Impact: Corporate profitability (positive), Offtake (Positive)

Brief: Providing the requisite thrust in the manufacturing sector are expected to be auto ancillary, electrical goods, chemical products, pharmaceutical, wearing apparel, leather and food processing. Similarly, we assess the services that are likely to add higher value in Q2 are banking, real estate, trading and hotel & tourism sectors. Overall, the sectors are expected to witness higher input cost as commodity prices (especially oil and steel) has intensified.

We are expecting the overall GDP to expand by 7.7% in Q2, FY19, which was 6.3%, same time last year. While the growth in gross value added by definition has been robust, given strong Government revenue and the implementation of the 7th Pay Commission, consumption story remains true to its potential.

Given this strong pull effect from the end consumer, most industrial as well as service sectors have outperformed expectations. While we have considered the IIP numbers to assess manufacturers from the production perspective, the service sector estimates are based on a sample of such entities. Overall, the estimates take into account a time series of the past five quarters.

Providing the requisite thrust in the manufacturing sector are expected to be auto ancillary, electrical goods, chemical products, pharmaceutical, wearing apparel, leather and food processing. Similarly, we assess the services that are likely to add higher value in Q2 are banking, real estate, trading and hotel & tourism sectors. Overall, the sectors are expected to witness higher input cost as commodity prices (especially oil and steel) has intensified.

However, as the consumer demand (both domestic and external) is comfortably robust, entities are expected to pass on the cost burden to the consumer groups. The expansion currently going on in the core CPI category is a case in point here; nevertheless, the stickiness of the headline inflation number is more than compensating this spurt. We therefore reckon that a higher input cost burden is unlikely to undermine profitability of these sectors - positively impacting the narrowing output gap.

Source: CMIE; Acuité Research