The December 2016 quarter numbers have become sort of irrelevant in the current macro-economic context. In post demonetised India, investors would be more focused on subsequent quarterly (March 17) season. Quarter four (Q4FY17) earnings season would be a real barometer of underlying economic recovery, as it would have the full quarter impact of demonetisation. Anecdotal evidence suggests that most of the sectors (especially organised) have seen a recovery in business from the lows seen one week post demonetisation. However, the pace of recovery may not be uniform across the country.
Bigger hit on unorganised sector
The unorganised sector is expected to bear higher brunt of demonetisation. Within the organized space, sectors like NBFCs, consumer, building materials would get most affected owing to high component of cash either in the sales-mix of the products or high cash usage in the distributor supply chain. Lot of industries would get impacted owing to the sucking out of daily liquidity needed to run the business. Moreover, the ancillary B2B sectors that have not seen an immediate decline may see an impact if the
currency situation does not improve, and the secondary sales hit impacts primary demand.
Equity market returns
The returns in the market could be slightly back-ended for the year and would depend on the trend of
normalisation in currency and recovery in the corporate sector. The normalcy could take a quarter or two to happen. FY18E earnings would look much better on the low base of this year (FY17E) and hence, makes a case for better valuations once the earnings get rolled over to FY18E/19E. However, if the Union Budget exceeds expectations and on-the-ground recovery takes place, the market could even discount the recovery earlier.
Good prices and good news don’t come together. Today, we have good prices but the news and sentiment is weak. These are the times when investors could recalibrate their
portfolios and create positions in fundamentally strong quality companies that are now available at a significant discount to their valuations from what they were a couple of months back. In hindsight, all corrections seem missed buying opportunities.
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The current volatility is providing an opportunity for long-term investors to build portfolios albeit in a staggered fashion. Once the dust settles and the currency availability normalises, demand should come back. Moreover, valuation for the market would look much better as we roll over to FY19E. The corporate earnings for FY19E could surprise the market on the upside as the base effect of FY18E, combined with lower capital costs and pent up consumption demand could push earnings upwards.
Extracted from Centrum Wealth Research report