The Decade of Wealth Creation in Businesses beyond Large Caps

Indian Equity markets are highly skewed. As of 9^th Sept-22 closing, the markets crossed a market capitalization of Rs 283 lakh crores ($3.5 trillion). It is imperative to note here that the 30 companies that form the Sensex 30 are worth more than half of India’s total market cap, and the 50 companies of the Nifty 50 pack constitute about 2/3^rd of the total Indian equity market valuation, and the top 100 companies constitute about 80% of the equity markets. Hence, it is evident that the markets are highly skewed.

In a skewed market, 2 things happen:

If the top 50 companies are running expensive, the whole market looks to be highly expensive
If the top 50 companies are running cheap, the whole market looks to be cheap

Insight #1: The valuations of Top 100 companies do not convey the valuation of the broader markets.

Beyond the Top 100 companies, there are a lot of businesses that are of decent size (but do not qualify as large caps) as well, that have been performing well in their respective line of businesses.

When one focuses on the scrips forming Nifty50, one limits himself to only certain sectors like banking, finance, and insurance [35% of Top 100 stocks]; IT [15%]; FMCG [14%]; and 8-10% each of Oil & Gas, Pharma, Auto; and so on.

Insight #2: Nifty & Sensex constitute of only few sectors like Banking & Finance, IT, FMCG, Oil & Gas, Pharma, and so on. Sectors like Construction, Textile, Specialty Chemicals, Travel & Tourism, and so on are also crucial to the Indian Economy but are hardly a part of Nifty & Sensex.

But who holds this market? What is the shareholding pattern of the Indian Equity markets as a whole?

About 55% of the total market cap of Indian Equity markets is owned by promoters [the market cap of US is $48+ trillion, but promoters holding is only roughly about 6%]. About 19% is owned by FIIs [Foreign Institutional Investors], about 14% is owned by DIIs [Domestic Institutional Investors]; and the balance 12% is owned by PMS Managers, Family Offices, Retail Investors, HNIs, and so on.

2/3^rd of our market, which is the top 50 stocks- here, the promoter’s stake is around 51%. In the basket of the next 50 stocks [Stock #51 – 100], the promoter’s stake is around 53%; whereas in the basket of Midcap Stocks [Stock #101 – 250], about 59% is the promoter’s stake. In the next basket of Stock #251 – 500, about 57% is the promoter’s stake.

Moving on the bifurcation of investments done by FIIs, it is noteworthy to realise that about 1/3^rd of their investment is into the Top 3 Stocks [Reliance Industries, HDFC, and TCS]. About 80% of their investment is into the Top 50 stocks. For domestic [institutional & retail], if one is holding any of these stocks, one has to actively track FII movements as any FII action on these stocks can affect its price.

A similar situation pans out at the end of DIIs- about 80-85% of their money is invested into the top 100 stocks.

Insight #3: 7-8 businesses constitute 75-80% of Nifty/Sensex, and the market cap as a whole; but they do not make 70-80% of the Indian economy- hence the disconnect is visible between the economy & the markets.

To put this into perspective, one can witness that between 1^st Jan-2008 to 15^th July-2013 – over these 5.5 years, while the Sensex was more or less at the same levels, our economy’s GDP grew 8.5% p.a. in real terms. To give a more recent example, from March 2020 to March 2022, the economy has not moved at all [GDP fell 7-8% in FY21 and went up by the same % in FY22], but the markets have gone up crazily!

Insight #4: Sensex & Nifty’s job is to reflect what’s happening in Sensex & Nifty companies, and not the entire Indian economy.

Let’s break this down to connect the dots. In the last 2 years, businesses in sectors like banking, financial services, IT, benefited from the disruption… and these are also the sectors that form about 70-80% of the total market cap; hence, Sensex & Nifty witnessed a rally, reflecting growth in businesses that form 70-80% of Sensex & Nifty.

On the other hand, businesses in sectors like Real Estate, Tourism, Textile, Construction, and so on, took a setback. These are businesses that constitute a good part of the Indian economy but aren’t the highlights of Nifty or Sensex. Hence, the economy took a hit as well, as major businesses that form the economy did not reflect growth in the said period.

Insight #5: What constitutes our economy, and what constitutes the Sensex & Nifty are very different businesses.

Thus, it is evident that there is a disconnect between the markets & the economy but that does not imply a negative correlation. It is simply a structure that plays out at times and as participants of the market & as contributors to India’s GDP, we should be aware of this phenomenon and not remain naïve.

The growth prospects in India are growing and India is poised to grow at a rapid pace over the next few decades- both in terms of market cap & GDP.

Index	1Y	2Y	3Y	5Y	10Y
Nifty 50	3.8%	23.2%	16.7%	12.4%	12.4%
Nifty 500	5.3%	27.9%	19.5%	12.0%	14.0%
Nifty Mid Cap 100	10.8%	37.4%	26.2%	11.5%	–
Nifty Small Cap 100	-6.3%	31.2%	20.9%	4.4%	–

Last 10 years returns of Nifty 50, Nifty 500, Nifty Mid Cap 100, Nifty Small Cap 100 | Returns as of August 2022

Attributes of last decade were low growth and high liquidity, so mid and small cap returns were not much different from large cap returns.

However, attributes of the current decade are high growth and low liquidity on account of quantitative tightening; so, high performance investing in this decade is all about investing in the space of businesses beyond top 100 companies.

Thus, we list the best Multi Cap PMSs which are designed to participate and outperform in this decade:

PMS	Date of inception	1Y	3Y	5Y	SI
AlfAccurate Emerging Giants PMS	January 2021	12.6%	–	–	30.2%
Carnelian SHIFT PMS	October 2020	0.3%	–	–	44.6%
Negen Capital Special Situations & Technology PMS	August 2017	8.9%	39.4%	14.7%	14.9%
Sage One Core Portfolio	April 2009	-13.7%	26.5%	14.3%	26.9%
SBI ESG Portfolio	July 2016	13.2%	27.4%	17.7%	16.2%
Unifi Blended Rangoli Fund	June 2017	-0.1%	37.2%	21.0%	22.2%

Returns as of 30th Sept 2022. Returns up to 1 Year are absolute, above 1 Year are CAGR

RISK DISCLAIMER: Investments are subject to market-related risks. This write up is meant for general information purposes and not to be construed as any recommendation or advice. The investor must make their own analysis and decision depending upon risk appetite. Only those investors who have an aptitude and attitude to risk should consider the space of Alternates (PMS & AIFs). Past Performance may or may not be sustained in the future and should not be used as a basis for comparison with other investments. Please read the disclosure documents carefully before investing. PMS & AIF products are market-linked and do not offer any guaranteed/assured returns. These are riskier investments, with a risk to principal amount as well. Thus, investors must make informed decisions. It is necessary to deep dive not only into the performance, but also into people, philosophy, portfolio, and price, before investing. We, at PMS AIF World do such a detailed 5 P analysis.

The Decade of Wealth Creation in Businesses beyond Large Caps

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