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Why do many top profit-making companies lag in market cap?


The 5 MAMAA shares – Meta, Alphabet, Microsoft, Apple, and Amazon – account for 22 per cent of the S&P500’s market cap. This dominance of mega-corporations in market cap is a significant development in mature economies, and this development is catching on in rising markets like India too.

A structural shift within the Indian financial system, which has gained momentum over the last decade, is the formalization of the financial system. Reforms just like the GST have hit the casual sector exhausting. The casual sector, which thrived on tax arbitrage, is discovering the going powerful within the extremely aggressive enterprise setting. The inevitable consequence of this transition is the formalization of the financial system. The formal sector is steadily gaining market share on the expense of the casual sector.

Consequently, the massive ones are getting larger, with the growing market and revenue share.

In 1991 when India began liberalizing its financial system, the top 20 companies accounted for round 14 per cent of India Inc’s internet revenue. This determine has been steadily rising. It rose to 52 per cent in 2010, and now in 2022, the High 20 mega-companies account for round 75 per cent of India Inc’s internet revenue. However you will need to be aware that many extremely worthwhile corporations lag in market cap. This divergence between earnings and market cap is important.

Companies



What occurs when the massive get larger?
The dominance of mega-companies is a worldwide development, which could be seen in mature market economies just like the US and Japan and rising economies like South Korea. These mega corporations have entry to cheaper capital, superior human assets and the newest cutting-edge expertise, which can allow them to develop larger and stronger.

Additionally, their large assets allow them to resist shocks a lot better than others. Subsequently, most of those extremely worthwhile blue chips ought to proceed to do nicely.

Why the disconnect between earnings and market cap?
It’s attention-grabbing to notice that many corporations within the High 20 in earnings don’t discover a place within the High 20 in market cap. Extra importantly, many corporations not in High 20 in revenue do discover a place in High 20 in market cap. That is essential since market cap largely signifies market’s notion.

A significant disconnect between earnings and market cap could be seen within the case of the Adani shares. Gautam Adani has confirmed experience in executing massive infra initiatives, however the stratospheric valuations of Adani shares are a matter of concern.

PSU majors like

and , although extremely worthwhile, usually are not a lot fancied as a result of they’re perceived by the market to be in sundown industries that deserve solely a decrease valuation a number of.

Additionally, these giants had by no means been wealth creators for traders.

and additionally usually are not fancied by the market as potential wealth creators. , , and are cyclical commodity performs. SBI, although India’s largest financial institution, additionally doesn’t have a monitor file of wealth creation, not like some non-public sector majors. However is doing exceedingly nicely now.

The Bajaj twins,

, , and the IT majors have an enviable monitor file of unbelievable wealth creation which justifies their excessive valuation multiples and market cap.

The crux of the argument is that greater than present earnings, it’s the potential revenue and market notion concerning the potential of those corporations to create wealth that determines inventory costs and returns to traders. For the reason that churn in Nifty is just going to extend in future, the potential entrants to the High 20 ought to be keenly watched.

Dr VK Vijayakumar is Chief Funding Strategist at



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