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What does core sector growth mean for industry?

Cement makers, refiners will continue to grow in the coming months

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The country’s core sector, comprising eight key industries, grew by 5.1 per cent in September. This is significant as growth had collapsed after growing 4.6 per cent in May this year. So, the question everyone’s asking is, whether this will sustain.

There’s no doubt that some industries are seeing traction, so the revival is not broad-based yet. Having said that, the days of abysmal growth levels of one and two per cent may be a thing of the past, as some industries are seeing growth, albeit at a slower pace. Analysts say, going forward, the pattern seen in September may continue. The growth seen by the core sector in September has been broadly driven by three industry segments — cement, refining and coal. The remaining five sectors, fertilisers, electricity, steel, crude oil and natural gas, have either seen very modest growth or contraction. Sonal Varma, India economist at Nomura, expects core sector growth to settle between 3.5-4 per cent for the rest of the year. If coal production continues to grow at 3.5-4 per cent then electricity too, will see positive growth.

So, what can one expect in the coming months from key and key companies? In order to understand what’s in store, it’s important to understand what has driven September’s growth. For starters, the refining industry has done well, as demonstrated by Ltd (RIL) in its Q2 numbers, due to capacity outages in various parts of the industries. This is what resulted in the sector’s 11 per cent growth in September. While global factors have driven production, diesel demand in India too, has helped post an uptick in the refining production.

However, after the price hike in diesel, consumption has fallen and, therefore, the sharp growth figure may come down from double digits to single digits. Analysts say refining production growth may settle at seven to eight per cent levels, as demand from China is likely to remain weak. RIL processed 34.9 million tonnes of crude oil, achieving a utilisation rate of 112 per cent in the first half of FY13. While refining will continue to grow, last quarter’s trajectory may not be possible.

However, other industries where RIL has a presence, like natural gas and crude oil production. are likely to be hit by the company’s falling output. From 35 mmscmd gas last fiscal, gas production at KG D6 is down to 25 mmscmd this year. This will continue. Similarly, the demand for complex is expected to be muted for the remaining part of the year. According to Karvy Stock Broking, initial indicators for industrial production in September 2012 are signaling a diminutive improvement in the production activity. The brokerage expects growth in the index of industrial production (due on November 12) to remain subdued at 3.1 per cent, registering a marginal improvement over 2.7 per cent recorded in August 2012.

However, the cement sector, where demand has sustained, will continue to report robust growth. The sector has clocked 7.4 per cent growth in the first six months, compared to 3.8 per cent in the corresponding period last year. This indicates that there is a relative improvement in the infrastructure sector this fiscal. If this uptick in infrastructure and construction activity continues, cement companies will continue to report robust numbers.

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