It may take 6 months before old banknotes are wiped out: Emkay

Speaking to CNBC-TV18 Dhananjay Sinha, Head, Institutional Research, Economist and Strategist at Emkay Global Financial Services said that the currency replacement scheme has caused some distress. “Given the good amount of linkage between cash transactions, and symbiotic relationship between black and white component from a technical standpoint the ability of the government to replace old notes will be critical.”

He believes it will take another 6 months before all bank notes can be replaced. By that time, the currency supply will be choked, he said. “What has to be understood is that we have had a scenario of no-growth for two and a half years. This year we have seen some top-line growth and this shock will [impact further].”

He believes government’s positive measures will play out. One, the minimum support price had gone up by 9 percent (for pulses), which is a significant increase. "That is a generous increase in the last six years," he said. Second, allocation for MNREGA has been higher than budgeted. As of now a Rs 10,000 crore of additions over last year have been made, he said.

In the next two years, based on whatever he has said, there will be a boost from the consumption side, primarily coming by way of larger spending, he said. “So, I would say there would be further valuations reduction going forward. There could be some de-rating and there will be some consumption ideas that we are looking at.”Below is the verbatim transcript of Dhananjay Sinha's interview to Prashant Nair and Ekta Batra on CNBC-TV18.Prashant: Do you believe that the disruption caused by demonetisation in terms of business activity is temporary -- by temporary I mean a quarter's worth -- or you think it will take far longer for business momentum to pick up again maybe even 12 months or beyond?A: There is a much deeper impact of the instability that has been created because of the replacement scheme of the currency that the government has come up with.Clearly, the channels are direct and indirect and complicated given the context that there is a considerable amount of non-banking transactions that also happen in this country and there is a good amount of linkage between the transaction that happens as currency and formal banking channel. So I think this is going to be fairly large.From a technical standpoint -- I would say that the ability of the government to replace the new note will be very critical and sooner they do, they could limit the damage but it appears that it will be at least six months before all the notes can be replaced. By that time, some of these currency supply could be choked and it will take some time after that also for things to normalise. So clearly, what needs to be understood is that we have had a scenario of virtually no growth in the last two and a half years. This year we have seen some improvement as far as topline is concerned that was sort of building up gradually into earnings but this shock would diminish that possibility. So it is possible that we might have another year that the earnings could be fairly flat.In the first half, the average earnings for Nifty for instance would be somewhere in the region of 2-3 percent and most estimates from a consensus standpoint is in the region of 15-16 percent. So there is a sort of a downscaling to growth this year. Going forward, it will also deepen.So assuming that the government is able to replace the currency in next six months, there are certain efforts that the government will have to make and they will realise it once they see the numbers and the ramification of this that they might need to come up with alternate plans to resurrect demand once again. So whether it lasts beyond nine months, one year or so, it will depend on how the government responds.Ekta: Do you expect something substantial in terms of measures to maybe boost spending coming in the budget?A: The thing is that, the way I look at it is that we might see a sort of a serious contraction in the sales growth and most of the channels that we have looked at, we have spoken to dealers, we have spoken to companies across multiple sectors, by and large most of them are saying that the sales have dropped by 20 percent or so and it varies across various sectors.My sense is that once that happens, there will be a further percolation of a difficult time for many other sectors and it could go down to individual levels as well especially with respective rural and agricultural sector. So government might start pump-priming once again. We have already seen couple of things, one is your MSP -- for the rabi season -- has been increased to almost nine percent so that is a significant increase, highest increase in the last six years possibly that can continue to accelerate going forward.Secondly, the allocation for NREGA has been higher than what has been budgeted, there was first supplementary grant that was approved by the government, there was Rs 5,000 crore additional allocation. So as of now, there is almost like Rs 10,000 crore of addition over last year and it is likely -- I am hearing this one from the media -- that the total amount could go up to as high as Rs 60,000 crore that is number two.Number three is we are also hearing again from the media that under the Jan Dhan Yojna, the government can give Rs 10,000 to each accounts, which doesn’t have any balance. So all those things will start panning out going forward and we see considerable focus on that specially for the rural areas and agricultural sector going forward. This will also be ahead of the some of the crucial state elections.Prashant: Where do you see or your team at Emkay see absolute great buying opportunities or you don’t see any right now?A: If I am looking at next two years, based on whatever I said, there will be a boost. On the consumption side primarily coming by way of larger government spending in rural areas and agricultural sector and a lot of those things relating to that, so I would say there would be further valuation reduction that can happen going forward in the near-term because we think that the numbers can be ugly in the near-term. So there could be some de-rating but broadly I would say that there are a lot of consumption ideas that we would be looking at when we are having a two-year's view. So we have selected names, which are in the areas of consumer primarily, some of them are fast moving consumer goods (FMCG) names and we can also look at some of the retail lending guys.Prashant: So basically the same things which worked for everyone before this demonetisation thunder struck, right? You are saying consumer, discretionary, staples and retail lending, these made the top of the list for anyone before November 8, so you are saying as these things turn around, these will be coming out the fastest out of the gate, right?A: Yes, it could be faster and stronger because it is possible that the government might overreact as they see the initial distress because of this and we are already seeing the last one week or two weeks, the government has announced a couple of things which are in this direction, so that could accelerate.