- In this issue:
- » No ATMs - No Cash
- » India's Unemployed Youth Now Worries the President too!
- » And More...
In our business, it's not unusual to see sales fall by 50% in a quarter. We have been through such crises several times. But have never been so positive about it.
The small retailing company we spoke to recently has had some disappointing quarters of late. But there was no air of defensiveness. No pretense to set things right. No attempt to hide the challenges ahead. And surprisingly little anxiety about the poor business performance...let alone its impact on the stock price.
You see, the majority of the company's stores are in very small towns...more than 90% of the purchases are in cash...and its products are aspirational in nature. So you'd think demonetisation would have left the management sour and desperate to get back on its feet.
At least that's what we expected...
But the CEO was nonchalant. He effortlessly shifted his focus from the pains of demonetisation to the gains that lay ahead.
His comments had nothing to do with black money, terror funding, or going cashless. He never peddled any of that political rhetoric. No, his optimism was neither superficial nor debatable. The arguments were both logical and provable.
Here's what he told us...
- When you go shopping to a large format retail store in Delhi, Mumbai, or Bangalore, you choose between the best brands. It's the quality that determines your choice. You rarely change preferences due to nominal difference in prices of identical products.
Our customers have a very different experience.
The can walk into our stores and buy brands. Or can walk out of it and buy unbranded products at almost half the price from kirana stores. Products sold by unorganised players are both aplenty and very cheap in smaller towns and rural areas. Both our pricing and market share are vulnerable to the customer's choices.
Demonetisation is hurting the company and its neighbouring kirana stores in equal measure. Neither expect to see sales growth or profits in the next few quarters. But the management expects this to change in a big way in the not too distant future.
That's because, post demonetisation, the unorganised players will have make tectonic shifts to the way they do business. Neither the unorganised producers nor distributors will have an easy go of it. Being able to sell cheap is no longer getting them business.
And soon they'll face the challenge of complying with GST.
The retailer we spoke to, though small, is prepared for the temporary challenges of GST. The CEO knows that GST could eat into his margins for a while as passing on price hikes will not be easy. But he foresees the demise of most of the unorganised players that typically eat into his market.
So no doubt the sales of this company will likely be unimpressive for another few quarters. And if GST is implemented soon, even the margins may look thinner. But the management recognises that demonetisation and GST could turn out to be a double bonanza for the business. It could gain them not only market share but more pricing power. And over the long term, the business could develop a significant edge over competitors.
It was great to see the CEO so excited to explain the possibilities ahead. But the big takeaway for us was that demonetisation has laid the groundwork for some formidable changes in how businesses perceive risk.
As we meet more managements, we will share with you the businesses that will remain safe not just a few months but several years down the line.
|--- Advertisement ---|
Even Now: Researching Small Caps is Important...
The current market scenario makes many small caps look like good opportunities...
Do you know that usually small caps that lead in small niche sectors have a high-growth potential?
Yes. That's one of the many secrets that 8 years of small cap research has revealed to us...
And these secrets have led to several recommendations that have generated double and triple digit returns...
Click here to discover the small cap advantage...
02:40 Chart of The Day
Private sector banks in India have been on a mission to expand their retail presence over past few years. And the surge in their number of automated teller machines (ATMs) tells the story of maximum reach at minimal cost. But despite the steady growth in the number of ATMs in the country, their penetration as measure by number of ATMs per 1,00,000 adults, is very low.
As today's chart shows, during 2015 the penetration of ATMs was quite poor in India when compared to its peers.
Banking Penetration a Major Challenge in India
Clearly the number of ATMs in India are not enough for its huge population. The ratio of ATMs will fall further as more households come into the banking system via financial inclusion. Further, as per the survey done by the RBI during May 2016, almost one-third of the ATMs in India have been found non-functional. So apart from financial inclusion, it is critical that the RBI looks into the penetration of banking services as well.
India is a young country. Younger compared to not just the West and Japan but also many developing economies. In few decades, half of the population will be below 25 years of age. Such a huge manpower can be an asset to any nation. But not in a situation where most are either unemployed or unemployable.
President Pranab Mukherjee, recently raised concerns about this grim state of Indian youths of the country. According to him, India may face unrest, frustration if youths are jobless.
This is hardly news to us! Our colleague Vivek Kaul has done some extensive research on the impact of joblessness on India's socio-economic prospects. He often puts out his findings in the Diary.
In fact in our recent edition of 5 Minute Wrap up here is what I wrote...
- The fact is that we have 1,000,000 new job seekers every month! That makes it 12,000,000 a year.
And as per estimates, demonetisation will render another 400,000 jobless in a few months. Hindustan Times arrived at this number based on estimates by top headhunting companies in India.
Rising automation means we will see more layoffs like the one at L&T. And without sufficient job creation, we are bound to find more unemployed youth on the street.
Anyone wondering if this is a figment of our imagination needs to remind himself of the Arab Spring, which was not so long ago.
In the meanwhile, the Indian share markets have continued to trade near the dotted line with negative bias as metal, energy and PSU stocks witness selling pressure. While gains are largely seen in consumer durables and auto sectors. At the time of writing BSE Sensex is trading lower by 25 points while the NSE Nifty is trading lower by 13 points. The BSE Mid Cap index is trading down by 0.3% while BSE Small Cap index is trading down by 0.1%.
04:55 Today's Investing Mantra
"Noah did not start building the Ark when it was raining." - Warren Buffett
|DISCLOSURES UNDER SEBI (RESEARCH ANALYSTS) REGULATIONS, 2014
Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research Analysts) Regulations, 2014 with registration number INH000000537.
An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment opportunities across asset classes.
There are no outstanding litigations against the Company, it subsidiaries and its Directors.
GENERAL TERMS AND CONDITIONS FOR RESEARCH REPORT:
For the terms and conditions for research reports click here.
DETAILS OF ASSOCIATES:
Details of Associates are available here.
DISCLOSURE WITH REGARDS TO OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST:
DISCLOSURE WITH REGARDS TO RECEIPT OF COMPENSATION:
- 'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report
- Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any financial interest in the subject company.
- Neither Equitymaster, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report.
- Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any other material conflict of interest at the time of publication of the research report.
- Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
- Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.
- Neither Equitymaster nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
- Neither Equitymaster nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
- Neither Equitymaster nor it's Associates have received any compensation or other benefits from the subject company or third party in connection with the research report.
Definitions of Terms Used:
- The Research Analyst has not served as an officer, director or employee of the subject company.
- Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.
- Buy recommendation: This means that the subscriber could consider buying the concerned stock at current market price keeping in mind the tenure and objective of the recommendation service.
- Hold recommendation: This means that the subscriber could consider holding on to the shares of the company until further update and not buy more of the stock at current market price.
- Buy at lower price: This means that the subscriber should wait for some correction in the market price so that the stock can be bought at more attractive valuations keeping in mind the tenure and the objective of the service.
- Sell recommendation: This means that the subscriber could consider selling the stock at current market price keeping in mind the objective of the recommendation service.
If you have any feedback or query or wish to report a matter, please do not hesitate to write to us.
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringementDisclosure & Disclaimer:
Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.
This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.
This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, Canada or the European Union countries, the same may be ignored.
This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.
As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use
, available here. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited (Research Analyst) 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407