{LONGTERMINVESTORS} Ambit Insights Nov 23, 2016 (Strategy: Demonetisation impact across sectors; Titan: Can't glitter in the dark; Results Update: L&T; Alpha This Week; Strategy & Economy: Demonetisation impact on GDP growth)

Click here for Ambit Insights November 23, 2016 

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THEMATIC

Strategy: Demonetised Disruption
The demonetisation-driven cash crunch will impact most sectors in 2HFY17; sectors with real-estate linkage and discretionary in nature (home building, jewellery, durables) could see weak demand continue in FY18 as well. Loss-of-wealth and income-uncertainty (for informal sector promoters/ employees) will be the key deterrents to an immediate recovery in consumption; however, the elevated pace of formalisation of the Indian economy over FY18/19 could be the key reliever. The near-term impacted companies could come out stronger as many sectors witness increased formalisation; however, some sectors could find new entrants capitalising on formalisation. The BFSI sector will witness a major change – the shift in favour of financial savings and formalisation bodes well for banks whilst MFIs are staring at material disruption and NBFCs could see a sharp slowdown in growth and rise in NPAs. Hence, we expect material downward revisions and downgrades to our stance in the BFSI sector. (Nitin Bhasin, +91 22 3043 3241)
(Click here for detailed note)



UPDATES

Titan (SELL): Separating black from white still leaves it grey
Demonetisation will shrink the predominantly cash-driven US$40bn Indian jewellery market by up to 30%. While unorganised players stand to lose more given low regulatory compliance, market share gains for Titan (4.7% now) will be a bumpy journey given cash accounts for 40% of its jewellery revenues. It will have to gain market share faster than the pace of market shrinkage to maintain revenue growth of 8% in FY18E. This will need repositioning of Tanishq to appeal to a larger audience (lower price points and gross margins) or introduction of a new mass brand (GoldPlus hasn't succeeded in filling this space). Moreover, increasing regulatory scrutiny on gold/jewellery purchases poses challenges to getting new franchisees and, hence, implies risks (unquantifiable currently) to our revenue/earnings estimates (already downgraded by 11%/14%) for FY18E. Remain SELLers with a revised TP of Rs312. (Abhishek Ranganathan, CFA, +91 22 3043 3085)


RESULTS UPDATE

Larsen & Toubro (SELL): Local woes; some respite on balance sheet
Three key highlights of L&T's 2QFY17 results were: (1) domestic contracting growth remained subdued at 2% YoY, the same as 1QFY17; (2) despite fructification of cost control measures (fixed overheads up only 4%), contracting margins were down 100bps YoY due to cost overruns and write-downs; and (3) improvement in the standalone balance sheet led by a decline in working capital and stake sales in subsidiaries. We await to see if the working capital improvement can be sustained given the tight liquidity conditions and growth pressure on the company. Weakness in the domestic franchise is likely to sustain as hopes of a concerted capex cycle recovery continue to be pushed back resulting in weak revenue growth (11% CAGR over FY16-18E). Current valuation of 16x FY18E core EPS is approaching a reasonable territory but it is not cognizant of the structurally lower margins of the business and potential impact of managerial transition. (Nitin Bhasin, +91 22 3043 3241)


DERIVATIVES

Alpha This Week: An alternative take on the markets
The Nifty has corrected sharply since touching the high of 9000 in early September. Currently, the index sits close to a crucial support of 7930. While a near-term bounce in the index cannot be ruled out on the back of this index support and an 'oversold' signal on momentum indicators (RSI), a trend reversal on the index will only be confirmed once the momentum indicators move from a bearish to bullish pattern (see chart). On stocks, we initiate longs on ACC and Havells. We advise exiting longs on Pidilite and exiting GSK Pharma. (Prashant Mittal, CFA, +91 22 3043 3218)
(Click here for detailed note)

ANALYST NOTES

Strategy & Economy: The impact of demonetisation on GDP growth
Several experts are saying that since the quantum of old money that could be extinguished is around 2% of GDP, the hit to FY17 GDP growth is also 2%. This is incorrect because it confuses a FLOW concept (nominal GDP) with a STOCK concept (money or currency in the system). The link between money and nominal GDP is the velocity of money (V), which is the number of times a rupee note changes hands. Until 8 Nov, India's nominal GDP was $2.3tn and currency in circulation was $0.2tn, implying that each rupee had a V of 10. Now, not only has M been hammered by 60-70% (thanks to demonetisation), the V has also plunged due to hoarding of cash by households and effectively also the RBI. Hence, we expect GDP to contract this quarter and grow at a sclerotic 0.5% in 2HFY17 (vs 6.4% in 1H, as per our estimate). GDP growth should recover to 5.8% in FY18 as economy nominalises. For details, click here for our 18 November note. (Ritika Mankar Mukherjee, CFA, +91 22 3043 3175)

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