For a second week in a row, securitized real estate stocks in the US posted the biggest gain for the major asset classes, based on a set of exchange-traded

Why is the Indian stock market falling since PM Modi’s demonetisation move?

Demonetisation not a well thought-out plan: Mark Mobius

I read an interesting point from Firstpost and I am paraphrasing it here:

“Some in the opposition and the commentators insist that the Modi government did what many school teachers do – punish the entire class for the wayward ways of one or a few students. It is not only unfair to the well-behaved students but an admission of inability of the teacher to monitor the class properly.

The government too is supposed to track the tax evaders through economic intelligence gathering. Demonetization is a catch all net in terms of inconvenience caused to the honest. But the Modi government had no choice but to take the most unpalatable step”.

Demonetization could push India Inc’s earnings trajectory downwards in a repeat of the fallout of the 2008 global financial crisis, some experts said. The 2008 global financial crisis changed corporate India’s earnings trajectory. Demonetization has the potential to inflict similar damage.

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Cash crunch shadow on Sensex earnings

If you thought, till now, that the stock market is unrelated to black money, then the time has come for an appropriate reflection. But before we go there, there is one point I would like to make and that is the introduction of GST.

In the last 6 -8 months, you might have seen hundreds of interviews of CEO’s of listed companies airing their views on the impact of GST on their businesses and economy as well, in general. The reason why they were so elated and gungho about GST move was that, it would marginalize the unorganized players in most of the sectors – sectors which have lot of cash transactions and tax evasion happening on a daily basis. The organized sector was supposed to have a fillip to their way of business – dealing in white money by removing/limiting the unorganized players.

Gopal Kavalireddi’s answer to What is the impact of GST on mutual fund industry?

But they never expected the demonetization move would remove the money itself from the hands of the same customers, that was fueling the growth of organized and unorganized players.

The combined market valuation of six of the 10 most valued Indian companies declined by Rs 57,015.31 crore last week, with ITC and HDFC Bank being the worst hit. Over the last week, the Sensex crumbled 668.58 points, or 2.49 per cent, while the Nifty plunged 222.20 points, or 2.67 per cent.

Read more at: Top 6 cos take cumulative hit of Rs 57,015 cr in m-cap

Demonetization: Banks may trim base rate by 360 bps in 3-4 years, says Ambit and in a report, has pegged the GDP growth rate for the second half of this year at a mere 0.5 percent. It has also cut its FY18 GDP growth guidance to 5.8 percent from 7.3 percent.

GDP to fall post demonetisation, follow-up reforms key: HSBC

Demonetisation: Banks may trim base rate by 360 bps in 3-4 years, says Ambit

GDP growth, earnings to take 18 mths to pick up speed:Old Bridge

India could well lose its “world’s fastest-growing economy” tag, thanks to the impact of the demonetization of high-value currencies on its economy. This is so because real estate, gold and the informal sectors that see a high element of cash transactions are expected to slow down, according to India Ratings.

But in the short term of 2 to 3 quarters, there will not be any sector, catering to India, which will not be impacted. Only the export oriented sectors and companies are expected do well in the current situation, mainly IT and Pharma. However, information technology stocks, for now, are down around 3%, which is more or less in line with the broad markets. While these companies will be unaffected by the demonetization process, this reflects a concern about a Trump presidency and a possibility of anti-outsourcing measures.

Economic times has come out with a survey, where analysts reckon, will have its share of benefits for the economy, apart from boosting tax coffers. The transition to a cashless economy will also improve savings in financial assets which will benefit intermediaries such as banks, NBFCs, micro-finance and digital money operators. Here’s a low-down on the impact of demonetization on the top 10 sectors of the economy, according to ICICI Securities.

Automotive:

Demand is likely to dip for a couple of months for two-wheeler’s, but passenger vehicles and tractors will be less impacted. In the two-wheeler industry, around 35-45% purchases are made via financing, while the rest are though banked cash, or are simply “unaccounted“. But in the passenger vehicles segment, close to 75%-80% of sales are either through financing, or even down payments are made mostly by cheques -so this segment could face less heat. As for tractors, close to 65% of the purchases are financed, therefore the impact of cash squeeze could be minimal.

