In India, large caps still present an opportunity

Large companies in India are a fraction of their global counterparts8 both in terms of revenue and market cap, thus presenting a huge opportunity. This will come in the form of an increase in India’s per capita GDP, which leads to an inflection point in various sectors.

As per SEBI classification, the top 100 companies out of 5000 by market cap are classified as large-cap stocks. They are just 2% of the total listed universe, but contribute almost 70% of the total equity market capitalisation. Large cap companies are usually market or sector leaders with an established and proven track record, and have better access to resources such as capital and talent pools. Their businesses and balance sheets are fairly stable as compared to small and midcap companies. These features have resulted in more stable operating performance by them during economic downturns.

capacity development

India is an emerging country in the global context; Hence its large caps are still very small compared to their global peers. For example, the US market cap is 12 times bigger than the Indian market cap. There are many examples of a US company growing larger than an entire similar representative field in India. Additionally, only 3 Indian companies – Reliance Industries, TCS and HDFC Bank – make the cut in the list of top 100 global companies by market capitalization.

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(Paras Jain/Mint)

Many large Indian companies have many smaller businesses through their subsidiaries, JVs and associates. We have seen on several occasions that they have good, embedded value that has the potential to be unlocked through demergers. Additionally, during periods of crisis, these companies tend to be more resilient and increase their market share and margins. Also, during such times, they can add value by acquiring innovators and thus, the talent that created it.

There have been many debates in the large cap space around active vs passive as most active managers have underperformed the benchmark over the past 5 years. There is ample evidence of the large dispersion of returns within these top 100 large cap companies. To give an example, the spread of returns between top quartile stocks and bottom quartile stocks during the last 5 years has been almost 40%! Thus, to beat the benchmark, one must allocate more to potential outperformers and allocate less or avoid potential underperformers. It refers to a diversified portfolio or a highly active stock portfolio as compared to the benchmark. This can be achieved by having a robust bottom-up stock-picking process, avoiding governance pitfalls and building a balanced portfolio.

Prateek Pant, Chief Business Officer, WhiteOak Capital Asset Management

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