Indian stocks yet to scale market capitalisation peak

By Ashutosh R Shyam & Rajesh N Naidu

The stock market is a strange beast. When the going is good, the rise can mask some important and hard truths. The Indian stock market is one of the top performers in the world today. Yet, the reality is that it still has some way to go before surpassing the heights of past glory.

Here's a sobering thought: Among the top 10 countries by market capitalisation, measured in US dollars, India is the only one that's trading at a discount of 8% to its peak, while the rest are at par or close to their highest levels.

In 2010, the market capitalisation of Indian stocks was $1.62 trillion, while currently it is $1.49 trillion.

"The market capitalisation of any market is directly linked with corporate earnings growth. As our corporate earnings pick up from current levels of 15-17%, they would support more capital formation, leading to higher market capitalisation," said Gopal Agrawal, chief investment officer at Mirae Asset Management Company.

"The next wave of market capitalisation expansion will be driven by stock performance of mid- and small-cap companies, backed by exponential earnings growth on CAGR basis."

Given the changed macro-economic situation between 2010 and now, there are four factors that demonstrate why the market capitalisation of Indian markets is yet to cross the 2010 peak.

First, valuations are different. In 2010, the Indian markets traded at a one-year forward price-to-earnings multiple of 20, while now they are trading at a multiple of 16.

The market capitalisation to GDP ratio in 2010 was 96 and now it is 60. This indicates there's scope for the Indian markets to expand in the coming quarters. Third, institutional participation was less concentrated in a large bunch of companies represented by the BSE 200 at that time, while now it has increased.

Lastly, the composition of index constituents and their weightage have changed from four years ago.

For instance, Reliance Industries had the highest index weight of 11.36% in 2010, which is now 6.31%. On the other hand, ITC now has the highest weight on the Nifty at 9.96%, compared with 3.76% in 2010.

Analysts believe the quality of earnings and the pace of earnings growth will be crucial for expansion of market capitalisation.

"There is ample room for further expansion of the total market capitalisation of India. With FIIs continuously increasing exposure towards the Indian equities — and they have poured in $100 billion in last five years — there is no dearth for appetite of Indian equities," said Amit Tiwari, portfolio manager at Escorts Securities.

Concern over the possibility of stocks falling because market indices are trading at record is not reason enough to elevate the perception of risk, he said.