Demonetization and Trump Victory

November 13, 2016

GH/Client Note/12/2016

Modi sarkar unveiled yet another reform in form of demonetization of higher denomination notes of Rs.500
and Rs.1000 on November 8th 2016, on the same day when US went into Presidential election

On back of the bold step by the India government, US presidential election threw another surprise when
Donald Trump defeated Democrat Hillary Clinton. Both these news collectively spook the market and it
opened more than 1500 points down on November 9th

Media covered the above events with (over) enthusiasm and experts joined them working overtime to
provide us, the investor community, their expert opinion on how things will move forward!

Though market recovered substantially on 9th, looking at long range ramifications of the events, went
downhill and closed at 26819, a loss of 733 points in just a week

Here in this note we have tried to provide our views on impact of the recent events on stock markets in
general and few stocks in our model portfolios in particular. We have also prepared annexures to this note
for our clients discussing their personalized portfolio

Trump Card!

Let us start with the nonevent first, which was there in the news for sometime now- the US presidential
elections. As it turned out, Hillary Clinton lost to Donald Trump in a bitterly fought election, to the surprise
for many. The market mood was that of a great crash if Donald trump wins

In our opinion, it was a non-event, as major factors affecting a companys performance are far more
important than an individuals election as a president of the US. One can always argue that Indian economy
is not an insulated one and what happens in the world, would eventually impact India. But then, you can
always combine events around the globe and relate them to Indian market performance by reason or
statistics but remember an old saying - There are three types of lies: lies, damn lies, and statistics

Though Indian markets were impacted by twin events and hence the impact of Trump victory alone is not
possible to judge, what happened to the US market after the election proves the above point- after an initial
drop, the US markets went up!

Demonetization!

The far important event, in our opinion, is the demonetization step taken by the Modi government. This has
far reaching ramifications and have surface impact as well as deep level impacts on Indian economy

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The first level impact obviously is on parallel economy run with black money along with fake currency notes
issue. More importantly, the second level impact would be more of a psychological one and a morale
booster for general public and for honest tax payers

In our opinion, along with GST, this step would be a game changer for the Indian economy in a long run,
however the short term is going to be tough

The first to get impacted are the sectors where black money is used most - real estate, gold, luxury goods
and other such businesses. The higher - second level or more- impact would be felt by construction related
businesses, housing finance and lending. In the same boat are Auto and auto components business and so
on. Since we are slightly in uncharted territory, it is difficult to calculate short term impact of such decisions
on markets or our portfolio as a whole, and better to discuss impact on selected companies instead:

Real estate & related business:

Our major holdings in this category are Ashiana Housing and Cera Sanitary. Out of which, Ashiana would
be affected the most, as it operates in industry where Cash is (partly) a norm of business. Though the
management has been quite straight forward and above the board in business dealings, the industry
environment will affect the demand scene for Ashiana for a year or more. In longer term, though,
business economics remain good. In case of Cera, the impact is a second level one. The Company is
already facing demand slowdown for more than a year now, and recovery would happen later than
expected, here also long term economics remain intact. One should also not forget a likely positive impact
of GST on Ceras business once the act is in force
A division of Piramal Enterprises is into real estate related lending business. The Company has aggressively
built its loan portfolio over last couple of years, and hence any liquidity / cash flow issue at the borrower
end will directly impact the performance. Though the management is quite competitive and reassured
investors that they have lent only to quality players, short term NPA issue can not be ignored here
NESCO is into business of leasing out office space along with exhibition centre business. Since this is
related to office space leasing and not a housing project, demand should not be impacted much, while
long term prospects remain good
Auto & auto components:

We have holdings in Tata Motors and Atul Auto from the industry. Though Tata Motors is into Luxury
segment via JLR, its impact in India would be limited while longer term economics remain good. Atul
Auto is only in three wheelers and concentrates on tier II or lower urban and rural markets. In short
term, the demand for the company would be affected due to chaos created due to demonetization,
again in long term we see better prospectus for the company

Finance and lending:

We already discussed impact on Piramals division, while other scripts from this industry are Shriram
Transport Finance and CARE rating. Among this, Shrirams business of financing trucks etc. would be
affected in short term due to possible cash flow issue for few borrowers as well as demand reduction,
however the long term business economics is not affected much. While for CARE, we do not see any
major impact

Others:

We also have interest in sectors like Textiles, Capital Goods, Energy & related businesses, Leisure and
travels, Chemicals, Minerals and consumer & health

In our opinion, these companies will be much more impacted by direct business related matters than
demonetization or Trump victory

The way forward
Our investment decisions are taken based on fundamental analysis of the company and its business, and hence
our subsequent decisions should also be taken same way. We do not see any major disruption of long-term
investment theory for scripts in our portfolios, and hence we do not see any need for a knee-jerk reaction. On
the contrary, investors should use major drops like the current one to add / invest in long-term stories.














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The topics discussed in this document are for educational and information purposes only and not a recommendation to trade into Equity
or any other asset class discussed here. For any investment decision, please contact a certified investment advisor.