Animal Spirits: Udayan Mukherjee's column on India's top companies

A deep dive into India’s top 500 companies always makes for engrossing reading. After all, it is on the shoulders of these institutions that rest our dreams of emerging as a global economic powerhouse. And despite battling a mind-boggling number of odds—demonetisation, GST, Covid-19, war-induced commodity shocks, inflation and a decade-long earnings slowdown—they seem to be in good shape, ready to move into a higher gear, growing in scale and influence at a time when their global counterparts appear mired in challenges.

The stock market senses this, and stocks of Indian large-cap companies have held up admirably well over the year gone by. Flat, yes, but that itself is no mean feat in a year of such pervasive turbulence. The biggest firms have consolidated nicely, and at the top the names on the BT500 list for 2022 haven’t changed much with the familiar Reliance Industries, TCS, HDFC Bank, Infosys and HUL holding on to their pole positions. ICICI Bank and HDFC have swapped positions and SBI has crept up on them with its stellar run of late. LIC, once thought to be the country’s most valuable company, barely makes it into the top 10. But the dominance of these biggies is unquestionable as the top 10 names account for nearly 30 per cent of the combined average market capitalisation of the top 500 companies. The big are not only not ceding ground to challengers; they seem to be getting even bigger. And this is the challenge for the names between the top 100 and 500—can they grow faster and bridge the gap? Or will the big boys use their financial and technological muscle to stay ahead of the pack?

This question is made even more interesting by the opening up of global opportunities in manufacturing amidst all the problems in China. This could be a game changer, more so for the larger mid-caps that have already attained a critical size and can scale up quickly to tap new opportunities. In a sense, the firms in the 100 to 500 bracket may be perfectly placed to capitalise on a manufacturing boom akin to what the IT companies may have seen at the start of the millennium. The sectors offering such opportunities range widely from chemicals and green energy to electric vehicles and auto parts. In the past two decades, India’s growth has primarily been led by services, and while that continues to be an enduring growth story, it will be interesting to see if it is the manufacturing sector that accounts for many more entrants into the big league over the next decade.

On the subject, the name that leaps out from the top 100 companies in the current list is Adani. The group has its critics, and many in business circles are leery of its meteoric rise, but it is still astonishing to suddenly see as many as seven Adani companies—Green, Total Gas, Transmission, Enterprises, Ports, Power and Wilmar—in the top 100, with a combined average market capitalisation of nearly that of Reliance Industries. This new kid on the block is certainly running fast, and time will tell if it burns itself out or makes it to the very top.

This doesn’t mean that the old behemoths are resting on their laurels. The Tata group, for example, appears far more energetic than it has over the last two decades, under the able stewardship of its Chairman. Fragmented internal group structures have been rejigged, investments made in sunrise sectors like electric vehicles, and a solid game plan is evident in the digital domain with its numerous recent acquisitions. This is a group ready to face the next decade.

Speaking of the digital domain, while many new names have been listed in the year gone by, some of which find their way into the top 500, it is worth noting that there are still only four digital stocks in the top 100—Nykaa (FSN E-Commerce), Zomato, Info Edge and Paytm (One 97 Communications). The influence of digital is so ubiquitous in today’s India that this seems a very low number, but perhaps there is a message here: these companies have to start making profits, for the market to give them the valuations necessary to propel them into the big league. Price to sales won’t cut it; it will have to be through the more difficult price to earnings route used by their older peers. As the venture capital drought intensifies, some of these names may drop out of the top 500 but eventually many more of the top 100 will come from this domain, inevitably, as India’s digital transformation continues. It is a journey interrupted, not aborted.

The top 100 has other interesting takeaways—from the absence of even a single real estate name to the inclusion of defence stocks like HAL. The market, in all its wisdom, gives us so many signs.

As we look ahead into the unfolding decade, it is critical that many of the mid-caps and small-caps from the top 500 list go on to emerge as large-caps. With the passage of time, as the dust settles on the global mayhem and India’s relative strengths become more manifest, the global money will come back seeking returns. It will be so much better, then, if instead of piling into the same six IT and private banking names, they see value in the faster growing leaders in smaller sectors. That would expand the market and maybe, in time, even raise the chances of India severing its umbilical cord with the rest of the emerging market pack, and stand out on its own.

In all global economic listings today, India has already made its way into the top 5. No longer a mid-cap, more a large-cap on its way to becoming a mega-cap. Our market value has to follow, and one hopes future top 500 lists will only pave the way for that.