The demonetisation knock: India Inc largely unhurt

The ban on ₹500 and ₹1,000 notes, announced on the night of November 8, 2016, caused a stock market crash the next morning, with the Nifty opening 5 per cent lower. But unlike economic growth, the stock market is driven by fear and expectation arising from myriad influences — domestic, foreign, economic, political and social.

While demonetisation and Trump’s victory in the US Presidential election dragged the Nifty down 4 per cent lower by the end of December 2016, it is up almost 21 per cent over the past 12 months.

The BJP’s thumping victory in the UP election, the roll-out of GST, the Federal Reserve’s gradual monetary policy tightening and the surging inflow of both domestic and foreign money into the market have helped lift sentiment, taking the market to record highs.

Despite fears to the contrary, demonetisation had minimal impact on India Inc. The aggregate growth in net sales of the companies in the CNX 500 index in the December 2016 quarter was 8.9 per cent compared to the corresponding quarter the previous year. This was an improvement from the 4.8 per cent growth recorded in the September quarter of 2016. Revenue growth improved further to 10.2 per cent in the March 2017 quarter.

The uptick in inflation, coupled with boost to consumption through lower interest rates and Seventh Pay Commission pay-outs, brought back pricing power for Indian companies in FY17. Earnings growth at the aggregate level was also robust in the third and fourth quarter of FY17, due to a turnaround in the fortunes of metal companies and banks showing improved earnings due to lower provisioning.

That said, some sectors, including FMCG, real estate, cement and consumer durables, did see a dip in sales volume in the December 2016 quarter as demand contracted for some businesses with the note ban. But with the rise in notes in circulation, demand too revived in most cases.

According to SIAM, total vehicle sales declined 5.4 per cent in November 2016 compared to the corresponding month the previous year, led by decline in sales of three-wheelers and commercial vehicles.

The contraction accelerated in December to 18.6 per cent as two-wheeler sales fell 22 per cent and three-wheeler sales fell 36 per cent. While sales remained muted in January 2017 too, growth stabilised thereafter to improve to a brisk10 per cent year-on-year growth by May.

Passenger carmaker Maruti’s revenue growth slipped to 12 per cent in the third quarter of FY17, from 29 per cent in the September quarter. But growth revived to 20 per cent in the March 2017 quarter.

However, both earnings and revenue of Bajaj Auto and Hero Motocorp took a knock in the December 2016 and March 2017 quarters as cash purchases are higher in two-wheelers. Of the two, Hero Motocorp witnessed a revival in demand after April while Bajaj Auto continues to struggle.

Lack of availability of cash, especially in the rural areas, and cash crunch among dealers pegged back volumes of FMCG players in November and December 2016.

But with re-monetisation, volumes also moved back to an even plane. HUL reports that its volume growth in the third quarter of FY17 contracted 4 per cent, only to rebound to 4 per cent growth by the fourth quarter of FY17.

Similarly, Dabur India reported 5 per cent contraction in volume in December 2016 quarter, which improved to 2.4 per cent growth in the March 2017 quarter.

With the roll-out of GST in July, FMCG players were hit by GST-related de-stocking affecting their volumes in the June quarter this year. As the dust settles on GST, a normal monsoon and continuation of strong consumption in urban areas should help this segment.

Another sector that took a hard knock with cash drying up in the hands of buyers is real estate. According to Knight Frank, residential sales in Mumbai, NCR, Bengaluru and Kolkata declined sharply in the six months ending December 2016, compared to the previous six-month period. Sale of office space was, however, relatively insulated from the note ban.

Real estate developers operating in the premium segment in single cities, not having diversified presence, were hit badly. Companies including Oberoi Realty, HDIL, Omaxe, Kolte Patil Developers and Prestige Estates witnessed a fall in profitability in the December 2016 quarter.

With developers currently grappling with the problem of surplus inventory, especially in the premium segment, alongside slowing demand from IT employees, their ability to move into the affordable segment will determine their prospects, going ahead.

The cement sector took a hit in the December 2016 quarter due to the falling offtake from realty. North-based cement producers such as JK Cement and Shree Cement were more severely hit, compared to other regions. These players witnessed decline in revenue growth in the quarter the demonetisation was announced.

Another sector allied with real estate that saw a dip in revenue in the months following demonetisation was tiles. The offtake for tiles fell as project launches stalled in most metros.

Somany Ceramics, Kajaria Ceramics and Cera Sanitaryware were some of the tile makers who witnessed a fall in revenue growth in the December 2016 quarter. However, the demand for this segment revived along with the increase in currency in circulation, with sales growth perking up in the last quarter of FY17.

Similarly, lack of cash in circulation made consumers cut back on small-ticket discretionary purchases with the result that consumer durable makers such as TTK Prestige, Whirlpool India and Symphony witnessed a fall in revenue in the December 2016 quarter. The BSE consumer durables index was among the worst affected in the fall in November and December last year, losing about 10 per cent.

These issues have, however, been sorted with remonetisation and return of liquidity, with the revenue growth of these players returning to a stable upward trajectory by the March quarter of 2017.