At a time when most brokerages and fund managers have turned a blind eye to consumer-related stocks, Edelweiss Securities has made a contrarian bet as it believes demonetisation would result in market share expansion for organised players and pick-up in direct distribution for some of these attractively-valued companies.
The brokerage outlines five structural positives of the demonetisation:
- Increased modern trade and e-commerce salience (this benefits leaders)
- Organised players to gain market share from regional/local players
- Training or preparing ground for GST
- Likely rationalisation of ad spends (currently 250 basis points higher than the average during financial year 2007-09)
- Coming back of direct reach expansion and improved trade efficiency
Since the government's move to curb high-denomination currency notes last year, more and more consumer goods companies are expanding their direct reach after a lull of past 12-18 months, Edelweiss says.
Direct distribution involves sale of goods directly to consumers without any intermediaries and is considered a more efficient channel compared to wholesale distribution.
“We also believe consumers will shift to modern trade and e-commerce channels due to liquidity crunch and the salience will increase,” the brokerage wrote in a report titled Demonetisation: Every Cloud Has a Silver Lining.
Also Read: Modern Retail Survives The Demonetisation Storm While Small Stores Wilt
Card sales, which jumped 70-80 percent on account of the cash crunch, is expected to stabilise at a level higher than the earlier 30-40 percent despite improvement in liquidity as most consumers would get used to cashless transactions, it adds.
The demonetisation has helped consumer companies prepare for the implementation of the Goods and Services Tax, which is expected to be implemented any time between April 1 and September 30, 2017, Edelweiss says.
The demonetisation drive has impacted growth due to destocking in trade, especially at thewholesale level. Though GST too is likely to trigger it, due to sizeable destocking due todemonetisation, the level of inventory in the system is already lower. Hence, destockingimpact will be much lower when GST is implemented compared to if demonetisation had nothappened.Edelweiss Finance Report
Further, the cash crunch has compelled companies to prune their advertising spends and new product launches, and Edelweiss believes the trend will continue in the fourth quarter of financial year 2016-17.
“Demonetisation has led to correction in the consumer goods companies and gives a good opportunity to accumulate… We expect that during the budget the government will likely announce stimuli for rural and middle class which is positive for the entire consumer goods segment,” the brokerage adds.
The selloff following the demonetisation presents a good opportunity to accumulate these stocks, according to Edelweiss. The brokerage's top picks include Asian Paints, Berger, Britannia and Pidilite.
Also Read: Cash Crunch Puts The Brakes On Automobile Sales In December
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