By Invitation. Getting back to normalcy, slowly

As demonetisation crosses the 100-day mark, things are coming back to normalcy. Some of the macro data points show improvement. The Markit India Manufacturing PMI at 50.4 for January ’17 is 0.8 points above the 12-month low it touched in December ’16, indicating expansion in activity.

Passenger vehicles clocked over 12 per cent year-on-year growth in January ’17 post marginal contraction in the previous month. Medium and heavy commercial vehicles (MHCV) have also rebounded to positive territory with a 4 per cent y-o-y growth after a couple of months of hiatus. Also, credit to the farmers for overcoming challenges to increase sowing area in the rabi season by 6 per cent.

Among the major market indices, the small-cap index perked up the most with a gain of over 7 per cent compared to what it was on November 8, 2016, the day demonetisation was announced. The benchmark index Nifty50 is also above the level by over 2 per cent. Only the sectoral indices — IT, realty and auto — are languishing.

Post demonetisation, there were sharp downgrades to some of the domestic-oriented sectors like consumer (staples & discretionary), cement and NBFCs. Some of the companies have navigated the quarter well in a tough environment.

The performance of consumer companies in Q3 has been divergent based on their business model and the strategies they followed. The wholesale channel was most affected while the modern trade channel benefited the most. The rural market was weak while urban market was resilient. The southern and western markets were quick to recover while northern and eastern markets are slowly recovering. There are some companies that extended the credit line to the channel while there are others who reduced inventory in the channel.

Just to highlight a few — HUL, the bellwether of the consumer staples sector, saw a volume decline of 4 per cent (expectation was 1 per cent decline) due to slow rural recovery. The volume growth of Godrej Consumer and Dabur was impacted due to de-stocking at the wholesale level. The like-to-like Q3 sales growth of 22/9/6.4 per cent recorded by Hypercity/Westside/Shoppers Stop shows the beneficial impact of modern trade due to acceptance of digital payments in a cash crunch environment.

Many analysts expected that consumer discretionary would be the most hit due to demonetisation. This worked to the contrary. For instance, Havells & Crompton Consumer clocked revenue growth of 13 and 10 per cent respectively. The decorative paint segments of paint companies posted positive volume growth (2 per cent by Asian Paints and 10 per cent by Kansai Nerolac & Berger) which is a positive surprise. Companies have increased dealer engagement, launched new products, extended credit period, offered discounts and gained market share from unorganised players.

Among cement companies, the larger players have seen volume de-growth but the smaller ones have seen good volume growth. The realisation was lower due to pricing pressure. The companies’ commentary, post results, suggests that Tier 1 cities are back to normal while Tier 2 cities which contribute significantly to incremental volume would take time to look up. The southern and eastern markets have done well in Q3 and are expected to do well but the ongoing elections in the northern region would cap volume growth in Q4 as well.

The NBFCs felt the brunt of stock price correction, post demonetisation. However, as markets realised that things were not as bad, recovery in prices happened. The results indicate the same. The Q3 Asset under management growth of Bajaj Finance was 33 per cent y-o-y (vs 38 per cent in Q2) and Indiabulls Housing was in fact better at 31 per cent (vs 29 per cent). Clearly, the impact of demonetisation has been highest for auto-NBFCs, small & medium enterprise financiers and mortgage financiers, in that order. In the micro finance institutions (MFI) sector, the cumulative collection efficiency of the largest MFI (Bharat Financial Inclusion) increased from 91 per cent in November ’16 to 92.5 per cent in January ’17.

Overall, two-thirds of the results declared were either in line with or above market expectations. Clearly the markets’ initial reaction to demonetisation was harsher which has mellowed significantly. However, going into the Q4 earnings season, it would be important to measure the effect of primary sales (to distributors) and watch if NPAs are increasing in the MSME/agriculture sectors. We would have to evaluate the impact of the slowdown of the real estate sector and its lingering impact on allied sectors like cement and building materials. The implementation of GST will also entail de-stocking, which could affect results in Q1 FY18. Post demonetisation, we have already seen organised players taking market share from unorganised ones, which could continue with the implementation of GST. As the liquidity in the system is good and consumers will have full benefit of lower interest rates over the next few quarters, consumption should rebound.

The writer is Co-Chief Investment Officer, Birla Sun Life Asset Management Company

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