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India's stock markets have ingested generous doses of steroids the past 12 months, creating huge wealth, and also destroying some. Alert for hopheads: watch your head; likely bumps ahead
By: Ashish Rukhaiyar
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"Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas"—Paul Samuelson, Nobel Prize-winning economist.

This widely-quoted line of the 1970 economics Nobel Laureate has been used in various market cycles, and every time it would seem the best line to describe the then market situation. Today, as we publish the much-awaited BT500—the annual ranking of India's 500 biggest listed companies in terms of market capitalisation (average market cap from October 1, 2020, to September 30, 2021)—the backdrop would seem to challenge Samuelson's edict.

India's stock markets have merrily hopped on to a runaway train in recent months. So much so that on an aggregate basis, the market value of the biggest 500 listed companies of India grew 43.4 per cent in 2021. But here's the reality check. Although the rise is much higher than some recent years, it is still lower than the early 2000s. In 2000, the valuation more than doubled, while 2004 and 2006 saw the cumulative market capitalisation rise 75.5 per cent and 65.7 per cent, respectively. And so, this year's listing has notable examples of firms that created wealth consistently for investors while also featuring entities that saw a huge and sudden erosion in valuation, which would really make a trip to Vegas look more exciting.

So, let us directly deep-dive into some of the key findings of the 2021 edition of the exhaustive study that Business Today has done every year since 1992.

The top three companies—Reliance Industries (RIL), Tata Consultancy Services (TCS) and HDFC Bank—have retained their ranks in the same order with RIL and TCS the only two companies commanding a market capitalisation in excess of Rs 10 lakh crore. The average market capitalisation of RIL during the analysis period was pegged at Rs 14.09 lakh crore while that of TCS was Rs 11.64 lakh croreMeanwhile, IT bellwether Infosys jumped two places to occupy the fourth position while toppling last year's occupant Hindustan Unilever (HUL), which slid to the fifth rank. The software major also saw the highest jump in valuation in the top 10 pack at nearly 80 per cent.

The bottom five of the top 10 have seen some churn, with new entrants Bajaj Finance and State Bank of India taking ninth and 10th position, respectively, while financial majors HDFC (Rank 6), ICICI Bank (7) and Kotak Mahindra Bank (8) played see-saw with last year's ranks.

Incidentally, the BFSI—banking, financial services and insurance—segment along with auto has seen many heavyweights register a drop in ranks with leading companies such as Axis Bank, HDFC Life Insurance Company, Bajaj Auto, SBI Life Insurance Company, SBI Cards and Payment Services, Maruti Suzuki India and Mahindra & Mahindra ending at a lower rank when compared to 2020's ranking. However, BFSI still has the largest representation in the BT500 with 85 companies from the sector. Healthcare comes second with 51 firms, followed by chemicals (42), automobiles (34), and FMCG and IT with 30 entities each.

Among business houses, Adani Group firms saw the biggest jump in valuations with Adani Green Energy moving up 45 places to 23 while Adani Enterprises and Adani Transmission improved their ranking by 87 and 58, respectively. Adani Ports and Special Economic Zone (10 ranks) and Adani Total Gas (110 ranks) also fared better than in 2020.

A highlight of this year's rankings has been the number of new entrants in the top 500 list as a vibrant primary market ensured that many large-sized issuances came to the market and made their debut on the bourses.

Gland Pharma, which made its debut in November 2020, is the 81st largest company followed by Macrotech Developers at 112th position. The realty major listed earlier this year in April and commanded an average market capitalisation of Rs 35,006.76 crore during the analysis period.

Indian Railway Finance Corporation (132), Computer Age Management Services (260), Happiest Minds Technologies (261), UTI Asset Management Company (297), Equitas Small Finance Bank (371), Burger King India (376) and Nazara Technologies (401), among others, were some of the notable entrants in the BT500 list of 2021.

"I think our market is maturing in terms of both breadth and depth, so from a market where there were hardly a few large companies, now we have several companies with large market capitalisation in billions of dollars," says Nirmal Jain, Chairman, IIFL. "A few years ago... for the first time... insurance companies and asset management companies went public. Now e-commerce companies are going public. They are not making profits, but have a huge customer franchise and, therefore, valuations, and so are going public," explains Jain, whose investment banking arm is one of the merchant bankers of PB Fintech (Policybazaar) and MobiKwik, among others.

“Our market is maturing in terms of breadth and depth. From hardly a few large firms, now we have several companies with mcap in billions of dollars”

Nirmal Jain

Incidentally, companies that were not traded on at least 20 per cent out of the nearly 250 trading days in the October 2020-September 2021 period were excluded from the study. That's the reason why Zomato, which listed on the bourses this year on July 23 and is currently among the 55 largest companies on the BSE, did not find a place in this year's BT500 list.

Traditionally, public sector undertakings or PSUs have traded at a discount to their peers from the private sector for a variety of reasons. Government interference, policy uncertainty and lack of good governance norms among others are believed to be the key reasons. PSUs such as Engineers India, Mishra Dhatu Nigam, Coal India, Ircon International, Rites, GAIL, MOIL and Cochin Shipyard were some of the prominent ones that saw the rankings drop.

