Consumption stocks keep sliding amid note pullback

According to stock exchanges, top-10 consumption-related companies have lost more than Rs 1.5 lakh cr of market value in the past four sessions

Consumption stocks witnessed another round of selling, with the BSE automobile and realty indices falling over 5% each on Tuesday, on fears that banknote ban would disrupt their business. Even BSE FMCG and consumer durables indices lost 3% each. FMCG is fast-moving consumer goods.

On Sensex, Tata Motors saw a double-digit drop, while Maruti Suzuki fell 5.7%. FMCG player ITC closed 2.2% lower during the session.

According to stock exchanges, top-10 consumption-related companies have lost more than Rs 1.5 lakh crore of market value in the past four sessions. Of this loss, Rs 78,000 crore was on account of auto companies alone.

"Distribution channels of everything, from consumer staples, oil marketing companies, pharmaceuticals to even two-wheelers and tractors, operate primarily in cash. Some parts of the cement and metal value chains also operate in cash. Lack of currency for next two months may result in some of these supply chains freezing for a while, which could suppress demand this quarter," said Neelkanth Mishra, managing director, equity research, Credit Suisse.

Note ban has also hit non-banking financial companies (NBFCs) and small microfinance lenders as shortage in cash could impact repayments and worsen loan quality. For instance, shares of Bajaj Finance slumped more than 17% since the note-ban announcement. Microfinance lenders Bharat Financial Inclusion and Equitas Holdings have lost 23 and 12%, respectively, during the same period.

"Causes for disruption in financing activity would vary across segments ranging from deceleration in consumption demand, concern about decline in collateral values, and inability to provide an alternative payment mechanism when availing loans. We believe these factors will likely affect near-term growth prospects. Timeline for restoration of normalcy is less clear, for now," said Sampath Kumar, head, banking and financial services research, IIFL Capital.

However, some say, despite near-term disruption, note ban will have a positive impact on Indian markets in the medium to long term. 

"Note ban could affect economic activity in the near term but will be more than outweighed by improved transparency and tax compliance in medium term," said Chetan Ahya, economist at Morgan Stanley.

Since the note-ban announcement, Sensex has lost more than five% as foreign portfolio investors have sold $1 billion worth equities, Bloomberg data showed.