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Is India’s market-cap headed towards $5 trillion?

Lokeshwarri SK | Updated on September 22, 2021

New, tech-savvy investors with higher tolerance for risk can make the rapid expansion of market cap possible

There was much celebration when the market capitalisation of Indian exchanges crosses the $3 trillion mark this May. In the four months since then, stocks have continued to surge despite lingering concerns about the pandemic and the Damocles sword of US Fed’s monetary tightening hanging over the market; current market cap is about 15 per cent higher, at $3.47 trillion.

A recent global strategy paper by Goldman Sachs however estimates that India’s market cap will increase to $5 trillion by 2024. The writers of the report have based this projections on the slew of IPOs set to hit the domestic market in the coming years. But there are couple of other changes taking place in Indian markets that makes this target achievable, albeit at a later date than that projected.

One, a large wave of new investors who are tech savvy and more prone to taking risk are overrunning the older set of more conservative investors. Two, the economy itself is undergoing transformation with most consumer-facing services and products going online, creating growth opportunities for technology firms and businesses. The three factors taken together have brought Indian markets to an inflexion point which can eventually take it towards the $5 trillion milestone.

2021, a watershed year

If 2020 was marked by a set of new investors, who traded online while working from home, entering the market, 2021 is reinforcing this trend further. While the new investors were testing the waters in 2020, they have tasted blood now, given the doubling of most stock prices since last March lows. The continuation of the rally this year seems to be luring more investors, who are game for risk.

This is reflected in the numbers given by the SEBI chief in a recent speech.

In FY20, an average of four lakh new demat accounts were opened every month. This tripled to 12 lakh/month in FY21. This number has jumped stupendously to 26 lakh new accounts every month in the current financial year.

Individual investors’ average share in daily cash market turnover has increased to 45 per cent in FY21 and FY22 from 39 per cent in FY20. Retail holding in stock markets has increased to 9.3 per cent towards the end of June quarter this calendar from 8.3 per cent towards the end of the corresponding quarter last year.

Retail investors are also taking the indirect route to investing in stocks, via mutual funds. About 51-53 lakh SIPs were added in FY20 and FY21. But FY22 has already surpassed the previous two fiscals with additions of around 59 lakh new accounts in the first five months.

In terms of trading turnover as well, 2021-22 is turning out to be outstanding. The average daily turnover in equity futures and options amounted to ₹51-lakh crore this fiscal year, compared with ₹25-lakh crore in FY21 and ₹13-lakh crore in FY20. The turnover figures are inflated because notional value of options contract is considered instead of the premium turnover, but the jump is evident in the numbers. The average monthly turnover in the cash segment has also been higher in FY22, at ₹15-lakh crore, compared with ₹13.7-lakh crore in FY21 and ₹8-lakh crore in FY20.

One gets a strong feeling that the Indian stock market, as we know it, is undergoing a change and the old order is giving way to the new.

Zomato, the inflexion point?

The dramatic change in retail participation this fiscal year seems to have been triggered by the IPO frenzy in July and August this year, led by the Zomato IPO. The offer worth ₹9,375 crore garnered subscription worth around ₹3.5-lakh crore. There was a virtual stampede for the issue with the non-institutional investor segment witnessing over-subscription of 33 times and the QIB portion getting oversubscribed to the extent of 52 times.

With funds worth almost ₹3.4-lakh crore not utilised in the Zomato offer, investors who could not get allotment began making a beeline for other IPOs with offers such as Tatva Chintan (oversubscribed 180 times) and GR Infraprojects (oversubscribed 102 times) attracting massive amounts of funds.

The IPO rush has made a difference to the underlying nature of Indian markets. The flurry of demat accounts opened this fiscal year shows that many new investors have debuted in stock markets with the Zomato IPO. These investors have greater penchant for risk and higher tolerance towards loss-making new economy companies compared to the traditional Indian investor. The presence of these investors bodes well for the upcoming IPOs of digital companies.

Goldman Sachs’ projections

The Goldman Sachs report, ‘Indian equities: Digital transformation as private goes public’, is betting on these digital IPOs and companies to drive market cap expansion in the years ahead. The report says that around 150 private firms could list over the next 2-3 years, adding $400 billion to the market capitalisation. It expects India’s market cap to increase to $5 trillion by 2024, making it the fifth largest market.

The authors of the report argue that the Indian market is dominated by old-economy sectors with listing age of Indian companies exceeding 20 years. The inclusion of new economy stocks could take the share of these stocks to 16 per cent from 5 per cent. Since these stocks trade at far higher valuation and have potential for faster growth, the valuation of Indian markets will expand, taking the market cap towards the $5 trillion mark.

Changing contours of economy

The factors discussed above can make the predictions of Goldman Sachs report come true. However, the time frame that the writers have set out looks tough to achieve.

They are overlooking the fact that the current IPO frenzy is also due to the secondary market conditions. If there is a sharp correction in the secondary market, the appetite for IPOs will also evaporate, and the offers in the pipeline will be postponed until market conditions improve. So achieving $400 billion of market cap through IPOs in the next two years appears a tall ask.

That said, the structural shift in the quality of investors along with changing consumer behaviour brought about by the pandemic will make the new economy companies grow fast and approach the stock market for listing, increasing their market share over the years. Higher valuation multiples could become the norm for Indian equities not just due to the kind of companies listed on it but also due to the change in investor behaviour.

Published on September 22, 2021

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