Investors lose as stocks turn dear

Investors in the equity markets have been on the losing side over the past three years, as they have paid more money to buy their preferred scrips than they deserve, reveals a DH analysis.

The market capitalisation of all the companies listed on the exchange has shown a healthy compound annual growth rate (CAGR) of 16.6% since 2015-16. The total market capitalisation of all the companies listed on BSE stood at Rs 1,44,48,466 crore by December 2018, a growth of 52.5% compared to Rs 94.75 lakh crore as on March 2016, according to the data available with Bombay Stock Exchange (BSE).

On the contrary, the earnings of all the listed Indian entities has declined by a compounded rate of 1.3% during the same period. The drop was triggered by the slower growth in the wake of demonetisation and banking crisis arising out of the increased bad loans. During three out of past four financial years, the overall corporate earnings have seen a year-on-year decline – 25.3% in FY18, 12.3% in FY16 and 0.2% in FY15, according to the data provided by Care Ratings.

The scenario is also reflected in the price-earnings ratio of these companies. For the companies listed on BSE’s All-Cap, the PE multiple has shown a compounded annual growth of 8%, which is the just half of the growth in the market valuation of BSE-listed companies.

BSE All-Cap comprises the S&P BSE LargeCap, S&P BSE MidCap, and the S&P BSE SmallCap and is a comprehensive, rules-based index that seeks to measure the performance.

On the other hand, the performance of 30 blue-chip companies on BSE Sensex is far worse – they have grown by just 5.7% since FY16, which is one-third of the growth in the market cap.

Prior to this, till FY16, even as the market cap grew at seven-times higher rate than the earnings, yet they didn’t move in the opposite directions. From FY10 to FY16, the m-cap of BSE-listed companies, grew by a CAGR of 7.4%, while the corporate earnings grew by 1.6%.

EPFO money propping

Experts attribute the phenomenon to the Employees Provident Fund Organisation (EPFO) pumping in the money into the Indian equity markets post-April 2015. “One of the fundamental changes in the equity markets has been the allowance for EPFO to put money in. That is what is propping the markets up irrespective of where the fundamentals are going. This phenomenon is mostly seen in large caps,” said Anubhav Shrivastava, Partner at Infinity Alternative, an India-centric equity investment house.

The EPFO had started investing in the stock market in August 2015 with a 5% exposure, after the government allowed it to do so in April 2015. It had subsequently raised its exposure to 10% in the last financial year, before further hiking it to 15%. The organisation has annual accruals of close to Rs 1.5 lakh crore, 15% of which is invested in equities. According to the estimates, EPFO has parked close to Rs 50,000 crore in Indian markets in past three years.

Some others attribute the phenomenon to the decline in the investment options post demonetisation. "There is a lot of money coming into the markets, but there aren't many options in the markets. So they are moving towards the equities," Kavita Chacko, Senior Economist at Care Ratings said.