Churn in Indian equities top league offers stock-picking opportunities

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India is known for substantial family-controlled conglomerates, which include some of the country’s largest stock market listed companies, such as Tata group, Mukesh Ambani’s Reliance group, KM Birla’s Aditya Birla and Sunil Mittal’s Bharti Enterprises. As of January 2015, listed companies from the top league (top-10) conglomerates accounted for more than 20% of the Bombay Stock Exchange’s total market capitalisation[1].

What few people know, however, is that the churn in India’s top league of largest companies has been considerable over the years, with a healthy number of emerging, fast-growth companies taking over from businesses that are past their prime. What does this mean in terms of stock-picking opportunities when it comes to Indian equities?

India’s top tier: changing faster than you may think

From the top-50 companies by market capitalisation in 1990, less than a quarter (12) was still in the top-50 in 2014[2]. By comparison, in the US – usually seen as an entrepreneurial economy avant la lettre – no fewer than 20 of the top-50 companies in 1990 managed to retain their spot in 2014[2]. This higher rotation in India reflects the arrival of consumer and services sectors such as information technology and pharmaceuticals, as well as the fast-moving dynamics of this emerging economy, in which traditional, established businesses face growing competition from players aiming for the top rankings.

Exhibit 1: Healthy rotation: more than half of MSCI India index constituents has changed in the last 10 years (% change vs. June 2015)

india stock graph

Source: MSCI, FactSet, July 2015

This top league rotation can also been seen by looking at the MSCI India index, which is the benchmark for most international investors investing in India. As of the end of June 2015, only 32 out of the 70 constituents were in the index 10 years ago, meaning that more than half are companies that have taken over from the incumbents over the last decade[3]. In the quarter to end-June 2015 alone, no fewer than eight companies entered the MSCI India index, while three left it.

Highlighting stock-picking opportunities

For investors in Indian equities, such changes can mean attractive stock-picking opportunities to own shares in the top Indian companies of tomorrow. There is a rich choice to be had. Investors can focus on listed companies that can be expected to endure among the top Indian stocks. And they can also seek to identify the smaller, fast-growing off-benchmark companies that are poised to gain market share and emerge as future leaders in their sectors.

[1] Source: MSCI, June 2015
[2] Source: Bombay Stock Exchange, Capitaline, as of 28 January 2015
[3] Source: Capitaline, Bloomberg, 2014

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Paul Milon

Investment Specialist, Indian equities

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