover of nearly `10,000 crore.
The ceramic products industry includes ceramic tiles,
sanitaryware and crockery. Among these, ceramic
tiles have the largest share followed by sanitaryware
and kitchenware. Ceramic tiles are available in three
variations – floor tiles, wall tiles and vitrified tiles.
Demand for ceramic products mainly comes from
new construction demand in both residential and com-
mercial sectors. Apart from real estate, retail, hospi-
tality, health and infrastructure sectors also drive de-
mand.
While demand growth has slowed marginally in the
current financial year, high costs are eroding profits.
We believe increasing fuel prices will continue to
affect profitability in Q2 and Q3. However, a pick-up
in demand post-monsoon and the festive season will
boost revenues of the industry.
Rupee Fall May Lead To Higher Domestic Polymer Prices
Overview
Plastics is one of the fastest growing industries in India. Robust demand for plastic has in turn led to a high demand for polymers that
are intermediaries for producing plastic. Domestic production of high density polyethylene – HDPE, a polymer -- for the first five
months of FY12 has declined 6%, from a year ago. Although we don’t have import data for the first five months of this year, i t does
seem that domestic production is coming under pressure from an increasing volume of cheap imports.
One of the major trends witnessed in the supply side of the plastic industry for the past five years (2007-2011) has been an increased
dependence on imports. Thirty to forty percent of domestic demand for polymers is met by imports.
Manufacturers in the Middle East enjoy a cost advantage. They use natural gas as feedstock that costs less compared with naphtha—a
principal feedstock for many petrochemical plants in India. Middle East markets also enjoy a freight cost advantage compared with
other export destinations.
However, recent depreciation of rupee has made imports expensive, hence domestic manufacturers can take a shot at increasing prices.
Earlier, the scope for price increase in the domestic market was limited despite increased crude oil prices, as price increase could lead to
0510152025
050
100150200250300350
Sep-10 Sep-11 Sep-10 Sep-11 Sep-10 Sep-11
H S I L Ltd. Kajaria Ceramics Ltd.
Somany Ceramics Ltd.
Chart 7: Performance of Major Ceramic Producers (`crore)
Sales Power Cost
Source: Companies, Dhanbank PRU
October 19, 2011
increased imports. With the rupee depreciation, the cost of landed imports has also gone up.
Note: Naphtha normally is a distillation product from petroleum. Hence, naptha prices follow crude oil pricing trend.
Impact
Cheap polymer imports help plastic manufacturers
improve profitability by keeping a check on domes-
tic polymer prices. But, the recent depreciation of
the rupee is likely to make imports expensive, which
in turn will probably provide domestic polymer
manufacturers with an opportunity to hike prices.
Domestic polymer production contributes to about
60-70% of the total polymer demand. The rise in
crude oil prices has led to increased polymer prices
in the domestic market. Domestic polymer prices
have increased by 6-7% in last one year, though they
still remained lower than imported prices.
Conclusion
The demand supply mismatch is expected to con-
tinue in the domestic polymer market, especially in
case of poly vinyl chloride (PVC) and polyethylene
(PE). Another 1.64 million tonnes of PE capacity is
proposed to be added by 2015-16. In case of PVC,
there are no major capacity expansions in the pipeline.
Going forward, we expect import dependence to con-
tinue.
The increased dependence on polymer imports doesn’t
look worrying given the estimated global PE capacity
additions of 23 million tonnes from 2009 up to 2015.
China and West Asia account for the largest share of
the additions. However, any import hike on polymers in future can make imports expensive thus leading to rise in domestic prices.
The availability of cheaper imports from the Middle Eastern markets is probably one of the reasons which inhibit the addition of fresh
capacity, which is required for bridging the gap between consumption and production.
To some extent, it might fair to state that recent government policies might have acted as a disincentive against polymer capacity addi-
tion in India. Naphtha imports attract an import duty of 5% since 2008. Currently, the same amount of duty is also being imposed on
polymers as well.
—————————————————
Polymers Uses
High Density Polyethyl-
ene (HDPE)
Injection moulds, electrical insulation, drums,
pallets,
Low Density Polyethyl-
ene (LDPE) Lamination films, coating and moulding etc
Polyvinyl Chloride
(PVC)
Pipes and fittings, bottles , container, footware,
blood bags etc
Polypropylene(PP) microwave container , furniture, automobile
components , Luggage etc
Source: CMIE, Dhanbank PRU
0.80
1.00
1.20
1.40
1.60
50
60
70
80
90
100
Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11
Chart 8: International And Domestic Polymer Prices
Linear Low Density Poly Ethylene Prices: Delhi (LHS)
High Density Poly Ethylene Prices: Delhi (LHS)
PVC Delhi Price (LHS)
Film: South East Asia (RHS)
Suspension grade PVC Prices: South East Asia (RHS)
` /kg $/kg
October 19, 2011
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