Modi Policy: What has changed; what has remained the same

Indian Prime Minister, Narendra Modi, announced on 8th November 2016 that legal tender character of the notes in denominations of ₹ 500 and ₹ 1000 stands withdrawn.

This was one bold step to scrap the parallel economy which was running on black money. Implications of this new policy are very positive for the economy over long term. Over 5-7-10 years, inflation is likely to be reasonable, taxes may moderate and real estate would become more affordable. Talking about businesses, our opinion is the businesses those were run on cash mostly from tax evaders etc will be severely affected. Consumption may slow down over 3-4 quarters. Liquidity problem may affect volume growth as unaccounted currency will vanish and black money parked in Gold and Real Estate will be difficult to liquidate.

We see a modest negative impact on consumption of high-value items as entities and individuals with large amounts of undisclosed cash (and income) focus on managing their finances rather than on spending in the short term. Residential real estate demand has been anyway subdued for some time. We can see some correction in real estate prices due to liquidity problem of small and mid-size builders. We already know that is has become quite difficult to use cash for high-value transactions in India with the requirement of disclosure of PAN (tax number) for high-value transactions.

This move will push many rural and semi-urban people to start using non-cash channels like banks, cards, or payment gateway. This will increase liquidity for banks and improve their CASA base. A positive for all PSU/private Banks but not all PSU banks are worth investing.

Many will hurriedly sell consumer durable companies like Bajaj, Hero, Maruti, Eicher, Whirlpool, Voltas, Blue Star, Page, Symphony, Titan, etc. These are not majorly affected by the policy. Many of the products these companies sell are bought by mostly salaried people (or Agri income) or on EMI (Taxable money). However, since the valuations are still high, we will have to wait for significant correction before buying.

Real Estate, land, unorganised sector jewellery are hit very badly. NBFCs with high exposure to risky mortgage or LAP will lead to prepayment of loans or defaults if owner faces liquidity problem.

Infrastructure companies with high unaccounted cash transactions may take a hit. Many BoT operators handle huge cash which is unreported. We may get to see scams in companies with shady promoters.

The attack on black money is bad to worse for people dealing in parallel economy while it is very positive for people like us who invest our clean money in listed enterprises. Many unorganised business will shut down and organised ones will attract more customers.

Private and Public Banks were in stress in Sep’15-Feb’16, we recommended BUY on good ones at attractive valuations. Though they have moved up considerably, we insist to hold on to quality ones. We will like to hold them for 3-5 years and ride the growth story of banks. Even if they grow at 10-12% CAGR, we make 16-18% CAGR on our purchase price. Thats how compounding works.

Currently IT services and Pharma sector is under stress and we are selectively sending out our BUY signals. We insist you to act on all our signals. Investing is basically a game of probabilities. We assign a % probability to each story and if it pans out we makes tons of money. Since we have restricted our investment to certain % allocation, we don’t stand to lose as much even if we go wrong. Its wise to invest in all companies recommended as we wouldn’t know for sure which particular company will yield the best/early results. If we had been so sure of one or two ideas, we would have bet our entire house; but future is always uncertain.

Happy Investing

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