Big firms become even bigger; mkt polarisation worries Street

Reliance Industries’ m-cap now 50% higher than the combined m-cap of all small-caps

The Securities and Exchange Board of India (Sebi) wants fund managers to broad-base their portfolios, by investing more in mid- and small-cap stocks, and reduce their exposure to large-caps.

However, Indian markets have become more polarised with each passing year.

In the last five years, bulk of the gains in the broader market has come from a select few stocks, while majority continue to languish.

The five biggest index stocks, in terms of index weight, accounted for 62 per cent of the incremental rise in the Nifty since end-december 2014. In comparison, the top five stocks accounted for 47 per cent of the market rise between 2009 and 2014.

RIL alone has contributed 28.4 per cent to the rise since 2014, followed by HDFC Bank with 13.1 per cent and Infosys contributing another 7.6 per cent.

The polarisation has been greater in the post-pandemic period, with RIL, Infosys, HUL, Bharti Airtel, and TCS accounting for most of the gains since the beginning of CY20.

Excluding the big five, the remaining 45 index firms are still down 15 per cent since end-2019, on an average. Even the Nifty has declined just 2 per cent during the period.

The combined m-cap of Nifty companies has risen ~36 trillion, or 65 per cent, in the last five and half years, from ~55.5 trillion at the end of December 2014 to ~91.4 trillion.

During the same period, the combined m-cap of the top five — RIL, TCS, HDFC Bank, HDFC Ltd, and Infosys — has nearly trebled to ~40 trillion from ~14 trillion at the end of 2014.

Together, these entities added ~25.6 trillion to their m-cap, accounting for 71 per cent of the rise in mcap of all index companies.

The top-five contribution to the index movement was, however, lower at 62 per cent thanks to the relatively lower non-promoter or free-float stake in TCS, which limits its weighting in the index.

The index calculation is based free-float (or market value of non-promoter stake) m-cap of its constituents, rather than their overall market value.

Polarisation in the benchmark index is line with the growing concentration in the broader market. According to data from the Association of Mutual Funds in India (Amfi), large-cap stocks have got bigger over the years, while mid- and small-cap stocks have lost out.

Large-cap stocks, or the top 100 entities in terms of m-cap, accounted for 74 per cent of all listed companies in the January-june 2020 period, against their 71.5 per cent share a year ago and 68 per cent during the Julydecember 2017 period.

During the same period, the share of small-cap companies in the overall m-cap declined to 10.5 per cent from 15.7 per cent in the second half of 2017.

In fact, RIL is now more valuable than the combined m-cap of the bottom 95 per cent of all listed companies. There are close to 5,000 listed entities in India, of which 95 per cent falls under the small-cap category according to Sebi’s classification.

Analysts attribute this to the growing market concentration in the economy. “Larger companies have gained market share in their respective industries, following demonetisation and implementation of the GST. There has been a structural shift in the economy, which gets reflected in the stock market,” said Dhananjay Sinha, head (research), Systematix Institutional Equity.

This has made it tough for smaller companies to grow revenues and profits, thereby resulting in lower valuations and m-cap.