Rally leads to democratised valuations

The current rally in the stock market is slightly different from the rallies witnessed previously in the sense that it has democratised valuations, leading to greater depth in the market.

Small cap stocks have graduated into mid-caps, while some mid-cap stocks have vaulted into the top league.

For the investors, this has meant greater depth in the Indian equity markets, and a wider choice of sectors and valuations. The market is no longer concentrated in the top 50 stocks now, but now investors can choose from at least 500 stocks, and more are being added by the day.

Ajay Bagga, chief executive officer of Kotak Securities, explains, "The market is deepening in terms of market capitalisation. New companies, especially in the public sector, are getting listed and new institutional players are entering the fray. New foreign institutional investors (FIIs), long term fund managers such as insurance and pension firms and the growing number of mutual fund players would increase the share and volume of institutional players in the Indian markets."

Raamdeo Agrawal, managing director, Motilal Oswal Securities Ltd, said that the greater depth in the market can be seen by the fact that despite the index at all-time highs, "the valuations are reasonable."

He pointed out that based on fiscal 2006 earnings, the market was trading at 13 times its price to earnings multiple.

"This is taking into account a 20 per cent year-on-year growth in corporate earnings." He gives further statistics to bolster his assertions.

In 1992, the market earnings per share (EPS) was Rs 60. In 2000, when the Sensex was at 6,250, the EPS was Rs 200. In 2004, the index is at 6,450 but the EPS is at Rs 425."

Unfortunately, retail investors have not been very active in the current rally. Agrawal pointed out that retail investors have been exiting probably thinking that the current valuations are not sustainable. Small investors have been waiting for a dip in the market for a long time.

According to data from DSP Merrill Lynch, FIIs have increased their ownership of the Indian market. As on September 30, 2004, FIIs own nearly 20 per cent of the equity of listed companies, the report said.

For both Sensex stocks as well as the companies included in the MSCI index, FII holdings have increased in the last few quarters. On a quarter-on-quarter basis (between June end 2004 and September end), FII holdings have increased from 16.7 per cent to 17.5 per cent.

Data also show that promoters have increased their holdings in their companies. As a result, the free float stock has declined somewhat. Within this smaller pie, FIIs have increased their share while mutual funds have ceded some ground.

Analysts said that the decline in floating stock has been more than compensated for by new issuances which have come up. In 2004, so far there have been very few or negligible delistings by companies unlike 2003.

However, while a whole host of new stocks were added - 34 issuances (out of which 28 were new) raising over Rs 30,000 crore - market cap remains at roughly one per cent of the global market cap. China fares no better with 1.3 per cent. Compare this to US markets accounting for nearly 42 per cent of the global market cap.