Here's a Management 'Excited' About Demonetisation and GST

Dec 16, 2016

In this issue:
» No ATMs - No Cash
» India's Unemployed Youth Now Worries the President too!
» And More...
Tanushree Banerjee, Co-Head of Research

In our business, it's not unusual to see sales fall by 50% in a quarter. We have been through such crises several times. But have never been so positive about it.

The small retailing company we spoke to recently has had some disappointing quarters of late. But there was no air of defensiveness. No pretense to set things right. No attempt to hide the challenges ahead. And surprisingly little anxiety about the poor business performance...let alone its impact on the stock price.

You see, the majority of the company's stores are in very small towns...more than 90% of the purchases are in cash...and its products are aspirational in nature. So you'd think demonetisation would have left the management sour and desperate to get back on its feet.

At least that's what we expected...

But the CEO was nonchalant. He effortlessly shifted his focus from the pains of demonetisation to the gains that lay ahead.

His comments had nothing to do with black money, terror funding, or going cashless. He never peddled any of that political rhetoric. No, his optimism was neither superficial nor debatable. The arguments were both logical and provable.

Here's what he told us...

  • When you go shopping to a large format retail store in Delhi, Mumbai, or Bangalore, you choose between the best brands. It's the quality that determines your choice. You rarely change preferences due to nominal difference in prices of identical products.

    Our customers have a very different experience.

    The can walk into our stores and buy brands. Or can walk out of it and buy unbranded products at almost half the price from kirana stores. Products sold by unorganised players are both aplenty and very cheap in smaller towns and rural areas. Both our pricing and market share are vulnerable to the customer's choices.

Demonetisation is hurting the company and its neighbouring kirana stores in equal measure. Neither expect to see sales growth or profits in the next few quarters. But the management expects this to change in a big way in the not too distant future.

That's because, post demonetisation, the unorganised players will have make tectonic shifts to the way they do business. Neither the unorganised producers nor distributors will have an easy go of it. Being able to sell cheap is no longer getting them business.

And soon they'll face the challenge of complying with GST.

The retailer we spoke to, though small, is prepared for the temporary challenges of GST. The CEO knows that GST could eat into his margins for a while as passing on price hikes will not be easy. But he foresees the demise of most of the unorganised players that typically eat into his market.

So no doubt the sales of this company will likely be unimpressive for another few quarters. And if GST is implemented soon, even the margins may look thinner. But the management recognises that demonetisation and GST could turn out to be a double bonanza for the business. It could gain them not only market share but more pricing power. And over the long term, the business could develop a significant edge over competitors.

It was great to see the CEO so excited to explain the possibilities ahead. But the big takeaway for us was that demonetisation has laid the groundwork for some formidable changes in how businesses perceive risk.

As we meet more managements, we will share with you the businesses that will remain safe not just a few months but several years down the line.

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02:40 Chart of The Day

Private sector banks in India have been on a mission to expand their retail presence over past few years. And the surge in their number of automated teller machines (ATMs) tells the story of maximum reach at minimal cost. But despite the steady growth in the number of ATMs in the country, their penetration as measure by number of ATMs per 1,00,000 adults, is very low.

As today's chart shows, during 2015 the penetration of ATMs was quite poor in India when compared to its peers.

Banking Penetration a Major Challenge in India

Clearly the number of ATMs in India are not enough for its huge population. The ratio of ATMs will fall further as more households come into the banking system via financial inclusion. Further, as per the survey done by the RBI during May 2016, almost one-third of the ATMs in India have been found non-functional. So apart from financial inclusion, it is critical that the RBI looks into the penetration of banking services as well.


India is a young country. Younger compared to not just the West and Japan but also many developing economies. In few decades, half of the population will be below 25 years of age. Such a huge manpower can be an asset to any nation. But not in a situation where most are either unemployed or unemployable.

President Pranab Mukherjee, recently raised concerns about this grim state of Indian youths of the country. According to him, India may face unrest, frustration if youths are jobless.

This is hardly news to us! Our colleague Vivek Kaul has done some extensive research on the impact of joblessness on India's socio-economic prospects. He often puts out his findings in the Diary.

In fact in our recent edition of 5 Minute Wrap up here is what I wrote...

  • The fact is that we have 1,000,000 new job seekers every month! That makes it 12,000,000 a year.

    And as per estimates, demonetisation will render another 400,000 jobless in a few months. Hindustan Times arrived at this number based on estimates by top headhunting companies in India.

Rising automation means we will see more layoffs like the one at L&T. And without sufficient job creation, we are bound to find more unemployed youth on the street.

Anyone wondering if this is a figment of our imagination needs to remind himself of the Arab Spring, which was not so long ago.


In the meanwhile, the Indian share markets have continued to trade near the dotted line with negative bias as metal, energy and PSU stocks witness selling pressure. While gains are largely seen in consumer durables and auto sectors. At the time of writing BSE Sensex is trading lower by 25 points while the NSE Nifty is trading lower by 13 points. The BSE Mid Cap index is trading down by 0.3% while BSE Small Cap index is trading down by 0.1%.

04:55 Today's Investing Mantra

"Noah did not start building the Ark when it was raining." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst).

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