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Any fallout of demonetisation on third quarter earnings is likely to be cushioned by the positive impact of a good monsoon, Seventh Pay Commission payouts and a robust festival season. Also, key sectors, such as pharmaceuticals, information technology, commodities and oil & gas are least affected by demonetisation, largely due to the global nature of their businesses and minimal exposure to retail consumers. Close to half of all Nifty companies belong to these sectors.
Low probability
According to market analysts, December quarter earnings may not be all that bad for Nifty 50 and large companies. “The probability of earnings declining by double digits in Q3 is very low. Forty-five out of 90 days have been good due to festive season. The first half was also good,” said Harish Krishnan, Vice-President — Fund Management Equity, Kotak Mutual Fund. Most companies in the Nifty100 will also see not much impact from demonetisation.
Varun Goel, VP — Fund Manager at Motilal Oswal said some companies (from select sectors) with greater exposure to southern and western regions will be relatively less impacted compared to others with exposure to northern and eastern India. “Penetration of banks, education, awareness, urbanisation and infrastructure are better in the former two than the latter two,” he said. There are a lot of unorganised players in sectors such as building materials, sanitaryware, tiles and paints. Listed companies in these sectors will probably benefit due to the shift in demand to organised players.
Most experts expect only pockets of sectors, including automobile, fast-moving consumer goods and consumer durables, to be affected by demonetisation. But even for them, a sound festive demand will act as a cushion.
Also, companies deriving business from urban areas will be less impacted compared to those operating predominantly in rural areas, which suffers from lack of access to banking and use of plastic money.
Realty, worst hit
For example, within the automobile sector, four-wheelers have been less impacted than two-wheelers, show sales numbers reported by companies in November and December.
The real estate industry will be the worst hit among all sectors.
In terms of mid- and large-cap companies, the former will be more impacted than the latter due to their focus on the domestic market. This is also the reason why most Nifty 50 or large companies would not get an earnings shock.
Nevertheless, the market has absorbed most shocks and has corrected by 5 per cent in the December quarter. The key aspect to watch will be the commentary from companies on how fast recovery will set it (March or June quarter). Also, expectations and excitement ahead of key events, such as Union Budget, elections and Donald Trump formally taking over as US President, will have a greater bearing on market movements, going ahead.
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