Cement:

Companies and dealers are indicating that volumes may get impacted in the near-term as real estate demand (which is 55-60% of overall demand), especially in tier 2 and 3 cities, may get affected in the interim.Demand in tier-1 cities has been weak for the past 2-3 years. But infrastructure demand, backed by government spending which has been driving growth, is unlikely to be impacted

Building Materials:

Building material stocks would come under pressure due to a sudden slowdown. Renovation work, which drives this sector, would get impacted as most of the demand is serviced though cash. Dealer sales in certain projects too would take a hit.

Capital Goods:

The impact won’t be big largely due to the B2B nature of business. However, payment to sub-vendors may face some liquidity issues.

Banks:

The move towards a cashless economy will boost savings in financial assets.

With any sharp infusion of deposits and relatively limited avenues to lend, the credit deposit ratio for banks would become unfavorable, and thus impact margins. In case of a spike in capital adequacy, it would be positive for margins. While in the event of a higher rise in deposits, the immediate avenue to deploy would be G-Secs, and this could create a temporary downward blip in bond yields. Thus some of banks could see windfall gains on treasury.

Consumer Staple Jewelry:

The move is good for the organised industry. But in the short term, it may impact the working capital in FMCG distribution. Anecdotally, there’s always a huge panic among distributors -business may be impacted in the short term with liquidity choking up, thereby impacting FMCG revenue growth.There will be a shift from unorganized to organised sector in the jewelry industry.

Jewelry sales have already fallen by more than 60% and the price of gold is expected to hit Rs. 29,000 by end of the month.

NBFCs:

Asset finance companies may see short to medium term pain as a large chunk of business is cash based. Housing finance companies to see key impact on loan against property. There may be a slowdown as people may stop buying the second or third house, which may affect developers. Small-finance banks will be big beneficiaries on the deposit front.

Telecom:

There’s no material impact as average transaction size is very small. However, slowdown in smartphone sales could potentially slower adoption of mobile broadband subscriber penetration.

Paints:

Paint companies which are into big project sales, deal in cash component worth 30-40% of sales, while for shops which have higher retail sales, cash component could be 70-80%. Therefore, paint companies could face fall in sales in the short term.

Asian Paints has already commented that their sales in the last 10 days have fallen by more than 45%.

Power & Coal:

A possible fall in the interest rate will be positive for yield players.

Coal prices have risen recently, with China cutting domestic production.With Trump focusing on US competitiveness, there’s a good chance that China will reciprocate allowing coal prices to fall again.

High End Retail Demand to Fall: The impact on high end fashion retail and luxury goods is expected to be more pronounced as discretionary demand in this segment will be curtailed. In case of Quick Service Restaurants, although 60%-70% of the transactions are currently in cash, the impact is likely to be moderate due to the low ticket size of purchases and high likelihood of patrons adapting to plastic money.

DSP Merrill Lynch (India), however, reiterates buy ratings on ITC, Hindustan Unilever, Godrej Consumer, Emami, Jubilant FoodWorks and Asian Paints on account of Pay Commission, monsoon and GST.

HDFC Securities foresees some demand postponement in the durables segment, affecting near term revenue growth at V-Guard, Havells and Bajaj Electricals. Impact is possible on the mass segment too, as it is largely driven by traditional and rural channels. However, this is not likely to be long lasting as product categories enjoy sticky consumption franchise. HUL, Dabur, Jyothy Labs, Marico and Emami fall into this category. Cigarettes are mostly sold for cash, too (ITC). They also project cement producers to cut back production and take some price impact.

For views from other brokerages, do read: Winners and losers from demonetization

All in all, there will not be escape from bad performance in the next 2 quarters for most of the companies, however, once the consumers start moving to plastic money or legal transaction based buying, there should be recovery seen in most of the sectors, but not before Q1 2018.

I am preparing some graphs based on certain data and once I verify the material, then I will update the answer here.

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