Decoding Demonetisation In DSIJ Way: Sectors To Be Impacted

It was a typical Tuesday evening—second day of the a week and people had just come back from work and surfing through television channels. Most of the news channels were showing Prime Minister of the country talking live but most of the viewers did not even find it unusual in an usual Tuesday evening till they heard, “so I am saying the notes of Rs 500 and Rs 1000 are now being scrapped.” These very words coming from Narendra Modi snatched away sleep for millions, billions found themselves then and there fall prey to anxiety, some were even dumbstuck. India was gripped in fear, panic, trauma, anxiety by the time clock struck 9pm. In a desperate attempt to curb black money menace, country’s Prime Minister opted for an extreme step, scrapped two high denomination notes. Next morning onwards till the time of filing this report, stock markets started falling almost every session during the first 15 days since the announcement. Global cues were not taken, only cues related demonitisation were read by the markets even as the country witnesses unprecedented cash crunch, queues outside ATMs, branches of all the banks, rise of payment banks, mobile wallets and even the neighbourhood tea-stall vendor putting up signboards of a popular mobile wallet entity. India started witnessing a very fast change, for good or bad—time will respond to this billion dollar question but for now, it is 50:50. A big objective to achieve, poll promises to deliver looking at polls at three key states including Uttar Pradesh, some pain for major gain screamed some people on social media, some whispered it all had been happening for some vested interests. Some started talking about new currency notes with nano GPS chips, some even clicked selfies with the new Rs 2000 currencies, Youtube videos on colour falling Rs 2000 notes became viral. Demonetisation almost overnight became the most popular or even unpopular word in the dictionary of all Indians. Whether his Operation Black Money will redefine Indian economy or not, time will say it but Modi undoubtedly played a massive political master-stroke on the night of November 8. Markets were not happy, volumes started falling, retail investors stood in the queues outside banks and ATMs and talked about the colour of the new notes while shying away from buying or selling stocks in the markets, analysts on news television screens looked stressed and anchors were not their usual ones.

Meanwhile, at Dalal Street Investment Journal, we started working harder analysing pros and cons of demonetisation move keeping a closer watch on the markets, sectors, stocks. After all, we care for your money. So we bring this exhaustive report talking about how different sectors are going to face the heat of Modi’s Operation Black Money and what exactly you should do at this time of crisis, rumours, fear, anxiety and some celebrations too.

Let us start with talking about performance of the Indian stock markets in comparison with the global peers post the demonetisation move. Equity markets globally slid on the US Presidential election results with Donald Trump winning the polls. The global markets however recovered once it got clarity on Trump win and equities rallied with a hope that the US economy will be resurrected with stated aim of doubling the US GDP in 5 years as promised by the new President elect. 

Even as the US markets touched record highs, Indian markets were the ones performing worst across the globe during the period of November 8 and November 22. Indian markets slid over 4.57 per cent in such a short time wiping out profits gained by investors since February 2016.  

Japanese markets along with the US markets outperformed global markets. FIIs are said to be pulling out funds from emerging markets as the growth in earnings have been disappointing coupled with improving fundamentals of the US economy.


The above table gives us a clear picture that the move of demonetisation has had a big impact on the Indian benchmark indices and the result of this is that the Indian stock markets have been the worst performing markets post the demonetisation move. The picture does not end here. The impact of demonetisation on some sectors has been severe and on the other hand, some sectors have been benefited by this move, even if slightly. 

Abnish Kumar, Director, Amrapali Adya says, “Since the demonetisation of Rs 500 and Rs 1000 notes came in the news, stock markets have got hammered brutally amid lingering worries of economy being impacted due to demonetisation. We further expect incremental selling pressure to remain intact for the short term; however we are also hopeful of indices to boost in the long run after India being whitewashed. We can’t even rule out the possibility of further decline from here and to hit its new lows because of short term disruption in India’s consumption storey along with slight dip in GDP growth for at least two quarters.” Talking about the near future trends, Kumar told DSIJ, “We anticipate the markets to remain under pressure for the short term. I would advise retail investors to follow the value buying tips and make the informative entry rather than getting into the bottom fishing at the lower level. Since most of the idle lying cash is getting converted in the bank deposits, hence we are bullish on the banking stocks specially PSU.”

Nitasha Shankar - Sr. Vice President and Head of Research of YES Securities India believes from a long term perspective this is positive for the country and consequently for the stock markets as it would raise mid-term growth potential of the economy, improve transmission of interest rate cuts by banks, improve the fiscal position as well as tax compliance.

“However in the near term there would be an impact on sectors that are driven by consumption and/or those that are dependent on cash transactions.  We expect this pinch to remain in short term till such time as liquidity gets infused from the banking system to the individuals. In addition to this cash limits would also lead to short term pressures in businesses relying on cash collections/disbursements. This could quicken the migration to cashless models,” he said during an interaction with DSIJ.

