Demonetisation: The Inside Scoop (Part 2)

Dec 6, 2016

In this issue:
» Crude Oil Prices Have Started to Rise Again. What Will the Government Do?
» Vivek Kaul Called Demonetisation Right from the Beginning!
» A Strong Possibility of a 0.25-0.5% Rate Cut Tomorrow
» A Quick Update About the Bursting of the NBFC Bubble
» ...and more!
Kunal Thanvi, Research analyst

Last week, I told you what's happening on the ground post demonetisation.

This week, I cover more ground...

Remember, there is no such thing as a 'free lunch'. You can't get something for nothing. Somebody always has to pay.

Demonetisation is a case in point.

The government decided to make Rs 500 and Rs 1000 notes illegal. The intention was to curb black money.

But now, the economy is paying for it.

The government realises this now. But it is too late. And the consequences may be severe.

I will talk about what I know best: present you with the boots-on-the-ground reality.

Last week, we looked at real estate and microfinance. This time, we look at consumer discretionary and auto.

Our first meeting was with a company in the consumer discretionary space. It's in the hotel business and has properties across the country. It targets a middle-class clientele and has industry-low room rentals.

What We Found

The hotel business is directly related with discretionary spending. And since the company caters to the middle and lower-middle classes, you'd expect most transactions to be in cash.

However, the management told us:

  • Around 75% of bookings are through credit/debit card or online portals
  • 60% of the food and beverage revenues are in cash

Now, footfalls post demonetisation are down. But the management expects the impact to be short term (three to six months) as clients shift to alternative payment routes.

What We Believe

With no cash in the system and a lack of a cashless infrastructure in tier two and three towns, the situation is daunting.

We believe there will be a major deferral in spending. Three to six months may prove to be a vast underestimation.

However, in the long run, people will not stop travelling and eating at restaurants. In fact, the short-term chaos could be an opportunity for consumer discretionary companies.


We then travelled to a famous city in Maharashtra to meet a major auto component manufacturer. The company is the market leader in every segment it operates in. Best of all, the component it manufactures has a huge replacement market too.

What We Found

Generally, auto component companies have high client concentration.

However, this company which has more than fifty years of its operations, is relatively immune from the risk of client concentration. No client comprises more than 15% of total revenues.

The management candidly explained the ground reality for both the primary market and the replacement market:

  • Primary market
    • Pre-demonetisation: 15-20 vehicles per dealer
    • Post-demonetisation: 2-3 vehicles per dealer
  • Replacement Market: The replacement market is entirely cash-based. This is because the product is inexpensive. It is, however, critical to the vehicle's functioning. No matter what the cash situation is, people will buy the component.

What We Believe

Major auto companies have reported flat monthly volumes. We believe there will be a lag effect and the actual impact of demonetisation will be seen in the coming months.

It is bound to be under pressure.

However, the auto space in India is highly underpenetrated. Only 18 in 1000 people own a car. This number is 80 in China and 800 in the US.

Macro events such as demonetisation can only defer it, but this number is set to increase.

Nothing can destruct the long-term automobile demand in India.


In sum...

There is too much uncertainty. The short-term looks daunting. Bad times are approaching. And earnings will see a southward trend.

But pessimism aids the discovery of true prices. And this creates more opportunity for us to recommend fresh buys to our subscribers.

I have been working with Richa to shortlist companies for Hidden Treasure subscribers post this draw down. We have several meetings lined up in the coming days.

Meantime, the team recently revealed their three highest-conviction stock picks. They call them 'Junior Bluechips' because they're small caps with five crucial blue-chip-like properties. The team believes these three stocks could do well in the long term, irrespective of the macro outlook.

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It's almost a month now since Rs 500 and Rs 1,000 notes were demonetised with the aim of fighting black money.

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In fact, these stocks could possibly be among the safest to rely on, among numerous other companies.

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02:45 Chart of the Day

Watch out! Crude oil prices have started to rise again. Brent crude was trading close to US$ 40 per barrel in August. It's now up to almost US$ 55 per barrel. That's a gain of about 35% in just five months. The recent OPEC meeting set the cat amongst the pigeons. The cartel decided to reduce production by 1.2 million barrels per day starting January 2017. But it seems that the markets were anticipating the decision.

Crude Prices on the Rise Again

This is bad news for the Indian economy. Ever since June 2014, the Modi government has received a huge tailwind from falling crude prices. It captured most of the gain by raising excise duties on petroleum products multiple times. This helped the government keep the fiscal deficit in check. The petroleum subsidy fell from Rs 968.8 billion in 2012-2013 to Rs 300 billion in 2015-2016. But the common man did not get lower petrol and diesel prices.

Now the trend could be reversing. Crude oil prices are rising again. What happens now? Will the government cut excise duties? We don't think so. We think prices at petrol pumps could rise. This will have a pass through effect on inflation. When consumer spending normalises post demonetisation, we should all be on our guard for rising inflation.


