Even the Most Defensive Sector Is Not Immune to Demonetisation - The 5 Minute WrapUp by Equitymaster
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Even the Most Defensive Sector Is Not Immune to Demonetisation

Dec 23, 2016
In this issue:
» Defensives losing their sheen?
» This asset class has witnessed more than 80% wipe out in its demand
» Notebandi Petition
» And More
00:00
Bhavita Nagrani, Research analyst

We've been looking at the impact of demonetisation on various sectors. Auto and auto ancillary and microfinance have been hit big time. But the list does not end there.

The demonetisation drive has also put pressure on sectors where spending is not discretionary. I refer here to pharmaceuticals.

I recently met a pharma company with a strong domestic presence. I have tried my best to reproduce it here:

  • Me: How has demonetisation impacted your business?

    Management: Well, the business in the month of November has not got much impacted but we need to see how things work out.

    Me: So what has changed since November?

    Management: During the initial few days when demonetisation was announced, chemists were accepting old currency. They could pass on these notes to distributors who in turn would get them converted at banks. However, the acceptance this month has seen a sharp fall. The distributors are now averse to accepting old notes as it's a pain to get them converted. They can't pass these notes to major big pharma companies as they are only into non-cash transactions. Thus, routing payment to companies has become a tough task for distributors.

    Me: So now what steps are you taking towards the same?

    Management: Since the distributors were not able to make timely payments, we have extended the credit period. But this hasn't helped. Finally, we had to curtail the supplies to distributors. We are forced to hold inventory. At the same time, top line is getting affected.

    The problem does not end here... More than half of the transactions between chemists and consumers are in cash. In major rural areas, chemists do not own card machines. Even customers do not hold cards or have bank accounts.


    Me: For how much time can one expect the impact in urban as well as in rural areas?

    Management: While demand from urban areas may get back on track in the next few weeks, it may take some more time to bring back demand from the rural markets. The supply of cash in these areas is quite limited. So much that consumers are also postponing their medical needs. The month of November has not seen much impact. But as I said, December will be the time to assess the real impact of demonetisation. We expect the impact to continue till the end of fiscal 2017.

In our view, players with a heavy dependence on the domestic market will fare worse than companies operating in diversified markets. But we'll have to wait until the quarterly results to find out. However, knowing Mr Market, if what the management told me turns out to be true, these stocks could see a sharp correction.

At least, we hope so!

After all, the Indian domestic pharma market presents hugely lucrative long-term opportunities. A lot of companies in this segment could become major wealth builders. Buying them after a correction will only further compound your long-term returns. But as I said, we will have to wait to see how this opportunity unfolds.

Meanwhile, the ValuePro team has shortlisted a pharma company with a strong track record in domestic as well as international markets. I can't reveal much more here, but the team is looking forward to an actionable recommendation. Stay tuned for a new recommendation report from the Valuepro team.

03;40

Notebandi hits us hard. But NOT this privileged group.

My colleague Vivek Kaul is on a mission to get us EQUAL RIGHTS.

Vivek will soon send a petition to the President of India to request him to set things right.

Here are the details of the PETITION.

I have already signed it and urge you to do so!

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

03:50 Chart of the Day

How often has your broker told you to buy defensive stocks? Every time there is a market correction, the so called defensive sectors fetch the limelight. The perception is that whether GDP growth is high or low, no one stops buying consumer durables and medicines. And therefore the stocks can stay resilient. Demonetisation or what is popularly called Notebandi changed that! The demand for most essential items including lifesaving drugs has taken a hit. FMCG companies have seen big drop in semi urban and rural areas. And pharma companies are also seeing a dip in the domestic demand. The Consumer Goods, FMCG and Healthcare indices have corrected by 6% to 12% since November 8, 2016. In fact the correction is almost at par with that of BSE Smallcap index, with much riskier stocks in its components.

The valuation multiple of the defensive sectors have come off the peaks over the past month. However, it's the disappointing earnings that we expect over the next few quarters, which could bring the multiples to our comfort zone. And that would be the best time to look for not defensive but safe stocks!

Demonetisation Effect: Defensive Sectors Corrected As Much As Smallcaps


04:20

The last three months of the year is the wedding season in India. And the demand for gold jewelry usually peaks at this time of the year. But unlike each year, the recent weddings has been less sparkling for many. It's not just FMCG or pharma, but also the demand for gold, considered resilient to inflation, that has been hit hard by demonetisation. As reported in a financial daily, according to the All India Gems and Jewelry Trade Federation, demand for gold jewellery has fallen by 80% after demonetisation.

Soon after the announcement of demonetisation, people rushed to jewelers to buy gold in exchange of their old currencies. In fact, there were media reports highlighting grey market for this precious metal. But soon after, fearing the IT raids, demand for gold tumbled. Since then, the demand for gold has hit a multi-year low.

With the US Fed signaling more rate hikes, it is unlikely that the gold prices would recover a lot anytime soon.

Our colleague, Asad Dossani who shares trading ideas on gold, has similar views.

04:40

In the meanwhile, after opening the day on a flat note with a negative bias, the Indian share markets recovered and trading in green. At the time of writing BSE Sensex was trading up 64 points (up 0.3%) and the NSE Nifty was up 12 points (up 0.2%). Meanwhile, the BSE Mid Cap index was trading up 0.5%, while the BSE Small Cap index was up 0.3%.

04:50 Today's investment mantra

"Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a fly epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497". - Warren Buffett

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

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Dec 24, 2016

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