Demonetisation impact: Construction, consumer durables demand hit; power logistics stable

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New Delhi | Published: January 9, 2017 6:08:34 AM

Q3FY17 will see the first effects of demonetisation. Ground checks indicated a near halt in a fair amount of economic activity esp. in the 2 weeks post the November 8 2016 announcement.

 We have factored 20% y-o-y decline in Voltas’ Q3 unitary cooling sales and 20% y-o-y growth in Q4 sales.We have factored 20% y-o-y decline in Voltas’ Q3 unitary cooling sales and 20% y-o-y growth in Q4 sales.

Q3FY17 will see the first effects of demonetisation. Ground checks indicated a near halt in a fair amount of economic activity esp. in the 2 weeks post the November 8 2016 announcement. Most companies have indicated business is as usual. We have factored some Q3 impact for industrial companies. NTPC’s and Power Grid’s regulated business models and Bharat Electronics should see negligible impact. Four material things we learnt from ground checks.

Construction activity hit due to cash crunch (Buy L&T)

L&T, BHEL and larger companies typically follow online payments for their subcontractors. However, ground level unskilled labourers are typically paid in cash. Government amended the Payment of Wages Act notifying that casual workers can also be paid online. Our understanding is that at least for ~2 weeks, 15% of the quarter, on-ground construction took a hit. This would have had some back-to-back impact for capital goods manufacturers also. For Q3, our revenue expectations are tempered to 5-7% below where it would have been earlier, except for Bharat Electronics (defence spend has not seen impact).

Consumer durables demand saw a hit in Nov-Dec (Buy Voltas)

Our dealer checks esp. AC segment indicated activity stand-still in demand for a week with some uptick thereafter. Q3 is typically a slow quarter for ACs, but y-o-y impact will be felt. As new currency availability improves, Q4 should see demand recovering. Sales slowdown has been at the wholesaler/dealer level. We have factored 20% y-o-y decline in Voltas’ Q3 unitary cooling sales and 20% y-o-y growth in Q4 sales.

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Power demand up 1% in Oct-Nov 2016 (Buy NTPC)

Slowdown in industrial activity does not seem to have reflected in power demand with the 2.7% y-o-y rise in Nov. 2016. Dec. data is awaited and Nov. might be a bit early to see the entire impact. NTPC and Power Grid should comfortably meet earnings expectations in Q3FY17E. 4 of NTPC’s plants have crossed 85% of PLF in Oct-Nov 2016 v/s 6 plants y-o-y and 5 plants in H1FY17. International coal prices are up 23% y-o-y and 27% q-o-q which augurs well for Tata Power’s Q3. We remain positive on NTPC v/s Power Grid as NTPC should see consistent pick up in medium-term earnings growth and RoE trend.

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Logistics likely to see regular Q3 (Buy Gateway)

We recently interacted with rail logistics and port companies for a sense on current business dynamics. Normalcy in transactions with limited EXIM impact for the moment has been the broad indication. Relatively limited number of cash transactions, given involvement of large sums of money, has restricted impact on this sector. However if overall economic activity does see a slowdown, impact on this sector is likely to be felt 2-3 quarters down the line.

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