Dinesh Rohira, Founder and CEO of 5nance.com reacts on the development saying this ‘disruptive move’ by government has certainly sent jitters to the stock markets as short term erosion of purchasing power would affect the buying behaviour and the enterprises that deal in cash segment and consumer segment will get largely impacted. But according to him, the cash crunch is not here to stay forever and it is welcome move from a longer term perspective.

Rohira adds, “core sectors like real estate, cement and automobile are largely affected as there is an impact on Q3 performance of the companies and the markets are adequately discounted on this account. on the other hand, sectors like Banking, E-commerce and infra will have a positive long term benefits from this.”

He further adds, “demonetisation has created a fresh buying opportunity at every dip and we will see it embark the new high with clean money in circulation by eliminating the shadow economy that is estimated to be at 20% of the total economy.
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Sector wise impact is summarised below:

Real Estate:

Since Modi’s surprise announcement on the demonetisation, the swells have been spreading through the previously distressed sector, which has been encountering excruciatingly moderate development lately. The real estate sector is expected to be badly influenced by the demonetisation exercise, as it has traditionally seen a very high involvement of black money and cash transaction. The steering of black money into real estate sector which was generating demand and supporting property prices is to a great extent going to become scarce. We are of view that the demand should be negatively impacted in tier 2/3 and smaller cities which are dominated by smaller developers and where cash component in the real estate transaction is significant. However, in metro/ tier 1 cities the proportion of cash component in real estate transaction has over the years come down significantly and is expected to be around 25-35 per cent and restricted mainly to few players.

The secondary market is likely to witness a gigantic fall in transaction given that a large portion of deals in this segment are done through cash. With the demonetisation move the black money involvement is expected to wiped out of the market, a lot of investors who have been investing projects with unaccounted money and raising price to book benefits will be disposed from the framework, thereby assisting a necessary correction in the prices of the Real Estate.

Formally, there is no announcement of realty prices crash so far.  However, the cash crunch has made it virtually difficult for the realty sector to function smoothly. Right now, the effect is being absorbed by the stock prices of realty stocks which have corrected sharply. Yet, sooner, rather than later, this effect will appear on realty prices as well.

Automobiles:

Historical data suggests there is slack in the demand of the automobile during the month of December. In auto sector, the demonetisation will have a short term impact. The passenger vehicle (PV) segment will be least impacted as over 80 per cent passenger vehicles are financed and cash transaction are nominal. But, there could be rescheduling of car purchase in anticipation of rate cut in car loans. Coming to the two wheeler segment, in this segment the cash component is higher when contrasted with the other automotive segments, given their smaller ticket size and lower income profile players. Therefore we expect the near term impact of the demonetisation move would be higher on two wheeler segment.  Finance penetration in the commercial vehicle is over 90 per cent, subsequently, the impact on demand on these segments would be minimal. There is one more segment in the auto sector which is the second hand luxury car segment and we expect this may get impacted as most of the transaction carried on this segment are in cash.

Consumer Goods:

Stocks from the consumer goods segment have been outperformer in the last two years or so and this has been on the back of India’s robust economic growth and growing purchasing power. India stood second among all the nations in the global consumer confidence index with a score of 128 points for the quarter ending June, 2016, after Philippines (132). Post demonetisation move, the consumer goods have witnessed a healthy correction. The reason are not far to seek. Demonetisation would create a temporary cash crush in the economy and consequent reduced or delayed spend by consumer, hence the demand of consumer goods will be affected in the current quarter.

Cement:

Demonetisation will have a negative impact on cement demand in the near term mainly due to about 60 per cent of cement demand comes from the real estate sector and absence of cash can impact the real estate sales and construction activity. It is probably going to affect the pace of construction as large portions of the payments for material and labour work are settled in cash. This is probably going to put burden on the cement demand from existing under-construction buildings.

However, once things settle the impact would ease on the cement demand.

NBFCs and MFIs:

The NBFCs (Non-Banking Finance Companies), MFIs (Micro Finance Institutions) and other finance companies are feeling the pinch.  Not only have they felt the pressure during the initial few days, they additionally expect the Operation Black Money affect going on for a while.  The sheer stun that the sector has taken was apparent from the 15-20 per cent slump in the stock prices of listed NBFCs, MFIs and HFC. The cause is straightforward. These companies transact in small ticket size loans and the sudden ban on Rs 500 and Rs 1000 notes has put a full stop to their business. Some pressure can be seen in form of asset quality for NBFCs particularly on LAP (Loan against Property). MFIs lending to rural customers may see some near term difficulty in collections.

