Here are the sectors that will be most impacted by demonetisation

Analysts have cut earnings forecasts for India Inc and expect the markets to remain volatile in the remaining part of FY17

The demonetisation move by the government has been disruptive – both for the markets and the economy – with a number of analysts now recalibrating their economic growth projections lower for FY17 and FY18, as consumption takes a hit. 

Markets, too, have been on a downward spiral with the frontline benchmark indices – the S&P BSE Sensex and the Nifty50 – slipping over 5% since the move was announced, which also coincided with the surprise outcome of the US Presidential elections.

“Consumption will now take a short-term hit. This is because the housing market had offered the best hope for a revival in private sector investment activity. Areas where the cycle has already picked up in terms of consumption now face some short term setbacks because of the knock-on contractionary effects of Modi’s attack on cash,” said Christopher Wood, managing director and equity strategist at CLSA in his weekly note, GREED & fear.

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Going ahead, analysts at Ambit Capital expect GDP growth to decelerate from 6.4% in H1FY17 to 0.5% y-o-y in H2FY17 with a distinct possibility of GDP growth contracting in Q3FY17. 

“From Q3FY17 until Q4FY19, we expect a strong ‘formalisation effect’ to play out as nearly half of the non-tax paying businesses in the informal sector (40% share in GDP) become unviable and cede market share to their organised sector counterparts. We expect this dynamic to crimp GDP growth in India in FY18 as well and hence we cut our FY18 GDP growth estimate to 5.8% y-o-y (from 7.3%),” said Saurabh Mukherjea, chief executive, institutional equities, Ambit Capital in a recent note.

 

As the economy stutters, analysts have cut earnings forecasts for India Inc and expects the markets to remain volatile in the remaining part of FY17. 

Abhay Laijawala, managing director and head of research at Deutsche Equities India, for instance, expects the remainder of 2016 to be highly uncertain, which will keep markets volatile with a downward bias. He has cut his December 2016 Sensex target to 25,000 (from 27,000 earlier).

“Some sectors have seen sizable cuts to FY17/FY18 earnings estimates, even as on an aggregate basis estimates for Sensex and PAT has been lowered by 1%-2%. Our analysts now expect Sensex earnings growth of 11.5% for FY17 and 21.5% on FY18,” he says.

Here is how demonetisation will impact consumption-related sectors, excerpted from a Kotak Institutional Securities report.