250 Large-cap Stocks

Large-cap Stocks: Coming Back Into The Reckoning! 

Come volatile times in the stock markets and people start looking for defensive and large-cap stocks to protect their money. Yogesh Supekar along with Nikita Singh summarise how large-cap stocks have fared recently and how they might perform in the coming year 

The AUMs of MFs swelled by Rs 1.06 lakh crore in January 2018 and the equity-oriented MF schemes attracted almost Rs 23,055 crore, while the highest amount of money (in a single month) that was invested in equity-oriented MFs is Rs 28,145 crore in August 2017.Now, the million dollar question is: “Will this trend of continuous high inflows into equities continue in the coming months?”. It will be extremely interesting to see the amount of money inflow into equity-oriented mutual funds in February. February been marked as a month showcasing a change in the sentiments in the markets, at least in the short-term as it has been witnessing a global equity sell-off. 

Has the sentiment turned negative for real? Are we headed into a long-term bear market? Is the February sell-off an inflection point of a major bear market? Market participants are asking such questions as the increased volatility has punctured the near-term bullish momentum in equity prices. 

While the majority of the market experts do not believe this is a beginning of any major bear market, for sure, the market sentiment has dampened the animal spirits of the bulls in the market. The recent correction in stock prices may have already tapered the return expectations of investors from the asset class that has done so well in recent years. 

The risk-off mode that we are witnessing today across the global financial markets has been triggered due to the concern on the world’s largest economy, i.e. the US, being overleveraged and that the rising interest rates only make the matters worse. Coincidently, t he spike in the US bond yields was timed to perfection with the budget event in India for the bears, who have waited for so long to hammer down the prices. Even as experts believe the sell-off is global in nature and the introduction of LTCG (long term capital gains) tax cannot be blamed for the current market correction, the fact remains that the introduction of LTCG tax has added to the volatility in the equity markets. 

At this juncture the tussle between bulls and bears is quite visible and only time will tell who will ultimately win over the next 3 to 6 months. However, in such a volatile market environment, it is common to note a change in investor behaviour. Investors rationally opt for safe havens in such volatile markets. 

Large-cap stocks become the flavour of the season when the markets turn volatile, and rightly so. Large cap stocks are considered to be relatively less volatile as compared to small-cap stocks and mid-cap stocks. According to Soumen Chatterje, Director, Guiness Securities, “Our HNI clients are showing strong interest in accumulating quality large-cap stocks as they appear to be relatively better in terms of valuation and earnings visibility is high compared to mid and small-sized peers. Value investors (well-informed clients) are finding solace in buying well managed and financially strong companies to build a stable and strong portfolio.” 


Kaustubh Belapurkar 
Director of Fund Research, Morningstar India 

"Equity flows are expected to remain robust over the long term"

How has been the performance of pure large-cap funds vis-a-vis mid-cap and small cap funds in 2017 and on a YTD basis? 

The equity markets were buoyant through 2017 and equity funds had a great year. Large-cap funds on an average delivered 31.7% return in 2017, while small-cap and mid-cap funds in most cases delivered returns in excess of 40%. Many small-cap and mid-cap stocks made new highs, which resulted in spectacular returns for small-cap and mid-cap funds. YTD 2018 has been an interesting phase of the market. January witnessed select large-cap stocks doing exceedingly well, which resulted in the large-cap benchmarks making new highs, while small-cap and mid-cap stocks were relatively muted. February has witnessed corrections across the board and YTD returns on an average stand at -2.5% for large-cap funds and -6.7% for small-cap and mid-cap funds. 

As per the SEBI circular, the AMCs have to adjust their holdings. How do you see such shuffling affecting the mutual fund performance? 

There will be an impact on two fronts for funds – one is where the mandate of the fund undergoes a change, whereby the manager will need to rebalance his portfolio to meet the investment mandate of the new fund category. Secondly, as SEBI has put in place market cap definitions basis full market cap as opposed to the free float market cap basis which are used by indices, we expect to see some additional rebalancing, depending on the underlying stock holdings of funds. Managers will be prudent while making these changes and will do it in a graded manner to reduce the impact cost of this transition, but there is potentially some impact cost, especially in stocks where there is limited liquidity. 

Since the dividend distribution tax will be levied even on the dividends distributed by MFs , how do you see it affecting the inflows into MFs from retail investors? 

We don’t think the LTCG or DDT levied on mutual funds will have a huge impact. There could be some sentiment driven redemption or slowdown in inflows over the very short term. Over the long-term, equity flows are expected to remain robust as even after a 10% tax, equities do present one of the best investment options over the long term. There could be a slowdown in flows into dividend plans, as they are now slightly disadvantaged as opposed to growth plans as LTCG below Rs 1 lakh is exempt from tax. 

