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Notebandi: The Impact on Earnings Estimates
Feb 28, 2017

December quarter results for most of the companies are out now. A peek at the results would not suggest that one of the biggest economic events - notebandi happened in the quarter. For companies in the non-financial sector, both sales and operating profit have grown. What more, the growth in the topline has been positive for the first time since September 2014. Operating profit too has recorded the highest growth since June 2014.

This may suggest that concerns on corporate sector were overblown. However, as an article in Livemint suggests, this could be a superficial conclusion.

Consumer goods and discretionary expenses were the worst hit segments due to demonetisation. If the overall results look positive, it has a lot to do with a favourable base effect.

In fact, the real impact on earnings is yet to be seen. As far as Sensex's earnings estimates are concerned, the analysts are already accounting for a downward revision until FY18.

As per CMIE data, there has been an inventory pile up across a lot of sectors. Whether this gets converted into sales soon will depend on the rebound in the consumer demand. And that in turn will depend on how soon remonetisation happens. Unfortunately, a lot is left to be desired on that front.

In our view, the real victim in the long run will not be listed firms. They could in fact gain from the 'going cashless' drive. The actual impact will be seen on the informal sector that runs mostly on cash and accounts for 48% of India's total output and 80% of employment. This impact may not be captured by Sensex earnings or estimates, yet will have a severe impact on the overall economic growth and sentiments.

Readers would do well to consider companies (while investing) that could benefit the most from such shifting economic climate.

As far as the Hidden Treasure team is concerned, we believe demonetisation has unlocked a great opportunity for resilient businesses and great managers in the small cap space.

As I wrote in the recent Research Digest:

    In our meetings with managements, one of the common challenges these companies tell us about is competition from the unorganised segment. The latter operate locally on a low scale and rely mainly on cash sales.

    With all the changes taking place around us, it is the informal segment and unlisted small businesses that will be worst hit. The cost of doing business for companies in the unorganised segment is likely to go up.

    And demonetisation is just the beginning.

    As accounting norms are likely to become clearer and stricter for all, tax evasion will be difficult. Meanwhile, India is expected to take further steps in the direction of a cashless economy.

    Further, with GST close on the heels, the story of India, for listed small companies, will become better at the cost of unorganised segment.

Data Source: Bloomberg, Livemint

This Chart Of The Day was published in The 5 Minute WrapUp - What's Common Between India's Loss to Australia and this Beaten Down Smallcap

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