Analyzing 100 days of Remonetisation

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Analyzing 100 days of Remonetisation

The event of demonetization has, in many ways, significantly impacted numerous stakeholders. While some have viewed this as an opportunity, others term it as a major disruption for their business. There is general consensus on lower than expected growth for economy in short term. However, the impact on long term growth and impact on specific industries is yet to be witnessed, highlights Manish Saigal, MD, Alvarez & Marsal (A&M).

Now that we have completed 100 days of remonetization, a lot of noise around the event has cleared. We thought, this may a right time for us to analyze the event and its impact in short and medium term. Let’s look at various industries and analyze the impact individually:


December quarter results for all FMCG companies were down by 3-5%. The impact was more evident for FMCG companies with more exposure in discretionary spent categories. Personal care items like soaps, toothpaste and shampoo were severely affected. Inventory depletion was witnessed across the value chain in the months of December and January with participants reducing monthly orders.

Short term impact: Supply chain of FMCG companies has multiple mid-size and small participants. The collections at multiple levels got delayed by as much as 45-60 days during the last 2-3 months. The sector may take 2-3 months to come back to normal levels of sales and fill rate. Inventory had ballooned which will take 3-4 months to come back to normal levels.

Medium term impact: Companies are expected to significantly alter roles of participants on the distribution side post GST. Demonetization has revealed strong and weak candidates in the chain. The level of intermediation is expected to decline in near term. Long distance transportation was last to get impacted in the chain due to demonetization. There could be 3-4 months of reduction of business for secondary warehousing and distribution companies. Long distance transportation is expected to pick up in 1-2 months.

Textile & garments

Textile and garments is an industry which is significantly fragmented. The industry is manpower intensive across the value chain. As expected, the industry witnessed significant disruption due to demonetization. This included impact on availability of working capital for small companies and availability of labour in general. The demand of garments dropped by 30% in the months of Nov, Dec 2016 and Jan 2017. The impact on the supply side is expected to be more long term.

Short term impact: Impact on disposable incomes and hence consumer spending has resulted in slowdown of consumer demand. Accumulation of inventory in the supply chain is expected to defer production plan and elongate cash collection cycle. Cash crunch is expected to delay crop arrivals as well. This impact is expected to last for the next 2-3 quarters.

Medium term impact: The yarn manufacturers which are largely organized are expected to be insulated from the demonetization impact in medium term. The impact is expected to be pronounced on the unorganized segment, which forms a large part of the domestic textile sector where cash transactions are more prevalent, as reduction in currency circulation is likely to temporarily affect their routine business transactions.

As per experts, large brands could in-source additional logistics activities as learnings from this event. Logistics buying may shift from shipper to consignee in many parts of the value chain. Large logistics companies are expected to benefit from this event and increase their penetration. 

Automotive & automotive components

This being a discretionary product for most consumers, the industry witnessed around 30-40% dip in sales compared to last year (Nov and Dec 2016). The used car segment witnessed a dip of around 60% during the same period. The impact was significantly higher in rural areas. 

Short term impact: As per most experts, the sales are expected to normalize by April 2017. According to leading 3PL companies, industry is expected to return to normal practices in the next 1-2 months. However, transportation is expected to get consolidated to lesser number of vendors due to lack of reliability witnessed in the last 3-4 months. Warehousing and inventory levels are expected to return to normal levels in the next 2-3 months.

Medium term impact: Demonetization process impacted the middlemen in supply chain more than the buyers of services. For 3PL companies, this event has triggered the need to fast track dis-intermediation both in transport and warehousing. Most companies have also revisited automation plans and are expected to lay down more aggressive plans for medium term, impacting productivity and cost of servicing. Companies offering technology and automation are expected to reap the benefits if the overall demand for finished goods attains normalcy soon.


E-commerce companies witnessed significant de-growth after a good festive month in October. Volumes were down by 15-20% in November and December compared to expected volumes. 

Short term impact: Volume growth is expected to be slower than expected due to lower CoD levels targeted by companies. This will impact performance of logistics companies by 6-10% in revenue as CoD shipments are higher realization product.

Medium term impact: E-commerce industry is expected to get back to normal levels in the next 4-6 months. CoDs,which have declined by approximately 10% in the last three months could be substituted by other various formats of digital payment. Ecommerce companies may have to relook at their economics of operations and rework their overall pricing strategy with reduced levels of CoDs.

What does the future hold?

100 days on, the situation has stabilized to some extent, but the shock is still felt and will take some time to wither away. Economy is expected to grow around 7.4% in FY18 as per RBI. Short term high frequency indicators are also supporting this forecast. The Nikkei Purchasing Managers’ Index (PMI) for manufacturing fell to 49.6 in December, for the first time in 11 months. But it moved back into expansion territory in January with the index at 50.4. The question now is where the index will stabilize and whether it will rebound to pre-demonetization levels when the manufacturing PMI was at a 22-month high of 54.4 (October 2016). On the supply side, demonetization has impacted supply chains, particularly in the informal sector. Hence, while business practices in logistics may continue in cash as availability of cash is resolved, type of participants in the value chain may become more organized in the medium term.

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