Long Term Performance Comparison 

Small Cap Index................................ 15.91 
Mid Cap Index....................................15.38 
Sensex................................................13.42 
* 15 year annualised returns (%) 

In the past five years, the small-cap and the mid-cap stocks have been consistently outperforming their large-cap peers. While the small-cap and mid-caps have been the growth investors' first choice, it should be noted that the small-caps and mid-caps have been outperforming the large-cap stocks by a healthy 2 per cent on an annualized basis for a good 15-year period. This observation is relevant in the context of the global equities as well. In the US markets, the average outperformance of small-cap and mid-cap stocks is nearly 2 per cent as compared to their large cap peers. Such a premium can be attributed to the additional risk that one takes while investing in such low capitalised stocks when compared to the large-cap or the blue chip stocks. 

In past few years, mid-cap and small-cap stocks have been outperforming the large-cap stocks. Do you see the trend reversing in the coming years?

Our entire equity basket is managed as per two strategies. One is value investment strategy and the other is growth-led strategy. Both these strategies follow the bottom-up approach. Our growth strategy firstly focuses on risk management, wherein we discard those businesses which are not sustainable from a long term point of view as well as which do not fare well on corporate governance. Secondly, we look for three important parameters – (a) scalability of the businesses, (b) competitive advantage and (c) capital efficiency. This is where, according to us, the wealth gets created over the long term.Our value investment strategy also considers the same parameters as the growth strategy. However, there we are buying businesses which are (a) victims of too much of pessimism and (b) with strong long-term inherent business model.We diligently follow these strategies for all our schemes. Hence, we do not focus on market capitalisation for any specific category while making investing decisions.

In your view, how will the markets perform in the coming year?

In the last 12-15 months, the Indian macro environment witnessed major adjustments, starting with demonetisation, followed by the implementation of the GST and then the strengthening of crude oil prices by the end of the year. The market is now concerned over the rise in the US interest rates. All these factors have induced a lot of volatility. However, one should remain focused on individual businesses. We believe the formalisation of economy and technology-led changes in the businesses is likely to have a long-term impact. At the same time, supply side reforms in China are having major impact in various sectors. While macros will have an impact on investor sentiments in the short term (which in nature are unpredictable), micro level business changes could create opportunities. Proper investment framework and discipline is the key to benefit from the same. Overall, we are not focusing on the market performance from a short-term view, as we believe there are opportunities to benefit from the major trends in the business environment and that is where wealth creation opportunities could be found.

Now that the budget is over, what are the key market triggers at this point of time?

The readjustment in domestic economy is mostly behind us now. Earning is going to be important trigger. We have also seen stable commodity prices showing effect in profit margins of the companies. Companies showing resilience and benefitting from these changes will be evident from their earnings. We have also seen NPA resolution process progressing substantially, the outcome of which will be important for banks.

Bond yields in the US market and the equity sell-off

There is a sell-off in equity market that got triggered in the first week of February due to sudden rise in the bond yields in the US bond market. It is the sudden increase in bond yields, which touched 4-year high of 2.85 per cent and is likely to breach psychologically important level of 3 per cent, and not the increase in bond yield per se which is considered to be the main reason behind the current sell-off in the US equities. The volatility is expected to continue in the US markets till the equilibrium between equity prices and bond yields is reached. With the rising bond yields, the money is expected to get transferred from the equity markets into the bond markets. When the money gets transferred to the bond markets, the yields should come down. When the bond yields come down, the equity prices would go up. Currently, the US markets are attempting to identify that equilibrium level, where the prices can be stable for the given bond yield. Unless and until that equilibrium is identified, the stocks prices in the US will remain volatile with a negative bias.

Will large cap stocks outperform small-cap and mid-cap stocks?

On a valuation basis, large-caps are much more attractive than mid-caps and small-caps. We believe as the markets move into the last phase of the boom cycle, historically, large-caps tend to do better than other category of stocks.

Where is market headed in your view?

The recent correction seen in the Indian markets was largely due to global factors rather than local factors. We believe the India structural story is intact, with corporate earnings growth likely to come around in eighteen months.

Now that budget is over, what are the key triggers for the market at this point of time?

The triggers to watch out for in the near term are how crude oil and global markets pan out.

Post-budget, how has your sectoral allocation/preference changed?

We are bullish on infrastructure, power utility space, IT and pharmaceuticals.