Speaking of demonetisation, our big picture expert Vivek Kaul, got it right from the beginning. In the Inner Circle Letter dated November 25, 2016 and the Diary dated November 29, 2016, he said the demonetisation mess will take some time to sort out. He was right.

His logic was very straightforward. He said that the entire mess was due to the inability of the government to print the new Rs 500 and Rs 2,000 notes.

Using simple maths based on the RBI's numbers he calculated that it would take another five to six months for the government to print enough new Rs 500 notes to be able to replace the old Rs 500 notes which have been demonetised.

People were expecting a quick resolution to the cash shortage at that time. So, it was a controversial thing to say. Now however, it is the mainstream opinion. Even finance minister Arun Jaitley agreed with Vivek.

This is exactly the sort of hard hitting analysis that is missing in the mainstream media. In The Vivek Kaul Letter, he tells his readers the real story, instead of the marketing spin that tends to make it to the front pages of business newspapers these days. He calls a spade a spade instead of beating around the bush.

In the latest issue Vivek talks about Paytm and why it is not a panacea for making the Indian economy a cashless one. Gain access to The Vivek Kaul Letter here.


The RBI's monetary policy meeting is scheduled for tomorrow. The consensus is clear. The repo rate will be cut by 0.25%. We believe, there is a strong possibility of a 0.25-0.5% rate cut. But we are not too concerned about that. It's old news. Interest rates in India have been falling steadily since January 2015.

We are more concerned about Dr Urjit Patel as RBI governor and the possibility of negative real interest rates for savers.

In the 28 November issue of The 5 Minute WrapUp, Tanushree explained why Dr Patel is off to a disappointing start.

  • Although banks have been at the core of the demonetisation drive, Dr Urjit Patel chose not to comment for nearly twenty days. At such times, we would typically expect the central banker to outline a plan. However, what we got from Dr Patel was rather more like political rhetoric.

Earlier, in the 11 November issue of The 5 Minute WrapUp, Tanushree explained why savers have received a bad deal due to demonetisation.

  • On one hand banks will have a deposit base much bigger than they would have earlier envisaged. On the other hand, the poor demand for credit is unlikely to pick up soon. The correction in bond yields has prompted corporates to raise funds via corporate deposits and non-convertible debentures (NCDs). Issue of NCDs, in fact, is at a seven year high. There will be few takers for bank loans at high yields. Threatened with prospect of poor margins, banks may therefore decide to cut deposit rates sharply.

Dr Patel will have a chance to assuage investors as well as depositors tomorrow. More than anything else, we hope he uses the meeting to lay out his thoughts clearly.


Before we wind up this issue, here's a quick update from today's Research Digest by Tanushree, about the NBFC bubble that has burst.

  • The fact that the valuations of NBFCs will sooner than later catch up with fundamentals was known. What was not known is that the cash ban will be a huge, albeit temporary hurdle to the business of NBFCs. And will therefore accelerate the correction.

    The last month has seen stocks of the best NBFCs correct by 5 to 25%. And the worst is to come. As these entities report their financial results over next few quarters, valuations could have a reality check.

You can read today's Research Digest here (subscription required)


After the positive start to the day, the Indian stock markets were trading in the green at the time of writing. The BSE-Sensex was trading higher by about 125 points (up 0.48%), while the NSE Nifty was trading higher by 37 points (up 0.46%). Most sectoral indices were trading higher with Energy stocks leading the gainers.

04:55 Today's Investing Mantra

"You only have to do a very few things right in your life so long as you don't do too many things wrong" - Warren Buffett

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2 Responses to "Demonetisation: The Inside Scoop (Part 2)"


Dec 6, 2016

I just can't understand why this totally biased write-ups...

Rahul, are contesting for elections-- to carve out political career..

Everybody said all this what your team has taken pains to write these articles..

It is hardly a month.. and you people are passing judgements..

I do not say either good or bad at this juncture but need to see after December, and then Budget that will surely factor all the points you have been writing..

Be Matured..

And concentrate on the Swing Trader where Apoorva has not recommendations since almost two weeks, and whatever he has charted out is not meeting the levels of his forecast.. When your one single product is a failure causing loss to your customers even after nearing 2 years of its start, don't you think how foolish it will be to pass judgement when the change is still in process...


Brij Kumar Singh

Dec 6, 2016

Demonetization has swelled the coffers of banks though nothing is known about how much black money has been flushed out. However the banks have reduced the interest rates on fixed deposits thus causing financial difficulties for retired people on one hand and the home loan rates has not been reduced thus causing more problems for the just retired people.
In my opinion the cause of generation of back money must be understood. Let us fix the accountability of the executing officers and their departments and if any wrong is caught it should be essential to fix the responsibility on the concerned officer under hose jurisdiction this wrong has been committed. The best example is illegal construction of buildings in various parts of cities which are not possible without the active connivance of engineers of various development authorities and police officers of that area. So punish them along with the people who have constructed them.

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