Media:

The Media sector would be have adverse impact in the short term. FMCG sector and consumer durables are the largest advertisers on news and entertainment television, post the demonetisation due to cash crush consumer are delaying purchases or avoiding it for some time till time things come back to normal this has resulted in fall in TV advertising.  In print, there is likely to be weakness in categories such as real estate, local advertising and political advertising revenues. Demonetisation would have an impact on multiplex in the short term as majority of transaction are done in cash.

Oil & Gas:

The immediate impact of demonetisation on oil marketing companies is positive as the huge queues have been seen at the fuel stations as old denominated notes has been allowed by the Government of India for usage of at fuel pumps till November 24, 2016 and this has resulted increase in the fuel sales. Furthermore, at the dealers end working capital situation has improved as some of the big debtors have cleared their dues.

Information Technology:

All the bad that could have happened for Information Technology sector happened in the course of the last 6-9 months. The impact of demonetisation on the Information Technology is not noteworthy in nature. Majority of the revenues of the IT sector come from exports. Domestic business is also B2B business. So there is no cash component involved in this segment, hence, there would not be any significant impact on this sector.

Banking:

Since the demonetisation move, banking sector has managed to stand tall. But not all the banks, only large PSU banks and select private sector banks have shown uptrend . If we look at the returns delivered by the PSU banks and private banks, SBI, PNB, Bank of Baroda, Union Bank and Canara Bank have delivered handsome returns post the demonetisation move. Total deposit mobilisation by the banks crossed Rs 4 lakh crore on November 14, according to the Indian Banks Association. The amount is expected to have since gone up as State Bank of India, the country’s largest lender, has seen “demonetisation deposits” grown from Rs 1.04 lakh crore on November 14 to Rs 1.34 lakh crore at 4pm on November 18. PSU banks have a great reach in Tier 2/3 and rural areas. They also have a higher number of account holders. As people deposit money and cannot withdraw too much as the withdrawal limit is set at 24,000 per week. Hence, PSU banks get a higher quantum of deposits. Comparatively, private sector banks have a comparatively lower advantage as their customer base in largely the upper middle class retail customer and some high end corporates. This customer base mostly transact through Debit or Credit Card hence, unlikely to deposit massive amounts of money into their saving accounts. Hence, the PSU banks likely to get benefit of higher CASA. Higher CASA is the short term trigger in the banks, as part/full money gets deposited with the banks (assuming 87 per cent of currency in circulation is in the denominations of Rs 500 and Rs 1000, translating to Rs 15 trillion, assuming 50 per cent of these get deposited, banks will get additional about Rs 7.5 trillion of CASA deposits.

Conclusion: Since the demonetisation announcement on November 8, there has been a sharp fall in the Nifty and Nifty is hovering around its 5-month low. With demonetisation coming into effect, sectors where there is high involvement of cash transaction or black money have been affected like the real estate to consumer goods. On other side of the coin sectors like banking especially PSU stocks have been benefitted from this move as its believed that there will be huge cash deposit in the banks and it will result in higher CASA. We believe it might be pain for short term for some sector, but for some sectors it will take time to revive. 

Participatory Notes (P-Notes): 

Indian government’s aggressive stance to curb black money or unaccounted money has created lot of speculation in the markets and is argued to be the most definitive stance ever taken by any Indian Government to curb corruption and stop circulation of black money in the economy. But this demonetisation step is not necessarily the first attempt to curb black money or unaccounted money.

The market regulator Securities and Exchange Board of India (SEBI) in the month of May, 2016 had tightened the rules of Participatory Notes (P-Notes) to curb round tripping of money considered to be highly popular with black money operator or Hawala operator.

P-Notes are Overseas Derivative Instruments that have Indian equities as their underlying assets. P- notes allow foreign investors to buy listed stocks on Indian exchanges without being registered.

Government and the regulator have been concerned on the growing popularity of the P Notes because of the anonymous nature of the instrument as these investors could be beyond the reach of India regulators as the ultimate investor in Indian equities is never known. It is also widely speculated that the P-Notes route is being used in money laundering by wealthy Indian including the promoter of companies who invest their unaccounted funds to manipulate their stock prices. SEBI very recently has taken several steps to curb the misuse of P-notes by making the KYC documentation compulsory for the P-Notes users. Even though SEBI has no intention of banning the P Notes completely as P-Notes are used globally as a financial instrument, the usage of P-notes is not encouraged by the regulator.
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Dipen Shah, Sr. Vice President& Head PCG Research, Kotak Securities.

Markets have been weak because of the expected slowdown in the consumption in the economy and the GDP, in the short term. Real estate and jewellery sectors may remain impacted over the medium term. Markets have also been falling since FIIs have been selling in the recent past. They likely triggers for FII selling are concerns of a slowdown concerns and potential depreciation in Rupee, as the US dollar strengthens.

Once the initial impact of the demonetisation is seen through, we expect its benefits to become visible. This will be in the form of higher GDP growth, greater liquidity in the system, lower interest rates and, better Tax: GDP ratio, etc.