One of the most important pieces of information that investors and traders alike will be looking for is – How low can the markets go from the current levels? Says Nalini Jindal, Chief Investment Advisor, Intellistocks , " In the present scenario, we expect that the markets may correct further 3-5% in the short-term. However, there is a strong possibility of a swift reversal in the negative trend and the markets will remain volatile. On the upside, if the markets break 10850 to10950 levels, we might again see new lifetime highs. On the downside, we might see 9800-10200 levels. ”

If we look for a direction from the historical performance of the major indices, the markets on an average have shown a drawdown of nearly 15 per cent. If we were to believe that the equity markets in 2018 are going to be performing below average, then a drawdown of 15 per cent would take Sensex below 29,000. The 200-day moving average for Sensex is 32,414 which is merely 4.6 per cent down from the 34,000 level as seen on February 9, 2018. 

Kotak Institutional Equity

"The steep correction in stock prices over the past few weeks reflects a partial retracement of the sharp increase in stock prices and multiples over the past 12 months, which is more visible in the mid-cap. Stocks."

"Stocks of companies that deliver on earnings front will continue to do well"

Will mid-caps and small-caps underperform large-caps in the coming year?

While valuations of mid-cap and small-cap stocks do collectively seem to be on the higher side, the stocks of companies that deliver on the earnings front will continue to do well - be it a small, mid or large-cap company. As such, rather than focusing on the market cap, it would make sense to focus on the earnings quality and longevity of the same for individual businesses.

What is your Sensex target for December 2018?

35,500 – We believe that the markets would continue to trend upwards on the back of earnings growth and the benefits of reforms for individual sectors. However, at higher levels, we could see profit-booking ahead of the General Elections scheduled to be held in 2019.

Now that the Union budget is over, what are the key market triggers at this point of time?

What needs to be gauged is whether the domestic fund flows would remain as robust post the reintroduction of LTCG. We, nevertheless, believe this would be a short term concern, which will die out within a short span, given that returns of equities (post tax) will be way above those of other asset classes, albeit over longer periods. It is a matter of time before the focus comes back on corporate earnings.

At what levels do you see buying coming in?

Between 32,000–33,000.

The table compares the performance of 150 large-cap, 70 mid-cap and 553 small-cap companies listed on the BSE in the last three years. The 3-year compounded annual growth rate of gross sales for the large-cap companies has been 7.41 per cent, whereas for the small-cap companies, it has been 8.42 per cent. The mid-cap companies, in our data sample, have outperformed the large-cap and small cap companies in this regard, with a 3-year growth of 10.52 per cent CAGR. However, in terms of net profit and EPS growth, the large-cap companies have surpassed their peers. The large-cap companies, in the last 3 years, have registered a marginal de-growth of 1.95 per cent in PAT on a CAGR basis as against a de-growth of 11.45 per cent and 33.06 per cent in the mid-cap and small cap companies, respectively, during the same period. The 3-year CAGR growth in EPS for the large-cap companies stood at -15.29 per cent, as against a de-growth of 31.90 and 35.17 per cent in mid-cap and small-cap companies, respectively

The table evaluates the performance of large-cap companies listed on the BSE in the last 12 months. In our analysis, we have considered companies having market capitalisation of Rs10,000 crore and above. For such 197 companies, we found that the average one year returns have been 23.43 per cent, whereas the average return on equity (RoE) for these companies stood at 18.89 per cent. The companies in our data sample maintained an average price-to-earnings (P/E) ratio of 36.66x while registering a marginal EPS growth of 0.94 per cent in the last one year. 

Whenever volatility returns to the equity markets, investors historically have shown preference for large-cap stocks over the mid-cap and small-cap stocks. The recent history talks favourably about the performance of small-cap and mid-caps stocks. However, over the long-term, the premium earned by investing in small-cap and mid-cap stocks is not more than 2 per cent over the large-cap stocks. For large-cap investors, the time is opportune to pick stocks that are expected to deliver higher earnings. The overall results in this quarter has been in line with the estimates and have been better than the previous quarter. There is a visible uptick in the earnings and 2018 will finally see earnings upgrade kicking in after a long wait. The volatility in equity markets is expected to increase in 2018 due to the back-to-back state elections, which are expected to influence market sentiments. The equity prices will also be impacted by the movement of the crude oil prices and the global market sentiments. One of the major factors that investors ought not to ignore is the rising trend in the interest rates across the world. The hardening of interest rates does not augur well for the equities. Investors will have to keep a close tab on the interest rate scenario in India and the likely impact it may have on the corporate earnings.

Methodology

 We bring to you the 250 large-cap stocks which have the highest market cap, sales and net profit. We have used two parameters of financial performance - sales and net profit - to draw up the list of companies with highest sales and net profit. To evaluate on the basis of market data, we have used market capitalisation as the third parameter. Also, when we talk about large-caps, dividend is an important factor to consider. We have rebased the dividends paid by the companies on the FV of Rs10 so as to equate the parameter for measuring the returns to the investors. We have then assigned equal weightage to these four parameters to obtain the list of top 250 large-cap companies. Please note that we have evaluated the companies based on the market data and financials of companies available in January 2018.

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