Sensex firms' share in total market capitalisation at 13-year low

Top 30 companies now account for below 40% of combined figure for all listed companies

Analysts say a steadily falling market capitalisation share of index companies signals exuberance on the part of investors and the market could fall at the first whiff of bad news, local or global

The share of the 30 Sensex companies in the market capitalisation of all BSE listed companies is down to a 13-year low as mid-cap and small-cap stocks continue to race ahead of the large-cap ones.

The country’s top 30 companies that are part of the benchmark index now account for only 39.9 per cent of the market cap of the listed universe, down from around 50 per cent three years ago and a record high of 65 per cent in October 2008. The previous low was 35.7 per cent in April 2004 (see chart).

The National Stock Exchange’s Nifty 50 benchmark index shows a similar trend. The Nifty 50 companies currently account for 53.1 per cent of the combined market capitalisation of the listed universe (on both BSE and NSE), marginally above its six-year low of 52.6 per cent in February this year. In comparison, at its high, the index companies accounted for 62 per cent of the total market cap, in October 2013. 

The analysis is based on the month-end closing market cap and index values for listed companies since April 2003. The BSE Sensex is up 57.6 per cent since the low of September 2013, believed to be the start of the current bull run. Over the same period, the Nifty 50 is up 66 per cent, while the BSE mid-cap index is up 169 per cent.

The market capitalisation of the listed universe doubled during the period, from Rs 63.8 lakh crore at the end of September 2013 to Rs 127.9 lakh crore now. Sensex companies’ combined market cap is up 57 per cent, to Rs 51 lakh crore from Rs 32.6 lakh crore. 

Analysts say a steadily falling market cap share of index companies signals exuberance on the part of investors and the market could correct (fall) at the first whiff of bad news, local or global. 

“The current rally has been mostly driven by mid-cap stocks. Large-cap stocks or the benchmark indices are now trying to play catch up. There is, however, no fundamental reason for the investor’s greater love for second-tier and third-tier stocks and the market is not very far from a bubble zone,” feels G Chokkalingam, head of Equinomics Research & Advisory. He says the rally is being driven by investor flows, rather than an improvement in corporate fundamentals.

Historically, every market correction has been preceded by a period of steady fall in the market cap share of index or large-cap companies. Conversely, every major rally in the past 15 years has been preceded by a period of steady rise in the market cap share of index companies, driven by superior performance of large-cap or top-tier companies.

For example, Sensex companies’ market cap share had fallen to a four-year low in December 2007 of 40.1 per cent, a week before the major market correction which started in early January 2008. The corresponding ratio for the Nifty 50 was 49.1 per cent at the end of December 2007, the lowest in 45 months.

Similarly, Sensex and Nifty companies’ market cap share had fallen to a three-year low of 41.4 per cent and 51.7 per cent, respectively, in November 2010. The indices topped in December 2010, ending the post-Lehman crisis rally in the markets.

In contrast, the index companies’ market share peaked in October 2008, a month before the indices bottomed out during the 2008 global financial crisis. A similar trend was visible in the 2013 sell-off, after the US Federal Reserve’s decided to taper its bond-buying programme. The index companies’ share (in market cap) peaked in September 2013, believed to be the beginning of the current rally. 

Others say the growing valuation gap between the mid-cap index and the benchmark indices shows the pressure points ahead for investors. The BSE Sensex is currently valued at 23 times its underlying trailing earnings, while the BSE Mid-Cap is now valued at 33.4 times its underlying trailing earnings.

“The mid-cap index is now trading at a 50 per cent valuation premium to the benchmark indices, a record in recent years. Investors are paying that premium despite no apparent difference in the earnings growth between mid-cap and large-cap companies in three-four years,” says Dhananjay Sinha head of institutional equity at Emkay Global Financial Services. 

Not surprisingly, fund managers such as Chokkalingam have raised the allocation to large-caps in their portfolio, at the expense of mid-caps. “I have told my clients that capital protection is more important in the current environment than the upside potential that smaller stocks could provide,” he says.