This may not be a fit-for-all indicator. In the US, the m-cap-to-GDP ratio has hit 200 per cent and in Taiwan, it is screaming at 300 per cent currently.
As per the indicator, stocks are deemed expensive when the value climbs above 100 level. For India, the average 10-year m-cap-to-GDP ratio has stood at 79 per cent, as much of the economy is unlisted and nonformalised.
But as soon as India’s under-represented sectors and new economy sectors join the listed space, this ratio may rise. For example, Zomato will list on the bourses within a week. Others such as Paytm, Mobikwik have filed for IPOs.
Speaking at Motilal Oswal Global Partner Summit, Sanjeev Prasad, MD and co-head at Kotak Institutional Equities, said he does not believe 100 per cent is the ‘limit’ for this ratio. For example, the US is commanding 200 per cent GDP-to-m-cap ratio, he said, as US giants such as Amazon, Google, Facebook and Netflix are capturing digital activities in other parts of the world.
“They are global companies with massive footprints. They capture economic activity in about every country on this planet, but the market cap reflects in the US,” he said.
It is still early days for India to reach that level, as India first needs to reduce imports which are a negative force for India’s m-cap acceleration.
But Prasad is hopeful. “We have an once-in-a-20 year opportunity. If India plays China-plus one strategy well, we will see massive manufacturing being done in India. Also, if some of India’s home grown tech companies scale up over time, they would ploughing back some of the economic activity lost to global majors. Top 15 unicorns were in fact valued at more that $100 billion at last round of funding,” he said.
$5 trillion market cap
Analysts believe India’s m-cap is bound to touch $5 trillion mark. It is just a question of when.
More listings from the under-represented sectors such as real estate, emergence of new sectors such as digital and green energy, boost to value chain in manufacturing and making most of the cyclical cycle ahead would be some of the factors that may push Dalal Street’s market cap beyond $5 trillion level from $2.7 trillion level or roughly the size of GDP currently, they said.
Venugopal Garre, MD at Bernstein, said ultimately the economy has to grow, which will be the key anchor for m-cap as well. “This is unless you believe that the flavour of the entire listed universe is going to change. Ofcource it would change, if the digital revolution picks up in a very different way where the approach towards the m-caps of those companies are very different. The $5 trillion mark can be achieved in 5-6 years if growth remains above 10 per cent,” he said.
Garre said India wants to be secular and high growth economy for long like China, but unfortunately India is seen from an economic lens of cyclicality. “So if the India is lucky and performs well in the next cyclical cycle, you would accelerate the path to m-cap addition, even for the old economy enterprises,” he said.
He said one should not shy away from the fact that cyclicality is a problem for India. There has been a lot of decision making in the last few years, which were just narratives and lacked planning and execution, he said, adding that lots of things we talk about as infrastructure or manufacturing are just excel sheet models.
“That said, we are in digital age and some of the decisions triggered by the Covid has given teeth to the Indian startup ecosystem. I have not seen such excitement for at least a decade,” he said.
“Not every startup may scale up. But even if a bunch of them do, they will formalise the economy. For manufacturing, one needs the acceleration of PLI scheme. One cannot just announce the scheme and say I’ll come out with details in two years and would take another year who all could participate,” he said.
Ganeshram Jayaraman, MD of institutional equities at Spark Capital Advisers, said the formalisation of the economy would make a big delta in how the earninigs growth of companies can get acceleration.
“For 10 years, earnings are muted. But now, earnings growth of 20 per cent compounded over next four years are dolable. Formalisation of the economy will only add to the earnings potential. When earnings rise, valuations will get moderated. We believe it would roughly take five years for Idnia’s m-cap may double from where we are today. Also, new companies will add to the mcap,” he said.
Jayaraman said after two decades, a few factors will come together: demand recovery, industry consolidation, inflation, operating leverage, balance sheet cleanup. “We last saw these things come together in 2003.”
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