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No GST Adds To Cash Ban Uncertainty

Dec 1, 2016

In this issue:
» Safe Stocks for navigating stock market volatility
» Payday blues - Cascading effects of the cash crunch
» Market roundup
» ...and more!
00:00
Sarvajeet Bodas, Research analyst

Rarely have Indians been exposed to so many economic uncertainties at a time. We are already hassled with limited cash and no spending power. To add to that the timeline of economic recovery is getting longer. We may want to adapt to the new normal for the sake of long term positives. But the list of uncertainties keeps getting longer by the day.

And now...another challenge comes into view: the implementation of GST.

Amit Mitra, finance minister of West Bengal and the chairman of the empowered committee of state finance ministers, says it's not the right time to implement GST, claiming India's federal structure may not be prepared for the 'double whammy' of demonetisation and GST.

Think about this for a moment.

Companies are already facing pressure, especially in rural areas where The India Letter team went demonetization has caused a severe cash crunch. Even in cities people are rationing their money. This will certainly impact companies' growth and profitability over the next quarter or two. And just when dust of demonetisation settles, we have another challenge - the implementation of GST. The disruption and discontinuity would continue as companies, distributors, suppliers, and other players in the value chain adjust.

What does this mean for companies?

The combined impact of demonetisation and GST would certainly create more uncertainty.

What does this mean for investors?

For long-term investors, it means opportunity.

  • Whenever there is change, and whenever there is uncertainty, there is opportunity. - Mark Cuban

Most people are wearing short-term spectacles and placing too much importance on these events. No doubt, the events are important, but try take a step back and look at them from a five-year perspective - and remember, we will have many more events like them in the coming years.

Then, try to take another step back and evaluate these big macro events using a bottom-up approach.

With a bottom-up approach, it is important to focus on companies with a strong business model. A business model describes how the pieces of a business fit together. Or as Michael Lewis says, 'All it really meant was how you planned to make money.'

If a business model is a description of how you plan to make money, then a competitive strategy explains how you will do it better than your rivals.

Doing better means being different. This could mean a better business model. It could mean entering different markets. It could mean a presence in the entire value chain. It could mean becoming a niche player catering to a particular segment.

With this in mind, The India Letter team went to the north of India to meet companies with unique business models and competitive advantages over their rivals.

When we asked about the impact of demonetisation and GST to one company's management, here's what they told us:

  • Yes, this will have some impact in the short-run. Our debtors' days may get affected in the short term. There could be a short-term impact on growth as well. But with our presence across the value chain and our products, which are critical for our consumers, we are quite sure to bounce back to normal levels. In the long-term, we see this as a positive development as there will be a shift from unorganised players to organised players.

Out meetings with managements post demonetisation reaffirms our belief that India's economic Megatrend is here to stay. Those tailwinds stay intact irrespective of the uncertainties in the offing. So, the opportunity to buy the best stocks in the midst of such uncertainties excites us. Forthcoming issues of The India Letter will talk about the stocks that stand to gain even post demonetisation.


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------------------------------

03:45 Chart of the Day

Uncertainties seem to be ruling the day in Indian stock markets. If global macro events like the Brexit, US presidential elections and Federal Reserve's actions were not enough, we are now grappling with our own problems with regard to Demonetisation and stagnant corporate profits. All these variables has added in a tremendous amount of volatility to stock indices.

I have plotted the performance of the BSE Sensex since Jan-2000. The BSE-Sensex has compounded at a rate of almost 11 percent annually since then. The index itself is up 5 times since 2000. However, the ride has not been smooth.

Maximum drawdown is a measure of the percentage change of a stock's high to its low. The below chart captures drawdown of the index.

Roller Coaster Ride of the Stock Market Index


The markets have seen a huge slide of 61% from its peak in Nov-2007. In fact, to recover back to those peak levels of 2007 required three years. This gut wrenching volatility could cause anyone to panic and result in a permanent loss of capital. In such uncertain times, one would do well to bank on the bluest of blue chips which have the wherewithal to face these uncertainties and come out unscathed.

The safe stocks are more resilient to shocks that the external environment throws at them. And thus can provide great risk adjusted returns in the medium to long term. We have a special report on Safe stocks, which could possibly be amongst the best ones to bank on for the long run.

04:20

The dreaded payday has arrived for the salaried class of the country. However, the money in the bank account unfortunately has not translated to cash in hand. Banks are worried that with little or dwindling cash in their branches and ATM across the country, anxious customers will be up in arms over the unavailability of cash. Already some of the ATMs have run out of cash or are only dispensing Rs 2,000 notes which customers are unwilling to take.

The void in overall currency circulation is being felt by everyone. This does not look to be a one-time phenomenon. The cash crunch is here to stay and as per some simple calculations that our colleague Vivek has provided, it will be at least five to six months of pain before the situation normalizes. Here is Vivek's latest piece asking the government, political parties to practice what they preach.

04:45

After opening the day on a flat note, the Indian stock markets traded above the dotted line. At the time of writing the BSE-Sensex was trading higher by about 29 points (up 0.1%), while the NSE Nifty was trading higher by 5 points (down 0.1%). Sectoral indices are trading mixed with banking and power stocks leading the losses, while pharma and FMCG stocks are in demand.

04:55 Today's Investing Mantra

"Risk comes from not knowing what you're doing." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Sarvajeet Bodas (Research Analyst) and Rohan Pinto (Research Analyst).

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1 Responses to "No GST Adds To Cash Ban Uncertainty"

Dhir Bhateja

Dec 3, 2016

No doubt its double whammy time to look for niche players in digital payment gateways ,swipe machine makers,anyone how about pine labs?

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