Realty stocks hit hardest by demonetisation

Demonetisation, coupled with the victory of Donald Trump in the US Presidential Elections, has clearly hurt sentiment in the stock market, with the Sensex shedding 5%, or 1,420 points, since 8 November. Realty stocks have been hit the hardest post the move to remove Rs 500 and Rs 1,000 notes from circulation. This sector is known to have a high volume of cash transactions, being the preferred route for stowing back money. With the sector already reeling under sluggish demand and high inventory pileup, the cash crunch is expected to hit developers hard.

Stocks like HDIL and DLF have tanked more than 20% since the demonetisation drive was announced. Analysts expect no respite for realty stocks for some time. With the expected slowdown in construction activity, cement stocks have also been under pressure. Transactions in such sectors are largely settled in cash, so the liquidity squeeze is expected to lead to a drop in demand for building materials. Ambuja Cement, Ultratech Cement and ACC have fallen 20.5%, 15.7% and 13.4% respectively.

Also at the receiving end are stocks from the NBFC segment. Most of the lenders in this segment deal with consumers in the semi-urban and rural area where cash accounts for a bulk of the transactions. These players are expected to come under stress if borrowers are temporarily unable to make repayments. Also, the propensity for consumption itself will be affected, which will hurt the loan books of these companies in the near term.

Firms providing loans against gold, for commercial vehicles, consumer durables and construction equipment as also certain housing finance providers are likely to be affected. M&M Financial Services, Shriram Transport Finance, Bajaj Finserv and Indiabulls Housing Finance have been mauled.

However, analysts say investors should use the price correction to enter high quality NBFC stocks. The biggest beneficiaries of the demonetisation move are expected to be the PSU banks, which are witnessing large volumes of cash deposits. This flux of low-cost deposits will allow banks to earn better margins and provide enough liquidity to expand their loan books. Bank of Baroda and Union Bank have surged 17.25% and 15.4% respectively.