Deal valuations Photo Credit: Ankit Kumar/VCCircle

How demonetisation may hurt deal valuations, companies’ listing plans

18 November, 2016

The government’s move to scrap high-value notes that caused a cash crunch in the economy is leading to an adjustment in the valuations of companies, likely stretching closures of transactions and delaying share sales, deal makers say.

Many companies had been prepared to deal with some uncertainties in coming months, including early presentation of the budget in February and implementation of the Goods and Services Tax from April. But the unexpected dampening of discretionary expenditure soon after the upswing during the Diwali festival season has thrown a curve ball.

Consumer-facing companies, including those that sell white goods and cars, are struggling as the supply chain is getting hit, said a senior investment banker who didn’t wish to be named. Transactions between distributors and retailers are usually made in cash, which has been drying out, and may take a quarter or two to adjust, he said.

Prime Minister Narendra Modi announced scrapping notes of Rs 500 and Rs 1,000 denomination on 8 November in a decision he said was aimed at combating corruption, tax evasion and counterfeiting. 

But the decision has caused a massive cash crunch as Rs 500 and Rs 1,000 notes comprised nearly 86% of the value of the currency in circulation. Banks have been struggling to replace the notes and cash-dispensing machines have turned mostly dry. This has hurt everyone from individuals to small traders and large companies.

Shinoj Koshy, partner at law firm Luthra & Luthra said consumption in November and December may be depressed. “Gains made by retail companies in October may get wiped out in November or December,” he said. “This may dampen valuation of some companies, which may impact deal activity.”

Stocks slump

The BSE’s 30-stock benchmark Sensex has slipped 5% in six trading sessions since 8 November, the day of the ban. To be sure, some of the fall can be attributed to the shock victory of Donald Trump in US presidential elections the same day.

But there is a broad consensus that the banknote ban is the main reason for the drop. And consumer-facing sectors have suffered more. The BSE’s fast-moving consumer goods index has fallen 7.7% since 8 November while the auto index has skidded 11.5%. The consumer durables index has shed 13% and the realty has slumped 17%. 

This could offer cues regarding valuations of private companies as well and may prompt some firms to delay their listing plans.

“Listings may get delayed in the short term as companies may not get the valuations they anticipated,” said Premal Doshi, managing director at Ambit Corporate Finance.

Green Signal Bio Pharma has become the first casualty of this uncertainty after it extended its IPO. Consumer-facing companies that are in the queue for initial public offerings include potato snack maker Prataap Snacks and apparel retailer Genesis Colours. Footwear firm SSIPL, backed by private equity firm Tano Capital, and real estate firm Paranjpe Schemes have regulatory approvals for IPOs that expire in December.  

However, mattress maker Sheela Foam is likely to launch its share sale later this month as planned, a person close to the development said. 

Doshi said that business activity in some sectors such as real estate, microfinance and consumer finance may take up to four quarters to fully recover.

Bankers also say that financial services firms including non-banking finance companies are also likely to be hit because of a drop in collections as impulse purchases are declining.

“Businesses with high cash element may see reduced deal activity. Both overseas and domestic buyers may pause before signing such deals in the near term,” said Rambhushan Kanumuri, head of corporate finance at Investec India.  

Mortgage lenders may also be re-rated on valuations, which may impact some deal closures. Ongoing PE deals in this segment include companies such as ICICI Home Finance, which was last in talks with private equity firm TPG. This transaction has been in the works for over a year with both parties negotiating valuations. Another ongoing transaction involves Shubham Housing Finance, which aims to raise PE money soon.    

A deeper concern is the slower disbursement of cash in the rural economy. The consensus is that the situation needs to improve faster. “Otherwise, potential political fallout arising out of the uncertainty and hardships of small and poor consumers could adversely impact the overall environment,” said Kanumuri.

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How demonetisation may hurt deal valuations, companies’ listing plans

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