Soaring m-caps and flagging sales: markets tell a different story
14 October 2019
Indian capital market is a classic dichotomy where stagnant market for industrial production is pitted against a booming secondary capital market – as if the two are unrelated – at least for the majority of listed companies.
It may be noted that eight of the 10 most valued domestic companies together added Rs80,943.32 crore in market capitalisation in the first week of October, with RIL adding the most.
Only Tata Consultancy Services (TCS) and ITC from the top-10 pack suffered losses in their market capitalisation for the week ended Friday.
The m-cap of Reliance Industries Ltd (RIL) zoomed Rs28,494.36 crore to Rs8,57,303.03 crore, the most among the leading companies.
The valuation of Hindustan Unilever Limited (HUL) jumped Rs13,216.18 crore to Rs4,33,990.70 crore and that of Infosys climbed Rs9,642.37 crore to Rs3,50,346.61 crore.
These are companies that regularly report profits. But can these companies be true representatives of corporate India in stock markets, especially when sales and profitability are tumbling?
Businesses and industry bodies in the country have been crying wolf over waning profit margins and high tax rates that deter investment. However, analysts argue that the higher corporate outflows have not been showing up in macroeconomic growth and that there is nothing to attribute slowing profitability to rising tax rates, at least since the roll-out of the goods and services tax. But the GST, perhaps, would have taken off the excise duty advantage that corporates quietly enjoyed – by showing lower warehouse inventry.
What then is driving up the market capitalisation of corporates that shows up in stock market indices? Either businesses are camouflaging real earnings, or the stock markets are misleading small investors that make up for a majority of market participants by artificially inflating stock prices.
To back up the stock trading community, analysts have also invented hypothetical price to earnings ratios for different business sectors to justify a certain price tag – and it may vary from company to company.
The index construction may also be correct considering the number of companies and the sectors they belong to as the index earnings are the aggregate profits of companies included in the index and the index market capitalisation the aggregate market capitalisation of these companies.
Also, the base year may influence the market cap and index earnings of these companies taken together – a difficult road for the common man to tread in the stock market jungle.
Also, with the index constituents often subjected to change due to regular updates by the index provider, index earnings would altogether project a different picture than the one existing – the investor chasing housing stocks instead of furniture stocks.