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It's been four months since demonetization was announced. The government has not offered any mathematics or hard proof to show how and why it was good for the economy. One still wonders if it was ever a move against black money or a political ploy before some crucial state assembly elections. Its effects are felt far less today than in November and December 2016. Banks are flush with funds and Indian Inc has started showing signs of profitability.
An article in the Hindu Business Line suggests 1,700 listed companies recorded a healthy year on year growth in net sales during the October-December 2016 period. On an average, these companies recorded a 9.1% YoY growth in the December quarter. This showed an improvement over the 5% YoY growth witnessed in the September quarter. Also, at 29.8%, profit in the December quarter grew at a much faster clip than the 13.6% in the September quarter.
Most of the companies were able to ward off the impact of rising input prices through cost-control measures. Some companies went for a cut in advertisement spends. So listed companies, at a whole, were able to shield themselves from the impact of demonetization. And with their December quarter results, it seems that a lot of them are back with a bang.
However, this is not the case with the economy. While a lot of listed companies managed to come out relatively unaffected, many unorganised players are still bearing the brunt of demonetization. One must note that the informal sector runs mostly on cash and accounts for 48% of India's total output and 80% of employment. We have been dragged back almost by a year or two because of the move.
Anyway, as analysts, our job is to find silver lining in every dark cloud. And demonetisation is no exception.
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Earlier this year, we wrote to you about value migration and how it has benefitted many Indian companies. Simply stated, value migration is defined as a flow of economic and shareholder value away from obsolete business models to new, more effective designs that are better able to satisfy customers' most important priorities.
We believe demonetization will lead to a value migration from unorganised players to organized players. And companies with solid fundamentals and a competitive moat will capture most of this value.
Our Hidden Treasure team is already on the lookout for opportunities in such companies.
The team consciously make it a point to visit factories and meet management of companies in niche business, at obscure locations. We obviously do not expect all of them to make it to our recommendations... But the few that do are a potential goldmine of sorts in the post demonetization era.
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