Demonetisation: Worst behind us, but more supply of cash needed for normalcy

Malini BhuptaMoneycontrolWinners & Losers for 2017Demonetisation isn’t after all the giant slayer of the economy, as was feared by some economists and strategists. As December data starts to trickle in, it is becoming clear that the impact is not uniform across sectors and businesses. Be it tolling at roads, sales of select segments in automobiles or viewers at multiplexes, data suggests that the impact of demonetisation could be easing somewhat. Anand Mahindra, Chairman and Managing Director of Mahindra Group tweeted on Thursday: “Auto and tractor retail sales showed resilience at the tail end of the month, which augurs well for the economy. Even more interesting, our December construction equipment sales were up sharply. Evidence of government infrastructure spending gaining ground.”In the month of December, M&M’s tractor sales were up 9 percent YoY to 14,047 units, mainly due to a lower base in the comparable period last year. Interestingly, total automotive sales were down 4 percent to 36,363 units, much better than estimates. The passenger vehicle segment declined 8 percent and LCV sales grew 14 percent YoY.Ravi Pisharody, Head of Commercial Vehicle Division at Tata Motors, is of the view that the January to March period is extremely critical as it will demonstrate how the consumers are behaving post-demonetisation. Commercial vehicle sales were expected to decline by 30 percent in December but large players like Tata Motors and Ashok Leyland only demonstrated a decline of 9-10 percent. IRB disclosed to stock exchanges on Thursday that its gross daily toll revenues in December were up 3 percent against October and that traffic is back to normal level is highly optimistic. Passenger car-maker Maruti seems to be surviving the demonetisation storm better than others and is expected to improve marketshare even further. Virendra Mhaiskar, CMD of IRB Infra, one of the largest integrated road operators in the country, told Moneycontrol.com in an interview that the impact of demonetisation has faded and things are back to normal.Clearly, there is no clarity on how demonetisation will play out but December data isn’t as bad as was anticipated by most. If the current trend continues then things could improve in the coming quarters for some sectors. For this to happen the supply of cash by the central bank has to happen on a war footing.Soumya Kanti Ghosh, Chief Economist at State Bank of India, believes that by the end of January 67 percent (earlier estimate was 75 percent) of the currency could be replaced if printing continues at the current pace. Explains Ghosh, Group Economic Adviser, State Bank of India, “By February, at this rate, RBI could thus print as much as 80-89 percent of the total currency. Either way, contrary to market perception, things will be closer to normal by February-end as opposed to predictions of the crisis lasting longer.” If this actually happens, the bounce-back in GDP may be faster than anticipated.Not all are this optimistic, however. IIFL says it is difficult to project how much and how long demonetisation will impact the economy. However, the general expectation that demonetisation will have a transient impact and that activity will revert to the earlier trend within a quarter or two is highly optimistic.The impact of demonetisation on the economy will play out in three ways: 1) Liquidity drying up will impact consumption by households. Businesses that have so far transacted in cash (but are not necessarily generating black money) will also take a huge hit. The migration to digital modes of payment will take time. 2)  Incomes and jobs will be lost as small businesses in the hinterland take a hit. 3) The biggest impact will be loss of confidence – both of businesses and individuals – due to a policy uncertainty will also impact economic activity.Sectors to WatchInformation TechnologyWhile there was some concern from the market following Donald Trump’s victory, market believes that India may not be the focus of the president elect’s protectionist policies. IIFL expects the sector to gain from currency depreciation. In the near-term the sector may benefit from improvement in the US economy. Longer term issues will continue to keep stocks under some pressure.UtilitiesHealth of the power sector has improved following the UDAY Scheme. Power companies with assured RoE (return on equity) models could benefit. Valuations are not stretched after the recent correction.AutomobilesDiscretionary consumption has come to a grinding halt post demonetisation. Automakers expect that some amount of buying will come back as confidence returns. The cash crunch has hurt the two-wheelers the most with sales declining by 30-35 percent month-on-month and new bookings for four-wheelers are also down by the same number. Emkay Global prefers Hero MotoCorp & Maruti Suzuki for FY18/FY19 as the demonetisation storm passes in the coming quarters and as spending picks up pace. The brokerage is also bullish on Tata Motors thanks to its strong product pipeline in JLR and margin improvement on account of currency benefitsCementThe sector to is expected to end the fiscal with a slight contraction in demand against an estimated growth of 5 percent. Demonetisation has hurt the sector and with real estate coming under pressure, recovery may take longer. According to Emkay Global, cement stocks are expected to remain under pressure in the near term due to low demand, which is also aggravated by cap on currency withdrawal.ConsumerAmbit Capital in its January 3 note says the FMCG sector has not priced in demonetization/GST disruption.  Sales will be hit by liquidity crunch, stalling wholesale channel, weakness in rural demand thanks to job losses coupled with farmer distress and deferment in discretionary spending. Near-term demand is likely to be hit by 10-20 percent. Distribution channels below the distributor has been disrupted and this would impact reach. In these circumstances, companies like ITC and HUL would gain as the channel prefers financially strong companies in times of crisis.