The average market capitalisation of BT 500 companies has fallen for the first time since 2012 reflecting the economic slowdown, a decline in corporate earnings and the liquidity crisis that have taken the sheen off Dalal Street.
BT 500 is a list of top 500 companies by average market cap. For the October 2018 to September 2019 period, the average market cap was Rs 137.5 lakh crore, down 1.5 per cent over the previous year. "Broadly, lack of earnings is the major reason behind the decline," says Siddharth Sedani, Vice President-Equity Advisory, Anand Rathi Shares and Stock Brokers. Corporate earnings grew only 6 per cent in 2018/19 and declined 8.9 per cent in the first quarter of this fiscal, excluding banks, non-banking finance companies and oil firms. When corporate earnings growth takes a hit, valuations suffer, leading to a lower market cap and investors booking losses.
Sedani says while earnings were not growing rapidly in earlier years too, "there was a lot of 'hope trade' and expansion of price-to-earnings or P/E". (A market rally on basis of positive expectations is called hope trade.)
Barring a select 10 or 12 stocks, other large caps have not performed well. "P/E expansion is unlikely as India's macroeconomic parameters have not been stable," Sedani says.
The overall economic situation is not encouraging either with GDP growing 5 per cent in the September quarter. The Index of Industrial Production (IIP) in August was the lowest in seven years - a negative 1.1 per cent. Umesh Mehta, Head of Research, Samco Securities, says the past year has been a whirlwind with liquidity crisis, consumption slowdown and election uncertainty. "If this wasn't enough, macros followed global cues like trade wars and volatile commodity prices. All these caused wealth erosion across D-Street," he says.
Indian stocks have also been hit by US and China dispute over trade and foreign policy. In times of international uncertainty, investors tend to look for a safe haven for investments and withdraw from equity markets, precipitating a decline in market cap.
Ajit Mishra, Vice President-Research, Religare Broking, says the decline in market cap could also be largely due to underperformance of mid-cap and small-cap stocks. According to BSE data, the collective market cap of BSE B group shares (small- and mid-caps) was Rs 20.63 lakh crore in 2017/18; it fell to Rs 7.72 lakh crore in October 2019, below the 2007/08 level of Rs 8.3 lakh crore.
Sedani says the economic slowdown is visible in mid-cap and small-cap spaces as well. "Broadly, mid-caps and small-caps have not performed in the last one year. In the last calendar year, the mid-cap index was down 15 per cent. This year, too, these stocks have not been performing," he says.
U.R. Bhat, Fund Manager, Dalton Capital Advisors, says small- and mid-cap stocks have fallen sharply from their peaks. "They are not as well-equipped to face adversity in the economy as large-caps. So, they are quoting at a discount now," he says.
According to BSE data, the BSE midcap index is now valued at 27 times its underlying earnings in the trailing 12 months, a sharp decline from of 35 times a year ago. In comparison, the benchmark BSE Sensex is trading at 27.3 times its trailing earnings. This is the first time in over two years that the mid-cap index is trading at a discount to the benchmark index.
Sectors Under Pressure
"Underperformance of a few sectors like automobile, pharma and metals, which together constitute over 12 per cent of the index (the NSE 500), would have also contributed to the decline," says Mishra.
Vehicle sales plunged for the 11th straight month in September. Passenger vehicle sales fell 23.69 per cent and commercial vehicle sales declined 62.11 per cent in September as the auto sector faced one of its worst slowdowns in decades. The reasons are structural (push for electric vehicles, implementation of Bharat Stage VI or BS-VI emission norms from 2020) and transient (rising cost of ownership), besides the overall gloom due to increased job losses and reduced incomes.
The BSE Auto index fell over 25 per cent to 15,400 in July 2019 over December 2018. Similarly, the BSE Metal index fell from a high of 13,000 in November 2018 to 8,500 in August 2019.
Another factor that has led to the steep fall in market cap of companies has been the liquidity crisis that erupted after the collapse of shadow banking giant IL&FS in September last year. That dried up the funding source for non-banking finance companies (NBFCs), curtailing their ability to expand their portfolio. They were unable to roll over short-term debt, leading to defaults in many cases.
G. Chokkalingam, Founder and MD of Equinomics Research and Advisory, says it is not only small- and mid-caps that have suffered. "Large-cap indices, too, have been beaten down due to the skewed performance of several stocks. This kind of narrow performance has not been seen in the last four to five years," he says. The companies that have been hit include those that were among the top players in their sectors like Dewan Housing and Finance and Indiabulls Housing Finance in the housing finance sector; Bharti Airtel in telecom; and Yes Bank and Reliance Capital, among others, in the financial services sector.
"Even large-cap stocks in telecom, banking, housing finance and real estate have been butchered. This narrow performance is getting reflected as pain in the boarder markets," adds Chokkalingam.
Samco's Mehta says that unless growth picks up and consumer spending rises, there won't be a significant multiplier effect on corporate earnings and, therefore, the market cap of companies. "It will take some time before rosy times return and translate into stock prices which will then bring the average market cap up just like the period of 2016-18 when Nifty rose from lows of 6,960 to highs of 11,753," he says.
For now, the road to recovery seems slow and long winding. Sedani does not expect things to change immediately. "We expect the December quarter to be better than the September quarter. In fact, some companies have already started showing revival. But, while green shoots are visible, they will not convert into big earnings in the December quarter," he says.
The March quarter could show some improvement but that's only towards the end of the year. "So, this year will not be great but we are expecting some revival in the March quarter on the back of the rabi season and higher procurement by the government. And in anticipation of that, the market will remain stable," Sedani adds.