India's blue-chip shares are vastly outperforming those of smaller companies as investors avoid risky bets in a slowing economy, with the gap between the two groups at its widest in more than a decade.
The country's benchmark blue-chip indexes hit record highs last month after Prime Minister Narendra Modi cruised to re-election, but the stock markets remain polarised.
While the blue-chip Nifty 50 has climbed about 12% in the last one year, the Nifty Smallcap 100 has slipped nearly 13%. The divergence between the two is at its widest since 2005.
Money managers say increasing caution about a prolonged economic slowdown at home and a global trade war has driven portfolio investment flows into a handful of India's largest firms, such as IT services provider Tata Consultancy Services Ltd, lender HDFC Ltd and oil-to-telecoms group Reliance Industries Ltd.
Their position as established market leaders with double-digit revenue growth makes them safer bets in a slowing economy.
Asia's third-largest economy grew at its slowest pace in more than four years in January-March. A delay in crucial monsoon rains this year could further undermine the agriculture sector that makes up 15% of the economy.
“There is a cyclical slowdown in the economy, and investors are not so confident about the near term,” said Mahesh Patil, co-chief investment officer at Mumbai-based Aditya Birla Sun Life AMC, whose team oversees about $13 billion in equities.
Credit crunch, rising debt
A growing funding crisis among India's shadow banks is also hurting private consumption, hitting sales across markets from construction tools to auto parts.
March-quarter earnings at plywood manufacturer Century Plyboards and tyre maker CEAT - two Nifty Smallcap 100 firms - both fell due to lower sales to real estate and auto companies, respectively, two industries where the credit crunch has exacerbated a slowdown.
Profit margins at smaller firms lagged those at their larger peers, Refinitiv Eikon data shows, even as both sets of companies showed similar levels of revenue growth.
Several small companies are either heavily indebted, or have faced allegations of corporate mis-governance.
Jet Airways, once India's biggest private airline, suffered a spectacular decline after running out of cash, while companies part of business tycoon Anil Ambani's Reliance Group face mounting debt or allegations of improper accounting.
“If we find corporate governance that is not in line with our estimates, we don't put money in the market,” said Jinesh Gopani, head of equities at Axis Mutual Fund in Mumbai.
“We are being very, very selective.”