"Some of these companies are great companies... but from a minority shareholder perspective, these are not necessarily the best investments," says Pratik Gupta, CEO & Co-Head, Kotak Institutional Equities. "[That is] because the government is the majority shareholder and it may have various social or national commitments that are typically detrimental to minority investor interests. This has typically impacted the long-term returns of these companies. Other areas of concern relate to ESG factors and/or the overhang of government divestments," explains Gupta.

"[A big concern is] inflation... [it can] not only impact demand if central banks raise rates quicker than expected, but also hurt margins due to rising raw material prices"

Pratik Gupta

In a similar context, Jain of IIFL says that while there could be various company-specific reasons, one overarching reason could be that PSU divestment has been delayed, which has impacted sentiment.

As mentioned earlier, while BFSI has the largest representation in the BT500, it is also the sector where many heavyweights have taken a hit in terms of ranking. While sector majors like ICICI Bank, SBI, YES Bank, along with Bank of Maharashtra, Indian Overseas Bank and Indian Bank improved their ranks, a much larger number saw ranks drop.

Entities like Karur Vysya Bank, UCO Bank, The Federal Bank, Bandhan Bank, Bank of India, Bank of Baroda, Union Bank of India, Central Bank of India and Punjab National Bank saw significant drop in ranks compared to 2020.
Gupta of Kotak Institutional Securities attributes this trend to asset quality issues, though he feels that going ahead one could see better-run banks pull ahead of the pack and show improved performance as the economy opens up further. "Due to the pandemic, worries over defaults—especially from SMEs and unsecured retail customers—had increased in the past one year, although now the worst appears to be over," he says.

"Going forward, we think there is going to be a dichotomy wherein some of the better-run banks—mainly the private ones and a couple of PSU banks—will pull ahead of their peers, and the weaker banks will be left behind. Banks are a leveraged play on the economy, and in the next 12 to 18 months, the better-run banks will tend to do better as the economy accelerates," adds Gupta.

There is no doubt that cumulative wealth is on the rise and India's Sensex and Nifty are the best-performing indices among all leading global benchmarks this year. But there are areas of concern, with many companies already highlighting the increased input costs—primarily due to rising commodity prices—that could adversely impact margins going ahead.

"One of the biggest concerns is inflation—this can not only impact demand if central banks raise rates quicker than expected, but also hurt margins due to rising raw material prices," says Gupta, adding that for some it could be higher crude oil prices, while for others it could be steel, aluminium or rubber. "[But] we believe that margin pressures will be behind us from FY23 onwards," he adds.

However, a headwind for many could actually be a tailwind for others. "Rising input costs might benefit some companies. When commodity prices go up, the primary commodity producers will benefit. But there will be an impact on others and the impact has been there in the past couple of quarters. But if the demand is strong, then it can be passed on by price increase," says Jain.

Indeed. The recent past has already seen analysts highlighting margin concerns for many companies on the back of higher commodity prices. A classic case is that of Maruti Suzuki India, the country's largest automaker in terms of market share and ranked 16 in the BT500 list. Post Maruti's earnings announcement for the second quarter ended September 30, ICICI Securities stated in a report that "margins continued to disappoint" even as the auto major attributed margin pressures to "adverse commodity prices" apart from higher sales and advertisement expenses.

Companies have taken price hikes to pass on the impact of commodity costs, and the impact on demand elasticity remains to be seen, stated a report by Motilal Oswal Financial Services while analysing the Q2FY22 results of nearly 130 companies. Incidentally, if one looks at the top 10 firms in the BT500, only three—TCS, HDFC and Bajaj Finance— saw a drop in the bottom line in FY21 when compared to the previous fiscal. Further, the aggregate profit of the top 500 companies registered a rise of 20.4 per cent in FY21, which was the highest in the past seven years. This assumes significance also due to the fact that the previous fiscal saw a drop of 8.2 per cent in the aggregate profit of the top 500 firms.

Going ahead, while one may believe that wealth will continue to rise as the "worst is behind us", the increased volatility has made stock selection all the more important, with leading experts suggesting that one should stick to some of the largest and fundamentally strong companies.

How we did it

By: Shivani Sharma

Business Today has been ranking India's largest companies based on market capitalisation (mcap) since 1992. This year's rankings are based on average mcap for the 12-month period from October 1, 2020, to September 30, 2021. We began with a master sample of 3,550 listed and actively traded companies. We used BSE market cap for all cases, except companies that are listed only on the NSE.

Some 240 companies that were not traded on at least 20 per cent of the 248 total trading days in the October 2020-September 2021 period were excluded. Thereafter, we extracted the average (daily) mcap of each company over this period and used it to rank the top 1,000 companies. For deeper perspective, in the tables we have also provided average mcap over the past two fiscals (FY21 and FY20), return on net worth (RONW) and return on capital employed (ROCE).

We have also ranked companies by assets, profit after tax, total income and debt. Companies in banking, financial services and insurance (BFSI) sectors have not been ranked on these parameters as their method of capturing and measuring these metrics is markedly different. For most companies, the financial year ending is March 31. The exceptions have been mentioned in the footnotes below the tables. All data has been sourced from ACE Equity database.


Story: Ashish Rukhaiyar
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