IN 2022, the Indian stock market was one of the few markets in the world that yielded positive returns. The biggest contributor to the success story was the Adani Group that singularly contributed to 49% of the market cap gain in the NSE 500 stock portfolio.
In a U-turn in 2023, the valuation of Adani Group companies fell 48%.
On January 24, 2023, the day Adani Enterprises FPO opened for subscription, in a dramatic synchronicity, the Hindenburg Report on the group was released. Within 10 days, the total market cap of Adani Group fell from ₹19.21 lakh crore to ₹10.08 lakh crore, a 47.54% plunge translating into ₹9.13 lakh crore of value erosion.
The Hindenburg report, amongst myriad allegations against the Group, mentioned that over $100 billion of chairman Gautam Adani’s growth in the then net worth of about $120 billion came in the past three years through stock price increase of the group’s seven key listed companies, which have risen an average of 819% in that period.
The Hindenburg report raises serious questions about the fate of the Indian market that soared high on the zooming market cap of Adani stocks.
What was the secret sauce that energised the Indian stock markets in 2022? And can it perform an encore in 2023?
Too Much Money Chased Too Few Stocks
Indices reflect the entire stock market trend and performance of the country. The Nifty 50 is the collection of top 50 companies based on free float that forms almost three fourth of the total market capitalisation in India. Thus, if the index constituents are performing well it is believed the overall market is buoyant and strong.
The resilience of the Indian stock market in 2022 may be on the back of two of the country’s biggest corporate houses. The Adani Group of companies and Reliance Industries contributed 49% and 8%, respectively, in the total market capitalisation gain of NSE 500 companies. PSU banks added another 22%. Ironically, the stellar performance of a few companies explains almost 80% of the market cap gain of the NSE 500 universe.
Madanagopal Ramu, head, equities, Sundaram Alternates, aptly points out that last year’s stellar show was purely on the back of strong performance by a few companies and sectors. “If you remove these few companies then the market has fallen 5-10%, depending upon the segment and index you are looking at,” he says.
By mid January, Adani Enterprises, the flagship company of the Adani Group that brought almost half of the NSE 500 universe gain, traded at a price to book ratio of 15.14, while its trailing 12 month (TTM) average PE was 322. Basically, current buyers of Adani Enterprises shares were willing to pay ₹322 for each ₹1 profit that the company made. But Adani Enterprises is not alone when it comes to investors’ exuberance for Indian companies.
According to a 2022 Bloomberg report, over the past decade, the proportion of NSE 500 stocks with stretched valuations has surged to record highs. Nearly one-third of the companies are currently trading at a PE of more than 50 times. About 10% of the stocks in the NSE 500 universe trade at a PE of more than 100 times and 60% trade at a price to book of over 3 times with a median of 4.3 times.
Investors’ preference for just a few companies indicates that the growth of the Indian stock market is skewed and investors are paying a scarcity premium for good companies.
However, despite being skewed, the domestic stock market has commanded premium over its Asian and global peers since the past few years. This out-performance could be attributed to a few index companies such as Reliance Industries, HDFC Bank, Bajaj Finance, Titan, and Asian Paints that have grown large and are still gaining market share at the cost of smaller and unorganised players.
Interestingly, over two decades, the MSCI India index has outperformed the MSCI EM Index by 2.3%, annualised.
Covid: The Game Changer for Nifty 50
Index reflects the entire stock market trend and performance of the country. The Nifty 50 is the collection of top 50 companies based on free float. Thus, if the index constituents are performing well it is believed the overall market is buoyant and strong.
In FY22, Nifty 50 companies posted a record profit of ₹5.93 lakh crore. In the first half of FY23, these companies clocked profit of ₹2.91 lakh crore compared with ₹2.73 lakh crore in the first half of FY22, ruling out any aberration in India Inc.’s performance last fiscal.
The exceptional run of Nifty 50 is more pronounced in earnings per share (See: Nifty 50 earnings per share).
From FY10 to FY19, EPS of Nifty 50 moved up from ₹257 to ₹460, a compound annual growth rate (CAGR) of 6.68%. But from a pre-pandemic (FY19) EPS of ₹460 to post-pandemic (FY22) EPS of ₹771, Nifty 50 clocked an impressive CAGR of 18.79%, almost thrice the long-term EPS growth of 6.68%.
The exceptional growth in profit of Nifty 50 companies was attributed to the current political system. The term ‘Modi Premium’ got introduced to the market lexicon to reinforce the perceived contribution of the government for the turnaround of EPS growth from mid-single digit to high teens.
However, a deeper analysis reveals a different story. Between FY15 and FY19, Nifty EPS grew from ₹379 to ₹460, a CAGR of just 4.96%, much lesser than its long-term CAGR of 6.68%. It was only after the pandemic that index companies made exceptional profit and staged phenomenal EPS growth.
The significant EPS growth in the last three years indicates the pandemic was the game changer for the bourses as the Indian economy became more formalised and big companies became bigger while smaller players lost ground.
Domestic Investors’ Rise to Prominence
Hardick Bora and Sanjay Bembalkar, co-heads of equity at Union Asset Management Company, say that the Indian equity market commands a premium over its global peers because of the high growth rate of its economy. According to IMF data of October 2022, India is the sixth-largest economy by nominal gross domestic product (GDP) in terms of size and is also expected to be the ninth fastest in terms of growth. “None of the other top 10 economies by size is expected to grow as fast as India,” says Bembalkar.
Domestic investors played a key role in the markets’ phenomenal run after the pandemic. Between December 2021 and December 2022, demat accounts grew from 8.1 crore to 10.8 crore, a 34% surge on an yearly basis.
Growth in demat accounts also brought a large sum of domestic money into the Indian market. In 2022, foreign investors sold Indian shares worth ₹1.21 lakh crore ($17 billion), while domestic investors bought ₹2.56 lakh crore ($36 billion) of equities, reflecting the buoyant mood of Indian investors towards the stock market.
Highlighting the threat for the Indian stock market, Aditya Sood, fund manager, InCred Multicap Portfolio, says the risks in the market would be a function of sustenance of retail flows. “As deposit rates inch up, retail flows into equities might get impacted,” he says.
A 2022 Bloomberg report points out many stocks like Adani Transmission, Adani Green, Adani Total, and Bajaj Finance getting valued at 10 times more than their annual sales. Paying such high prices especially when interest rates are rising suggests exuberance mixed with amnesia, especially considering the costly lessons from the 2000 dot-com crash, the report says.
It seems that the words of the 2022 Bloomberg report are now coming true.
As controversies downsize the stock investment of the common man, the loss of trust in the Indian market seems quite imminent.
The share of DIIs, which include mutual funds, insurance companies, banks, financial institutions and pension funds along with retail investors and HNIs, reached an all-time high of 24% on September 30, 2022, while FPI holding in Indian stocks is currently at 17.3%.
The confidence of domestic investors in the Indian market may be the key to its success in future. The question is, will the market, dunked in the quagmire of controversies, retain investors’ trust?
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