Big Impact of Demonetization across sectors like Retail, Real Estate and Banking

Big Impact of Demonetization across sectors like Retail, Real Estate and Banking

A few weeks after Narendra Modi, India’s prime minister, declared 86 per cent of the country’s bank notes invalid overnight, corporate India is only beginning to understand how the move is likely to change the way companies do business.

For many, the measure could prove historic. Digital payments companies, for example, are reporting that demand for their services has increased several hundred per cent, and some have brought forward their growth targets by a year or more.

Other sectors have more reasons to worry. Consumer goods companies are trying to determine whether the short term interruption to sales, which are often made in cash, might lead to a more protracted downturn and there is a property slump that might last for over two years.

For the economy, as a whole, my  prediction is  that this will pause growth, which has been running at more than 7 per cent a year. The Sensex share index has lost 6 per cent since the announcement, falling under 26,000 for the first time since May.

Many economist, have described the move as being like shooting at the tyres of a racing car.

However the long-term implications might yet be positive, if the government can use some of the extra revenue it expects to garner from the measure to offer a fiscal boost, such as sweeping tax cuts in next year’s budget, by giving more funds in the hands of people to send rather than trying to increase the government spending as it would take its own time and the result would be rather very disappointing.

If that does happen, by giving more breaks to the people on the whole I  expect much of corporate India to recover after the turmoil. But whatever happens, different sectors are likely to feel the benefit or the pain to very different degrees.

Banks

Beleaguered bank staff might not feel it right now, but demonetization is likely to prove a major boost to their banks balance sheets, as a slew of money that might have otherwise stayed as cash is now deposited.

My estimate is that 80 per cent of the country’s notes will return to the banking system, which will increase deposit growth by up to 10 per cent.

Of which I expect about half of that to stay in the system long term, which would increase pretax profits — especially at public sector banks that usually have bigger retail networks  by up to 15 per cent.

The problem for all banks, however, is that both consumer spending and the housing market are expected to slow in the next few months as people rein in their spending and companies struggle to keep their supply chains going without cash.

These competing pressures have sent Indian bank stocks on a rollercoaster ride. Shares in State Bank of India, for example one of the biggest public sector lenders initially climbed 12 per cent in the first few days after the move, but have since fallen back 9 per cent.

Consumer goods

Consumer goods companies are counting the cost of the sudden shortage of cash. From items as small as medicines or household goods to larger appliances such as dishwashers or washing machines, much of India’s consumer economy runs on banknotes.

 Sale of white goods items such as air conditioners and TVs, almost 40 per cent of such purchases come via cash which will be hot major time due to this move.

Luxury consumer goods would be hit even harder as a large part of sale is this segment is done using cash and a major hit is anticipated.

Even companies with large financial clout are having to adjust. A number of multinational consumer companies have started   renegotiating credit terms with its small-scale distributors around the country that have seen sales collapse.

Property

India’s property market is likely to be one of the hardest hit from demonetization, not least because buying or building houses has been the most common way to launder black money. But due to the fact that 15 or 20 per cent of real estate transactions in India involve illicit cash.

My estimates are that It may take several years for currency to normalize in the ‘black’ economy. This would slow down transactions, and hurt prices of real estate and land.

However bigger, more reputable developers will be unaffected, given that most of their transactions come via bank loans. Larger companies will also be able to take market share from smaller rivals in the long term. Hence the larger and well established developers who have systems and processes in place would benefit at the cost of the smaller developers.

The secondary sales market in real estate would slow down major time and the kind of slow down would be in place for the next 2 to 3 years.

Hence the real-estate industry that was already in the ICU has been put on the ventilator and days to come would be very hard. 

Ecommerce

While bricks-and-mortar retailers struggle to attract customers many of whom are instead standing in line at the bank  this should be an opportunity for India’s ecommerce companies to hoover up market share.

Executives from many of those companies, including Amazon, Flipkart and Snapdeal — India’s biggest online retailers — have welcomed the move. But in the short-term business has suffered, mainly because about 70 per cent of online commerce in India is paid for by cash on delivery.

The trend in the last week or so after the immediate shock is seen that   the fall in cash-on-delivery transactions has offset the rise in card payments. While business from the larger towns and cities has gone up, overall sales fell 7 to 8 per cent following the government’s announcement.

Several online platforms have even put temporary restrictions on purchases paid for by cash on delivery. Others are offering discounts on card transactions.

However, many are optimistic about what this could mean for the online market in the long term.

However the reality so far is that the 6% fall in the Sensex index since large bank notes were declared invalid 70% Amount of online commerce in India paid for by cash on delivery and this would take a major impact on the online business as the cashless penetration would be reasonable in Metros and larger cities but in tier 2 and tier 3 cities the preferred form of payment is cash on delivery which would take a long time to normalize and the impact would be felt on the overall numbers.

_ Farzan Ghadially