 "Demonetisation impact: Ambit cuts FY17 GDP growth estimate to 3.5% from 6.8%")
Ambit Capital has slashed its GDP growth estimate for the ongoing financial year to 3.8% from 6.8%. The brokerage says the cash crunch created by the demonetisation drive of the government will “paralyse economic activity in the short term.”
Ambit sees a significant deceleration in GDP growth in the second half of the fiscal. It says there is even a possibility of the GDP growth contracting during the December quarter.
“We expect GDP growth to decelerate from 6.4% in 1HFY17 (as per Ambit estimates) to 0.5% year-on-year in 2HFY17 with a distinct possibility of GDP growth contracting in 3QFY17,” said the brokerage in a note authored by Ritika Mukherjee, Sumit Shekhar and Prashant Mittal.
“From 3QFY17 until 4QFY19, we expect a strong ‘formalisation effect’ to play out as nearly half of the non-tax paying businesses in the informal sector (40 per cent share in GDP) become unviable and cede market share to their organised sector counterparts,” it adds.
Ambit has also cut the GDP growth forecast for 2017-18 from 7.3% to 5.8%.
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Further, it has scrapped its March 2017 Sensex target of 29,500. The brokerage has set a target of 29,000 for March 2018, implying an upside of 11% for a period of little over 16 months.
Ambit says the earnings per share (EPS) of Sensex companies could remain flat in 2016-17 at around Rs 1,390 per share “to reflect the weak GDP growth expected over the next two quarters.”
The Sensex on Friday closed at 26,150.24. The index has given up 1,441 points, or 5.22% since November 8, when the Prime Minister Narendra Modi announced recall of 500 and 1,000 rupee notes to clampdown on black money.
“We apply a conservative growth of 10% to the FY17 Sensex EPS of Rs 1,390 arriving at FY18 Sensex EPS estimate of Rs 1,530. Finally, we apply trailing Sensex P/E multiple of 19x (which is also the 10-year moving average P/E for the Sensex) to the FY18 Sensex EPS estimate to arrive at March 2018 target of 29,000,” Ambit says.
The Street is expecting EPS growth of Sensex companies between 15% and 18% for the 2016-17.
Ambit sees ‘three effects’ triggered by the demonetisation move. The first effect, it believes, “will be the transactional hit created by a hard cash deficit as banks are unable to replace the demonetised cash expeditiously.” This the brokerage says will be temporary but will kill business activity mainly in the second of current fiscal. The second effect it says will have an adverse structural hit on non-tax paying businesses in the informal sector that become unviable and to the real estate sector “where 30-40% of the value of purchases is funded using black money.”
The third positive effect will be a “structural boost to tax-paying businesses in the formal sector which are able to capture the market share vacated by the informal sector.”
