The market finally embraces large caps with a nod to
efficiency, leadership and transparency
Large-cap indices are touching lifetime highs even as mid-
and small-cap indices have slipped more than 20% from their peaks. The pace of
gains of the benchmarks has been slow as against the rapid climb of their peers
in other categories. Only a few components in the S&P BSE Sensex and the
NSE Nifty 50 are driving the rally in contrast to the all-round surge in the
discounting of the constituents of the tier 2 and 3 indices. Beyond the
obvious, the stock movements are sending subtle signals about the state of the
market. Those that have taken debt to grow, are in sectors that are subject to
cycles, are facing increased competitive pressure and are confronted with
changes in the market place due to scaling up of technology have been left
behind. The leaders and laggards include promoter-driven as well as
professionally run companies. Hopefully, the latest outcome should set to rest
the fruitless debate on the effect of promoter holding in attracting investors.
What matters are transparency, vision and leadership position. Missteps and
corporate governance issues are not unique to any particular type of
organization. Companies within Old Economy and emerging areas have scored
differently. The market has recognized the foolishness in rushing to re- or
de-rate a sector because of the stunning performance or misdeeds of one or two
peers. Examples of resilience can be found even in the face of an epidemic such
as economic slowdown or ballooning bad loans. Product innovations and efforts
to reach the last customer can overwhelm even a crowded field. Prudent use of
cash for diversification can unleash a sluggish stock. Conflict of interest can
de-rail a promising counter.
An inescapable inference is that the benefits of the policy
thrust on rural economy and infrastructure-building have yet to percolate to
companies slated to be the recipients of the largesse. The lack of enthusiasm
for these stocks is due to two factors. One, most of the spending is by the
government with its downside of delay in approvals and payments. Second, many
winners are lowest bidders: the top line gets a boost but not the margins.
Despite their dominant market share, the demand for large companies in core
sectors is lukewarm. The firepower of automobiles, usually in the forefront of
any rally, seems to have been consumed to remain competitive amid rising input
costs, fuel-efficiency norms and the coming transformative challenge of
electric vehicles. The surge in the side counters hinged on the cost of money
staying low to facilitate growth plans. The limits of efficiency in giving a
bump to the financials have been exposed, with producers unable to take price
hikes to stay in the game. Volumes had to compensate for healthy operating
profit. Also souring the mood was the flurry of resignations by auditors,
raising doubts about the numbers in the public domain.
Some stocks with a track record and brand recall escaped
from the stampede. Clearly, the market concluded that, though expensive, these
counters deserved the premium. Left unsaid is the inadequate supply of quality
stocks. It also points to another problem: the subscription flood into mutual
funds during a bullish period. Schemes have exposure ceiling. Not many want to let the cash remain idle.
The result is a hunt for counters that have a semblance of operations and an enticing
spreadsheet of consumption projections in the hope they shape up and justify
the trust. A few companies abandoned by
investors due to tighter regulatory surveillance are now buying back shares to
support prices. The problem is there is hardly any headroom for most mid and
small caps to maintain the 25% minimum public shareholding due to hefty
promoter holding. Many owners dilute stake just so to stay listed. Price
discovery is the casualty. Significantly, the Securities and Exchange Board of
India recently relaxed the norms for delisting. Instead of a consensus price, a
range will be offered to the investors. Despite the unease, there are three
satisfying conclusions from the recent partial meltdown of the market. Companies
in the services sector are majorly creating wealth for the investors. India is
leaping into being a services economy, unlike China, due to near 35% millennial
population, according to Morgan Stanley. Many services sectors are yet to get
recognition in the headline indices. Retail, logistics, hospitality and healthcare
have poor representation. Their eventual inclusion will be a powerful booster
dose for the benchmarks. Second, those that have invested in brands are
enjoying an edge. Third, the divergence in trends in gains and decline within and
outside the sector- and
market-value-based grouping points to selectiveness that will cushion
future shocks so typical of mid and small caps.
-Mohan Sule
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