On 8th Nov 2016, Government of India took a drastic step of demonetising Rs 500 and Rs 1000 Notes, which constituted 87% of the currency in circulation. Its been almost a month since this landmark policy decision was announced and enough has been said about it already. From leading economists, to analysts and company managements, the opinions have been varying significantly and changing with every passing day.

So far we stayed away from commenting on it as we could not see through the effects. Most market participants believe it is just a short-term pain and long-term gain, however the moot question is how short is short-term? Is it 6-months pain or 12 months pain or 24 months pain?

Whilst we strongly believe that along with GST, difficulty to deal in cash should logically help organised players gain market share, speeding up the 'Consolidation Wave' we have been talking about for a while now. However, like the individuals, the companies are also facing currency shortage and this will impact H2FY17 in a meaningful way. For most of our portfolio companies, there is no fundamental effect on the business models due to Demonetisation, for instance businesses like Wonderla Holidays or Amrutanjan Healthcare should resume normalcy as soon as liquidity is restored which could be a matter of another 4-8 weeks.

However, there are couple of businesses where the impact could be slightly longer and lets discuss these one by one:

Mahindra Finance
A good monsoon after two consecutive draughts, 7th Pay Commission and pick up in Infra activity in rural India was all going to make FY17 a turnaround year for this company. However this policy move might push that away by a few quarters as:
- OEM volume growth is expected to get effected,
- Real estate is expected to stay dull/correct,
- Some of the daily-earn and pay borrowers could become part of formal banking and MMFS might not be able to capitalise on the entire upturn expected in rural economy.

Jamna Auto
We believe that there will be a negative impact on M&HCV volumes due to slowdown in industrial activity and at the same time trucks are sitting idle which will also impact the replacement demand, as a result, there could be an impact on sale of leaf springs. The effect could be offset if JAI is able to scale up revenue from new products (Lift Axle and Air Suspension) and exports.

VRL Logistics
When we invested in this company, the most fascinating part to us was their fragmented customer base. Top customer accounting for ~1% of revenue and top 10 customers for ~6% was very impressive, which implies VRL has been largely catering to SMEs of India. However, within Corporate India, SMEs are going to be the most effected by Demonitization which should have a ripple effect on logistics and players like VRL. Being a fixed cost business, the financial performance will be effected in a major way.

Current View and Strategy
Now when we know these businesses might not deliver healthy numbers for a couple of quarters, should we exit now in the hope of getting back at a lower price? That could have been a valid question if the price had stayed the same, however these stocks have already come down, probably pricing in the pain. Though there could be some more correction, we prefer to stay invested for now as we are confident about the business model as well as the execution capabilities of these management teams. On the contrary, if there is a further meaningful correction even from these levels, we would contemplate adding/restoring allocation.

These are 'Uncertain' times but if the selection of business is done right, there is no change in the 'Risk'. If you have not yet invested in some of the businesses under BUY list or have a lower allocation, these are good times to pull the trigger and buy/add on dips, provided you have an investment horizon of next 3-5 years.

PS: A Clarification
In the recent CNBC interview of Stalwart Advisors' Founder, they had flashed on screen Agro-Tech Foods (ATFL) as one of our misses. They had picked it up from SA's website where we had mentioned it to give example of a business where probably we had been too early and execution is yet to follow.
We continue to be bullish on the business and maintain our stance. For more details kindly refer latest Q2FY17 Result Update on ATFL.