Few takers for 'Made in India' on bourses

Export-intensive sectors' m-cap share at 5-year low of 17.6%, displaced by lenders and automakers

‘Made in India’ is floundering on Dalal Street. The market capitalisation share of export-intensive sectors is down to a five-year low of 17.6 per cent, from a record high of 23.9 per cent at the end of FY16.

The decline has been led by information technology (IT) companies and pharmaceuticals, two of corporate India's biggest exporters. Software exporters such as Tata Consultancy Services, Infosys and Wipro now account for 9.7 per cent of the combined market capitalisation, a seven-year low and down 450 basis points (bps) from their high at the end of FY14.

The decline for pharma exporters such as Sun Pharmaceuticals, Lupin and Dr Reddy's is more recent, with the sector market cap share falling by 240 bps from their high at the end of FY16. One bps is a hundredth of a per cent.

Once the second biggest sector on Dalal Street in market capitalisation, behind banks & financials, IT companies now trail consumer goods makers, basic material producers (metal, mining & cement companies) and oil & gas companies on this. In contrast there has been an increase in the share of non-exporting sectors such as financial services, real estate, consumer goods and oil & gas companies.

The analysis is based on financial year-end market cap of a common sample of 816 companies from the BSE 500, BSE Mid Cap and BSE Small Cap index. The latest data is for last Wednesday. The foreign exchange revenue and expense is on a standalone basis, as few companies report this number on a consolidated basis.

An analyst attributes this to slowing in the country's export and rupee appreciation. "Pharma exports declined in FY17 for the first time in many years, while IT export growth was in low single digit, hitting earnings growth for these companies," says G Chokkalingam, chief executive at Equinomics Research & Advisory. He expects the trend to last for at least a year more.

Others say this is part of a domestic flows-driven rally. "This is cyclical and has happened in all past rallies such as 2006-2008 and 1992-1994, with the exception of the dotcom rally. On all past occasions, the biggest gains were made by consumer companies, domestic cyclicals and lenders," says Dhananjay Sinha, head of institutional equity at Emkay Global Financial Services.

He ascribes this to domestic investors' high earnings expectation from companies focused on servicing the domestic market.

Not surprisingly, export-intensive sectors have been a big laggard in the current rally. The combined market cap of listed companies in sectors such as IT services, pharma, textiles, agro chemicals and leather have been stagnant since the end of FY16, against a 36 per cent rise in the market during the period. These sectors have underperformed the broader market in the past three years, with a 42 per cent rise in their market cap against a 73 per cent rise in the broader market.

Entities in the financial services space, including banks, are now the fastest growing segment on the bourses. The sector market capitalisation has more than doubled in three years, despite a poor show by public sector banks (PSB), leading to a 400 bps rise in their market cap share since March 2014, mirroring the decline of IT companies. Financial services companies now account for 21.1 per cent of the combined market cap of the entire sample, up from 17.1 per cent at the end of March 2014.

Other big gainers in the period have been automobile and auto component companies. They now account for 8.1 per cent of the entire sample market cap, up from 5.9 per cent at the end of FY14.

Nine out of the top 10 exporters (on a net basis) were either IT companies or pharma makers last year. TCS topped with net export (revenue earnings minus expenses in forex) worth Rs 54,256 crore on a standalone basis in FY17. Followed by Infosys and Wipro. In pharma, Lupin was the largest exporter, at a net Rs 6,037 crore, followed by Dr Reddy's and Aurobindo Pharma.

ITC is the only non-IT and non-pharma company to feature in the top-10 exporters list, with net export revenue of Rs 3,308 crore in FY17.

Overall, corporate India continues to run a foreign exchange deficit, with import exceeding export by Rs 3.13 lakh crore in FY17, down from Rs 4.95 lakh crore in FY15. This was largely due to a sharp decline in oil import by refiners such as Reliance Industries, Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum.

Illustration by Ajay Mohanty