Overall corporate financial results for the December quarter, at first glance, show little impact of demonetisation. Consider these figures from the Centre For Monitoring Indian Economy (CMIE) database: net sales for companies in the non-financial sector (sample size: 3,356 companies) show a year-on-year (y-o-y) rise of 5.9%—the first positive growth since September 2014. Operating profit growth for the non-finance sector showed an increase of 21.5% from a year ago, the highest since the June 2014 quarter.

For the manufacturing sector as a whole, sales growth at 7.5% is the highest since June 2014. For manufacturing excluding petroleum products, it’s the highest since September 2014. Operating profit growth for manufacturing excluding petroleum products has been a startling 30.4%, the highest y-o-y rate of growth since at least March 2012. These numbers seem to strongly suggest the concerns over the impact of demonetisation on the corporate sector were overblown.

How did we get such extraordinary results? Look a bit more closely and a more nuanced picture emerges. Demonetisation did indeed hit the sales of companies in the consumer goods sector, with overall sales shrinking. It created havoc in the domestic appliances segment, with consumer electronics being the worst affected. It slowed growth in sales of passenger vehicles and two- and three-wheelers. Many services were affected, including business consultancy and recreational services. Even sales of food products showed lower growth.

On the flip side though, there were many businesses that did well. For example, sales growth in the metals sector moved up sharply, no doubt due to rising prices. Sales of machinery too improved in the December quarter. Mining did very well. Rather surprisingly, the real estate sector showed good growth, due to the commercial complexes segment. Industrial construction, information technology (IT), chemicals all did better than in the previous quarter.

What holds true for sales was also reflected in operating profits. Mining, metals, machinery and even real estate showed strong growth in operating profits, primarily because of the sharp contraction in profits a year ago, so the base effect was very positive. What appears to have happened is that consumer-facing sectors did badly, while companies in the industrial segments did much better, with a favourable base effect and a turnaround in metals prices being major factors.

There is, however, another twist to this story: inventories piled up in the December quarter. The CMIE database shows that the increase in stocks of the manufacturing sector excluding petroleum products was the highest since at least March 2012. There was a substantial rise in inventory in the automobile, metals, housing construction and in the wholesale trading sectors. This pile-up in inventory, to the extent that they are finished goods inventory, would mean higher profits.

At the same time, though, the sustainability of those profits would depend on whether the finished goods are sold in the current quarter. There would also be an element of sales being pushed by companies to dealers, so the final offtake of these goods by consumers in the current quarter would also matter. The question then is: how soon will consumer demand rebound from the disruption caused by demonetisation?

Most analysts believe the lingering impact of demonetisation will continue to be felt in the current quarter. Opinion is divided whether we will then see a V-shaped recovery or a more sedate one, depending on one’s assessment of the demand destruction in the informal sector. The initial disruption caused by the introduction of the goods and services tax (GST) in the next fiscal year needs also to be weighed.

We do, however, have a handy tool to gauge the consensus opinion of analysts. The Bloomberg consensus EPS (earnings per share) estimate for the Sensex was Rs1,540 for FY17 and Rs1,848 for FY18 as on 8 November when demonetisation was announced. Currently, this estimate for FY17 is Rs1,435 and for FY18, Rs1,722. If we make the assumption that other factors haven’t changed, the fall in EPS estimates would be the impact of demonetisation. But of course, there are many other factors that have changed, especially the global outlook. Nevertheless, the downward revisions in EPS do suggest that the impact of demonetisation will linger on in FY18 as well.

For investors, the rise in the equity market despite lower earnings estimates shows that the recent rally has been based entirely on an expansion of the price-earnings multiple, or higher valuations, underling the need for caution.

Nevertheless, as far as the macro picture goes, Gaurav Kapur, chief economist at Indusind Bank, points out that the upbeat corporate results for the manufacturing sector will also be reflected in the manufacturing gross domestic product (GDP) estimates for the December quarter.

Manas Chakravarty looks at trends and issues in the financial markets. Respond to this column at manas.c@livemint.com.

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