Large-Caps For Large Gains
Large-caps are perceived to be safe, liquid and qualitative when compared to mid-caps and small-caps. With the ongoing market correction, investors are once again focusing on large-cap stocks for outperformance. Yogesh Supekar highlights the historical performance of large-caps in India while sharing the outlook on the set of stocks that influences the market returns heavily even as the DSIJ research team shares the list of top thriving companies and the companies with improving financials in the large-cap space
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Investing in the equity market is always a relative concept. It is never about a particular set of stocks doing well. It is always about a particular set of stocks doing better than the rest of the market. While attempting to identify patterns in equity markets, investors are always found to be keenly watching the performance of large-cap stocks versus the performance of mid-cap and small-cap stocks. Most individual investors perceive that the small-cap stocks and mid-cap stocks can deliver better, faster returns while there are some investors who consider large-cap stocks as their best bets simply because in the long run the performance of large-caps is superlative.
Says Sachin Chandanshiv, a practicing company secretary and long-term investor, “I have dabbled with both small-cap and mid-cap stocks only to realise that large-cap stocks can give equal or better risk-adjusted returns in the long run. Honestly, the lure of aggressive returns in small-caps and mid-caps is omnipresent but the steadiness of returns in large-cap stocks over a longer investment horizon is extremely comforting. Also, it is a misnomer that one cannot identify a multibagger in the large-cap space. The recent performance of large-cap stocks has churned out an incredibly high number of multibaggers in this space. While I do remain invested in the broader markets for aggressive returns, it is large-cap stocks where the biggest chunk of my portfolio is invested in.”
Indeed, the performance of large-cap stocks has been an eye-catching one in CY 2020. The table below highlights how large-caps fared versus the small-caps and mid-caps.
Large-Cap Performance and Momentum
While the outlook for the equity market in general has changed with fears of rising inflation and increasing corona virus infections, the market is not in a bear territory yet. In fact, there is a strong momentum in the large-caps as is seen in the 52-week data for the large-caps. As many as 63 stocks from the list of 100 stocks that are constituents of BSE 100 are trading close to their respective 52-week highs. What is interesting to note is the performance of power generating and distribution companies such as Adani Green Energy, NTPC, Tata Power and Power Grid.
All of these companies from the same sector are trading with good momentum and showing relative strength. Infosys from the IT pack is showing maximum strength, trading close to its 52-week high, followed by Tech Mahindra and HCL Technologies. As the budget this year focused on the infrastructure sector, the following table highlights how the infrastructure related stocks have been outperforming the markets since the budget.
Acuité Ratings and Research's Outlook on Inflation
After dropping to sub 5 per cent levels briefly, CPI inflation accelerated sharply to 5.03 per cent YoY in February 2021 from 4.06 per cent in January 2021. On a sequential basis, while the jump in CPI at 0.19 per cent MoM in February 2021 appears modest, it is relatively much higher in comparison to a contraction of 0.73 per cent MoM seen in February 2020. This explains the exaggerated impact coming from the adverse base effect in February 2021. Despite the acceleration in price pressures, we note that CPI inflation is currently tracking at 4.9 per cent, below RBI’s forecast of 5.2 per cent for Q4 FY21. This indeed offers mild solace. In addition, record rabi crop sowing also provides comfort as it is likely to keep food price pressures somewhat under check in the coming summer months.
Going forward beyond the near term, the south-west monsoon outturn, strength of demand recovery, pace of supply restoration, and trajectory of commodity prices would determine the overall inflation trajectory. Also, any government action on reduction of fuel taxes will require a careful balancing of fiscal consideration and inflation or sentiment impact. Assuming a normal monsoon, strong V-shaped recovery in growth and range-bound commodity prices at the current levels, we continue to expect headline inflation to moderate towards 5 per cent levels on an average basis in FY22 from an estimated level of 6.2 per cent in FY21. While this would be comforting, it would also mark the third successive year of overshooting of the mandated target, which we expect to be retained at 4 per cent by the government in its upcoming review of the existing flexible inflation targeting framework in March 2021.
Such was the momentum in large-cap stocks that in the year gone by we have as many as 23 stocks that more than doubled with Adani Green Energy leading the top large-cap gainer list followed by Tata Motors and Motherson Sumi. The following table highlights the large-cap stocks that gained more than 100 per cent in the past one year.
"The stock market is a place to make the easiest money the hardest way"
Vijay Kedia, Value Investor
INTERVIEW
Satish Ramanathan
Managing Director and Chief Investment Officer (Equity), JM Financial Asset Management Ltd.,
“Value Lies in the Eyes of the Beholder”
What is your outlook on large-cap stocks?
We continue to remain optimistic on large-caps as they offer earning stability, lower debt to equity and higher operational efficiencies when compared to their peers. There are some large-cap sectors and segments that are rich in value. While their business outlook remains bright, investing in these richly valued sectors could diminish their future potential returns and hence a cautious approach is warranted. The skew in the equity market of growth over value and quality over value is expected to reduce, thus providing an opportunity to invest in a broader market with higher participation across different themes and styles.
Where do you see value in the large-cap space?
