Institutional investor demand will fuel rally in mega stocks MEGA CAP ‘CLUB’ TREND

Morgan Stanley picks 14 likely winners who could gain from this theme

The demand for companies with market capitalisation (m-cap) of over $10 billion (~64,000 crore) — also known as mega caps — is set to increase on the back of higher institutional investor flows. Morgan Stanley, an influential foreign brokerage, has identified three key drivers that will cause more institutional money — domestic and foreign — flowing into Indian markets.

“As Indian stocks gain weight in the MSCI EM Index, the market will attract tourist money and bigger flows, which will look for large liquid names to invest in,” say Ridham Desai and Sheela Rathi, equity strategist at Morgan Stanley, in a note.

Second, “as India’s domestic institutions grow in size, they will no longer be able to rely on mid- and small-cap stocks to generate outperformance. Making the right megaand large-cap call may become crucial to generating alpha.”

The third and a crucial factor is the exponential growth in domestic exchange-traded funds (ETFs). “We believe that domestic ETFs’ assets are likely to grow 30 times in the coming decade to $200 billion,” the analyst duo says. The $10-billion club India made rapid strides in during the 2004-08 bull market NUMBER OF COMPANIES

The growth of ETF assets has picked up in recent years because of more pension money being allowed in the Indian market. “From a relatively small size of $100 million in 2009, ETF assets have grown to $8.2 billion in size in a span of eight years. We expect ETFs in India to gain further traction, as provident funds are likely to continue channelling their investments in equities via ETFs. All these trends point to the growing importance of mega and large caps for India,” says the Morgan Stanley note.

Currently, there are about 45 companies in the “$10 billion club”. Because of the sharp rally in the Indian markets since 2014, the mega-cap list has doubled from its decadal low point of 20 in 2013.

The brokerage has picked likely winners that could benefit from higher institutional flows. Among the current mega caps, Morgan Stanley has picked seven stocks that include Bajaj Auto, BPCL, HDFC Bank, IndusInd Bank, Infosys, M&M and Maruti Suzuki. These stocks mainly belong to the consumer discretionary and banking sector.

“Over the longer term, the expanding household balance sheet augurs well for both sectors, as households leverage more than before to advance discretionary consumption and drive loan growth, especially for non-banks and retail banks,” Desai and Rathi say.

Morgan Stanley has also identified seven future mega caps that include Cummins India, JSW Steel, Lupin, M&M Fin, Petronet LNG, UPL and Zee Entertainment.

“The list of future mega caps is a bit more diversified, as there seem to be more valuation opportunities down the cap curve,” the note says.