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In India, the large caps still present an opportunity


The larger companies in India are a fraction of their global counterparts8 in terms of both revenues and market cap, thus presenting a sizeable opportunity. This will come about as growth in India’s per capita GDP likely leads to an inflection point across various sectors.

As per the SEBI categorization, the top 100 out of 5000 companies by market cap are classified as large-cap stocks. They are just 2% of the total listed universe but contribute approximately 70% of total equity market capitalization. Large cap companies are typically market or sector leaders with an established and proven track record, and have better access to resources like capital and talent pool. Their businesses and balance sheets are quite stable compared to small and midcap companies. These characteristics have led to more stable operational performance by them during economic downturns.

Growth potential

India is an emerging country in the global context; hence its large caps are still very small compared to its global counterparts. For example, the US market cap is 12 times bigger than the Indian market cap. There are multiple examples of a single US company being bigger than the entire similar representative sector in India. Additionally, only 3 Indian companies – Reliance Industries, TCS & HDFC Bank – make the cut in the list of top 100 global companies by market capitalisation.

 (Paras Jain/Mint)

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(Paras Jain/Mint)

Many of the larger Indian companies have multiple smaller businesses through their Subsidiaries, JVs, and Associates. On many occasions we have seen that they have good, embedded value that has the potential to get unlocked through demergers. Additionally, during periods of crisis, these companies are more resilient and increase their market share and margins. Moreover, during such times, they may add value by acquiring the innovators and, this way, also gain the talent who created it.

There have been many debates in the large cap space around active versus passive as most of the active managers have underperformed the benchmark in the last 5 years. There is enough evidence of large dispersion of returns within these top 100 large cap companies. To give an illustration, the dispersion of returns between the top quartile stocks and the bottom quartile stocks during the last 5 years has been almost 40%! Thus, to beat the benchmark, one must allocate more towards potential outperformers and allocate less or avoid the potential underperformers. This refers to a differentiated portfolio or a high active share portfolio than the benchmark. This can be achieved by strong bottom-up stock-picking process, avoiding governance pitfalls and a balanced portfolio construction.

Prateek Pant, Chief Business Officer, WhiteOak Capital Asset Management

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