Value truly lies in the eyes of the beholder! It is true that value has not worked and a concentrated portfolio approach has worked very well till now, regardless of valuations. We believe that there is some valuation comfort in industrials, manufacturing, commodities and PSU sectors. However, one needs to take a bottom-up, company-specific approach before investing.
What sought of returns should investors with a 3-5 years’ investment horizon expect from large-caps?
Typically, the large-cap indices perform in line with the growth of our nominal GDP i.e. inflation + GDP growth. The current valuations appear stretched but post the pandemic and GST reforms business has shifted from smaller companies to larger companies as well as from the unorganised to the organised sector. The current 10-year NIFTY return is around 11 per cent. Returns are expected to be in a similar range with an upward bias as the economy recovers.
What are the key risks facing the markets as of now?
In my opinion, the key risks are on two counts: first, a recurrence of the pandemic either in India or internationally and hence a prolonged economic slowdown which belies current market sentiment and second, the risk associated with surging of inflation because of commodity prices shooting upwards, thus forcing central banks to pause on the current surplus liquidity environment.
What would be your advice to equity investors at this juncture?
Structurally, Indian equities offer an attractive proposition. A combination of factors such as demographics, lower interest rates and higher employment will push demand growth. Governmentinduced spending in infrastructure as well as incentives for manufacturing could well change India’s growth trajectory. Markets have moved up sharply and the valuations are not as attractive as they were; hence, the markets are expected to take a breather and may even have a few pullbacks.
Direct retail participation has been very high in recent times which could enhance volatility. Indian mid-cap companies have started reducing debt and restructured their business much as their larger counterparts did a few years back. Hence, mid-cap earnings’ momentum is expected to continue. We remain optimistic on corporate India’s earnings and hence expect equities to benefit from this trend. Investors should hold on to their existing equity investments and build on it using a systematic investment plan.
Conclusion
The equity market is precariously poised and has been showing signs of fatigue since the beginning of the current month. The technical indicators are suggesting that the key benchmark indices may have entered into a broad consolidation range. Usually such a period of consolidation can be frustrating to a lot of traders and investors who are used to profit from the directional moves of equity prices. The sharp rise in bond yield is leading to a fear of higher inflation amongst the investors. With inflation expected to escalate, there are market experts who believe that the US Federal will increase the interest rates earlier than previously anticipated and such a move shall be a dampener to the global equities, including Indian equities.
While the Indian economy remains a shining star in the global context, it is hard to imagine that India will keep on growing at more than 6 per cent in the coming years. If India delivers a growth of more than 6 per cent in terms of its GDP, it will be the fastest growing economy in the world and probably the only economy that can grow by more than 5 per cent. Without much support from the global economic growth, Indian economy may not be able to achieve its true growth potential and that may impact the equity returns, especially those of large-caps in the coming years. There are definite signs of broader markets doing well and investors are betting on the relative underperformance of broader markets in the past three to four years for its outperformance in the coming year.
However it is the large-caps that may be back in vogue again as market volatility increases and investors start looking for safe havens. There is a good probability that large-caps will start dominating the headlines again and institutional investors will park their monies in them. In the wake of the recent correction, select large-caps are getting very attractively priced, thus creating investing opportunities for long-term investors. Within the large-cap space there is a clear momentum building in favour of infrastructure stocks along with public sector enterprises and commodities stock. Automobile companies are also showing some relative strength in momentum and investors can profit from the expected relative outperformance.
Within the large-cap space PSU banks are likely to show some strength going forward. FMCG stocks are definitely showing a lot of promise and are gaining with strong improvement in relative momentum. Investors can focus on large-cap FMCG companies for stable returns going ahead. Meanwhile, investors who wish to generate alpha need to focus on valuations of those large-caps that are showing consistency in performance with regards to revenue and EPS growth. Above industry average RoE is one aspect that can be focused on along with revenue growth, EPS growth and institutional interest in the large-cap stocks. As majority of the companies in the large-cap space have adopted aggressive cost-cutting measures during the lockdown period, these companies have become efficient and lean which suggests that any hint of growth in revenue may have a multiplier effect on their profitability. Thus, profits may grow at a faster rate than the recovery in economy, which may augur well for equity prices in the long run. Accumulating consistent performers in the large cap-space could be a market-beating strategy for the reminder of CY 2021 and beyond.
METHODOLOGY
To come up with a list of performing large-cap stocks, we took into consideration five crucial parameters. The first includes market capitalisation. The second and third parameters obtained from the Profit & Loss Account include Sales and Net Profit. We have also taken into consideration the efficiency of the companies by analyzing operating margins. Lastly, we factored in the returns earned by investors by means of dividends. This is because we want investor-friendly companies to be featured on our list. Each parameter was then ranked by awarding it a carefully determined weightage based on its significance. We then segregated the companies into three categories as follows:
Turnaround Performance:
These companies include those that successfully managed to turnaround the losses incurred in FY19 into profits in FY20.
Improving Financials:
Although these companies still reported losses in FY20 as they did in FY19, they succeeded in reducing these losses by a notable amount. This indicates that they are on the road to recovery.
Thriving Companies:
This list includes all those companies that have seen their profits increasing on yearly basis for FY20. All the raw financial raw is sourced from Ace Equity and price-related information is as of March 12, 2021.
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