The problem with India's core industries data

India's core industries grew a satisfying 6.8% in November 2017. This was one of the highest in recent times. The growth came on the back of mindblowing numbers in steel (17.9%) and Cement (17.3%). This is heartening news for any Indian as it signals economic recovery and specifically for investors in that sector as these numbers suggest a re-rating of some sort. Only that the stock market did not move by much! The argument was that these numbers were already baked in and therefore the markets were already overvalued. While we can only guess the real reason, my hypothesis is that the experts in the stock market already knew something that most us don't care to study in great detail.

The core sector data was belatedly recognizing something that was already happening on the ground.

I evaluate the cement industry to make my case.

As I pointed earlier, Cement production grew a massive 17.3% in November 2017. Let us look at what the CSO has been reporting since July. These are the updated numbers and not as reported first. In that sense they are much more accurate than when reported first.

The data is clear, after 4 slow months, there is a clear jump suggesting a massive turnaround for the Cement Industry.

But is there indeed a turnaround in November?

To validate this, I checked the financial results of the top listed cement companies in India. My estimate is that the top 10 listed cement companies constitute about 70% of the cement industry revenue. In that sense, they are a good barometer of how well the industry is doing. I take their published numbers for Q2 (JAS 2017). Further, I take the average of the production number for July-August-September numbers to arrive at production growth for JAS 2017. All growth numbers are versus same quarter 2016

The comparison with the Government production data and revenue increase is quite revealing. While Government data claims that production is up just 0.6%, revenue appears to have increased a massive 13.9%. Not only that, in my list of 10 companies, just two companies revenue grew lower than the overall production growth estimate, 5 of the 10 companies reported revenue growth greater than 10%.

The nature of this industry is such that pricing is an important factor. So a second level validation I did is to check the production versus revenue numbers. In case of the biggest player in the market volumes were up 18%. In case of the second biggest player, volumes were also up 18%. Both these companies reported a revenue growth exceeding 20% indicating a 3-4% price increase. Even if one were to correct for 3-4% across the companies, the production growth would be close to 10% and not the 0.6% reported here.

I was looking at the steel production data and the problem appears to be reversed. The numbers quoted by the Government appear to be higher than the numbers quoted by the companies.

The new Core sector data and IIP have been launched earlier this year and are bound to have flaws at the beginning. However, the variances versus the cement industry are quite stark.

It is also ironical that while the overall industry appears to be growing at a much more rapid pace, the Government data appears to give the impression that things aren't going well. This is not great for our image as an investment decision.

This is food for thought for the CSO. Cement experts, please feel free to clarify or correct me.

Industry Production Data Source: MOSPI

Company Specific Data: Moneycontrol.com, Company web-sites