Demonetisation: The Inside Scoop - The 5 Minute WrapUp by Equitymaster
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Demonetisation: The Inside Scoop

Nov 29, 2016

In this issue:
» Junior Bluechips and Steady Income Smallcaps Hold Out Well Amid Market Volatility
» Can PSUs Solve India's Employment Crisis?
» ...and more!
Kunal Thanvi, Research analyst

Everybody is talking about demonetisation and the impact it will have on India's growth story.

People have taken sides.

Some support demonetisation. They think demonetisation will curb black money and make the India growth story even stronger.

Others, however, see the move as just short of an act of war that will not only reverse India's growth trajectory but result in some sort of crisis.

We're still watching. And we wanted to get boots on the ground to gauge the real impact.

Post demonetisation, our Hidden Treasure and Phase One Alert teams have met with companies across sectors.

Because we believe the best way to know is to be out in the middle, right where the action is.

The real estate and microfinance are two of the most-impacted sectors.

First, we met one of the microfinance companies. We travelled to the northern part of the country. The company boasts of an industry low NPAs and amongst the highest loan book growth.

Here is What We Found

In microfinance sector all the transactions are in cash. The management told us the impact of demonetisation has been severe in first few days:

  • No fresh cash lending is taking place;
  • The company had to relax the recovery schedules.

For perspective, we met the management on 11 November 2016. Collections for microfinance companies occur on daily basis. Here are the collection numbers post demonetisation:

  • 8th November (Pre-demonetisation) - 100% of the amount to be collected;
  • 9th November - 15% of the amount to be collected
  • 10th November - 40% of the amount to be collected
  • 11th November - 65% of the amount to be collected

What does this mean? The problem is not the demonetisation; the problem is the unavailability of the cash in the system.

Management believes it would take around 5-6 months for cash situation to go back to normal.

Here is what We believe:

Only time will tell how much time it would take, 5-6 months or 12-14 months.

One thing is sure, once the cash arrangements are normalised, the environment is bound to improve. Demonetisation won't erase the demand for microfinance in India.

Yes, it will postpone it. But in India, the underpenetrated banking markets work on joint group lending models. And we believe these models are here to stay.


Next we had a chat with a real estate company. The company is into affordable housing only and the management has a good track record.

Here is What We Found:

They believe that the land prices in the area it operates are already seeing some softening before an ultimate correction of 20-35%.

They also believe this will result in sector consolidation. And demand will bounce back on interest rate softening.

Here is what We believe:

We think that even if interest rates don't come down, the outflow of the unaccounted money from the sector will benefit organised companies with long track records and sound managements.


I have been meeting companies across the length and breadth of the country to understand the real situation on the ground.

The response is mixed. There are both, positive as well as negative stories coming out.

Look out for my next issue, when I talk about few more companies I met. The insights were very interesting.

We have a long list of companies that may qualify for Hidden Treasure recommendations post this draw down.

Richa and her Hidden Treasure team recently revealed their three highest conviction stock picks in a unique report called Junior Bluechips. Junior bluechips are small caps with five crucial properties that remind us of bluechips. The team believes these three stocks could do well irrespective of what the macro outlook looks like.

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03:15 Chart of the Day

The demonetisation saga has certainly confused the markets. There is a lot of uncertainty. No one knows for how long and by how much corporate earnings will be impacted. The consensus seems to be that the impact will be short-lived and things will start improving next year.

If only it were so simple.

As Rahul Shah wrote in The 5 Minute WrapUp recently,

  • It is important to ignore simplistic explanations. The current economic situation in India is unprecedented.

    We have all been caught up in what is seen. There's not enough attention being paid on what is unseen.

There's no better example of simplistic thinking than the market's reaction to midcap and smallcap stocks. As today's chart shows, there is no Sensex stock that has fallen 15% since 8th November. On the other hand, between one-fifth and one-fourth of stocks in the BSE Midcap and BSE Smallcap indices have fallen by at least 15%. Some have fallen by more than 50%.

Midcap and Smallcap Stocks Hit Hardest

In times like these, it is easy to forget that there are good quality smallcap stocks in the market that have stable business models, strong cash flows, and are run by shareholder friendly managements. We have even compiled a list of the steadiest among them.

Our Hidden Treasure team's Steady Income Smallcaps report, provides three smallcap companies with solid business fundamentals that can potentially unlock wealth when purchased at the right price. The team wanted these stocks to have a consistent dividend track record. This is often a strong proof of a company's robust fundamentals. Further, the team wanted to ensure that investors are able to make money even in a volatile market.

How have these 3 stocks fared post demonetisation? Quite well...

As per yesterday's closing prices, the BSE Smallcap index is down 7.2% since 8th November. On the other hand, the three Steady Income Smallcaps have delivered +5.6%, -1.1%, and -1.7%. respectively. That's a weighted average gain of 0.9% post demonetisation. Of course, these are long-term recommendations but it is evidence that strong smallcaps stocks can weather this storm.

Gain access to the Steady Income Smallcaps report here.


In a recent issue of The 5 Minute WrapUp, Tanushree wrote about the massive layoffs at India's largest Engineering firm L&T. We believe, the mainstream media did not give this story the importance it deserved. After all, L&T decided to lay off 11.2% of its total workforce, almost 14,000 employees.

Here's what Tanushree wrote...

  • We believe the situation could actually get worse.

    Consider this...

    First, Trump's win in the US. This has put India's IT sector in the spotlight. IT service companies, the last straw of hope in the critical job scenario, are themselves expected to lay off thousands in the years to come. And the situation could turn out to be even worse. We don't know as yet.

    Second, the demonetization-led economic slowdown which has brought corporate activity to almost a screeching halt. Even if it takes six months to adjust to this black money move, you can imagine the impact on job seekers and their families. Not to mention potentially huge job losses in the unorganized sectors.

    Now, it's not that the government has taken any tangible steps yet to improve the jobs scenario in India. Initiatives like Make in India and Skill India have failed to make any difference. And the plight of thousands of jobless youth is slowly converging into an economic crisis of gargantuan proportions.

    But in our view, it's not enough. In fact, if we were even a bit more skeptical, we would say that there is NO PLAN to deal with this crisis.

    As the unemployment numbers keep adding up, we believe it will have a snowball effect on India's future.

The question is what will be the reaction to this? Today's Economic Times seems to suggest that the youth will make a beeline for PSUs!

Apparently, PSUs will be among the first at the Indian Institutes of Technology (IITs) this placement season. The IITs have taken this decision ostensibly to provide PSUs access to the best engineering talent.

However, we believe this is a direct fallout of inability of students to find the jobs of their choice. The reason for that is simple. There aren't enough jobs in the first place.

Vivek Kaul had explained the dire unemployment situation in India in the October issue of The Vivek Kaul Letter 'What the Media Did Not Tell You About India's High Unemployment Rate'.

Gain access to The Vivek Kaul Letter here.


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 212 points (up 0.81%), while the NSE Nifty was trading higher by 67 points (up 0.83%). Most sectoral indices were trading higher with Auto stocks leading the gainers.

04:55 Today's Investing Mantra

"Be fearful when others are greedy, be greedy when others are fearful" - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Kunal Thanvi (Research Analyst).

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