| The index of industrial production (IIP) went up a smart 10.9 per cent for the month of January 2007 as compared with 8.5 per cent in the previous period. The manufacturing sector was the key driver, rising 11.6 per cent for the month.
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| As a result, the numbers were higher than the 10 per cent growth that analysts were expecting. In January 2006, the IIP had risen 8.5 per cent. The CSO has also revised the December 2006 IIP growth from 11.1 per cent to 12.5 per cent.
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| For FY07 so far, the IIP is up 11 per cent. In January 2007, mining and electricity have also contributed to the higher IIP growth. The mining sector grew 6 per cent as opposed to 2 per cent in the same period last year.
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| Similarly, electricity index also rose 8.5 per cent against 6.4 per cent in January 2006. For the year to date, manufacturing continues to bring in most of the growth, except for October when it had slowed down to 3.8 per cent. For the 10 months of FY07, this sector has grown at 11.9 per cent.
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| In terms of use-based classification, the capital goods sector has slowed down somewhat to 8.6 per cent in January after rising 29.2 per cent and 20.9 per cent in November and December 2006.
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| However, this is due to last year's higher base, when it had risen 27 per cent. For the first 10 months, the capital goods index has grown at 16.8 per cent.
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| The growth in consumer goods, which no doubt is robust at 9.9 per cent, is lower than the 12 per cent and 10 per cent growth in the previous two months but higher than the 8 per cent of January 2006.
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| The consumer non-durables index grew 10.9 per cent against 5.7 per cent in January 2006, but the growth rate in consumer durables slowed down to 6.8 per cent, partially due to the higher base as it had grown 15.9 per cent in January 2006.
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| Of the 17 industries that the manufacturing index tracks, only one sub-sector--the jute and other vegetable fibre (except cotton)--declined in January 2007 down 89.2 per cent, but as this sub-sector is the smallest in weightage, there was no damage.
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| Among the high growth industries include food products (up 12.1 per cent), cotton textiles (22.4 per cent), rubber, plastic, petroleum and coal products (up 13.9 per cent), basic metal and alloy industries (28.7 per cent) and wood, wood products, furniture and fixtures (up 81.5 per cent).
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| If heavyweight sub-sectors like chemicals (up 6.9 per cent), and machinery and equipment other than transport (up 7.4 per cent) had risen faster, the manufacturing index would have been higher.
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| So far, industrial growth, especially in manufacturing remains robust, and the interest rate hike of December 2006 has not impacted industrial growth. If growth continues at this pace, expect another interest rate hike to calm inflation.
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| Reliance-IPCL: boost to EPS
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 The ratio of 1:5 for the Reliance Industries and IPCL merger is quite in line with the market price of the two companies, based on Friday's closing or their 26 week average prices prior to the announcement.
However, based on the book value, the ratio is skewed towards Reliance. RIL had a book value of Rs 357.4 per share at the end of FY06, while that of IPCL was Rs 172.99 a share.
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Reliance trades at a higher price-book multiple compared with IPCL because it has benefits of scale, and has high-growth businesses such as oil and gas exploration and retail, besides refining.
On Monday, the IPCL share closed 1.5 per cent lower at Rs 265, while Reliance was marginally lower at Rs 1316. For Reliance shareholders, the impact of this merger is not going to be too significant—the equity capital will go up 4.3 per cent to Rs 1454 crore, and the recent promoters' warrants issue will take it up to Rs 1,573 crore. Two per cent of the enhanced RIL stock will be owned by RIL's associated companies, which could be sold later.
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| Clearly, the merged entity will be able to leverage economies of scale in the petrochemical business and get tax benefits on naphtha. IPCL is in the commodity petrochemical business and trades at about one-third RIL's forward P/E.
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| Thus, it will also allow IPCL shareholders to participate in the current expansion plans and new businesses of RIL. After the merger, RIL's ethylene and polyethylene capacities will more than double to.78 million tonne and 1.02 million tonne a year respectively.
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| Analysts expect the merger to be earnings accretive, saying it will add about 2 per cent to the FY07 estimated EPS and 1 per cent to the FY08 earnings. Reliance trades at about 17-18 times FY08 estimated EPS. |
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