CIRCUIT BREAKER. Why the Indian stock market is boring

Retail investors are queuing up again for public offers, equity mutual funds are raking in record flows and the number of demat accounts is at a new high. If all this suggests a flourishing equity cult, the latest data on household savings from the RBI throws a bucket of cold water on the notion. It shows that out of every ₹100 of disposable income in FY16, Indian households had ₹10.8 in financial savings. But they put away a measly 70 paise in shares, debentures and mutual funds.

It is usual to blame this Indian aversion to equities on many things — lack of awareness, pusillanimity about risk, high returns on risk-free instruments and the difficulty of opening demat accounts. But what if the reason is that the aam aadmi finds the menu of listed companies so yawn-inducing that he’s unable to get excited about the growth prospects for many of them?

This may seem like an outrageous claim until you actually run through the stocks that make up the Indian listed universe, and realise how disconnected they are from our everyday lives. This is being starkly brought out as the market digests the impact of the Seventh Pay Commission payouts.

For the past year, there has been much excitement among market players about the 23 per cent pay hike for government employees and how this will boost ‘discretionary spending’. Analysts in brokerages have embarked on a frantic hunt for firms that can be expected to capture a piece of the fatter consumer wallet. But you can see them running around in circles when they try to translate this into concrete stock ideas.

Most brokers have latched on to compact cars and two wheelers as the big-ticket splurges and put out ‘buy’ ratings on Maruti Suzuki, Hero Motocorp, Bajaj Auto and Eicher Motors. But it is quite possible that the employee will give Maruti or Hero a miss, and opt for a Hyundai or Yamaha instead. He may even skip vehicle-buying altogether and continue zipping around in Uber.

In consumer appliances, a strange amalgam of stocks — TTK Prestige, Whirlpool of India, Havells India, Voltas and Titan — are touted as the plays to benefit from the Pay Commission. But if you realistically think about it, what is the consumer appliance that you would splurge on if you received a windfall? It is unlikely that you would excitedly buy LED bulbs, pressure cookers or washing machines. Instead, you would probably log on to Flipkart to check out the latest smartphones, laptops and Bose speakers.

More imaginative brokers have stretched this idea further. They recommend that you buy VIP Industries, Indian Hotels or Mahindra Holidays as a proxy for the impending splurge on travel, Kajaria Ceramics or Asian Paints as a play on home improvement, and PVR, Inox or Jubilant Foodworks as a way to benefit from entertainment spends.

But the names that spring to the urban consumer’s mind while planning a trip is MakeMyTrip or TripAdvisor where you can book any number of budget resorts. Home improvement can entail replacing your sofa at Pepperfry.com. And as for dining out, you may as well pop over to the neighbouring Saravana Bhavan.

It is not as if these smart analysts are not aware of the myriad options available to the Indian consumer today. But as very few of the actual discretionary spending plays are as yet listed, they are forced to chase after the few that are available. In fact, this mad chase for the scarce-branded businesses is the reason why even mediocre consumer-facing stocks today trade at astronomical valuations, while many industrial names languish at single digit multiples.

The evidence isn’t just anecdotal either. We know that household spending has been the biggest driver of India’s economic growth in the last few years, while investments and government spending have been lacklustre. GDP data shows that it was Private Final Consumption Expenditure (jargon for household spending) that contributed 59.5 per cent of the FY16 GDP, while Gross Fixed Capital Formation (spending on fixed assets) chipped in with 29.3 per cent, and government spending made up 10.6 per cent. But an analysis of India Inc’s top 500 names reveals that the listed space is the converse of this. Industry-facing firms dominate the listed universe, while consumer-facing firms are in short supply.

We attempted a simple segregation of the CNX 500 companies (over 95 per cent of the listed universe) into companies that make branded consumer products and those that don’t, after leaving out financial firms. We found that in FY16, 108 of the 438 companies fit the bill as makers of branded consumer products, while an overwhelming 338 firms were in industrial businesses. The branded consumer firms also made up just 17 per cent of the listed universe by sales and 27 per cent by market capitalisation.

This tells us that while 60 per cent of the Indian economy may be driven by consumer spending, only 17 per cent of the listed space represents this opportunity.

This is not all. Observation tells us of many interesting mega-trends that are unfolding in consumer spending. Across products, consumers are shifting from the unorganised sector to brand-name goods. An increasing share of our wallet is now spent on branded services, rather than goods (mobile calls and data, fitness, entertainment, healthcare, dining out, vacations).

Digital innovation is disrupting a range of sectors and opening up a huge canvas of new choices. So there’s the option of using Uber or Ola instead of plonking big money on a car, shopping on Flipkart instead of popping to a retailer, booking a budget resort on Makemytrip instead of making reservations in a Taj property. But seriously evaluate whether this sea change is reflecting in the universe of listed stocks and you would realise that it isn’t.

One can only speculate on the reasons for this lack of vibrancy in the Indian stock market. Markets like the US don’t seem to face this problem with even the indices choc-a-bloc with interesting names such as Google, Twitter, Amazon, Apple and Mastercard.

One reason could be that India’s primary market has been practically dead in the water for the last six years, reviving only this year. This may have kept away promising ventures from the market. Two, given the flood of money that has been pouring in from global venture capital and private equity funds, it is possible that really promising consumer-facing firms are easily able to raise private money and have no reason to list. A well-known mutual fund manager recently commented that PE investors were skimming off all the malai from the attractive growth stories, seeking a listing only when profits had been thoroughly milked!

A third reason could be that tightening IPO regulations in recent years has set such a high bar on new listings that only mature firms are able to make the cut. Whatever the reason, this is a problem for the best minds in the Indian market together with the market regulator, to thrash out and fix at the earliest.

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