Big Companies Are Becoming Bigger, Leading To Market Highs

First Global co-founder Shankar Sharma talks about the current state of India’s equity markets and what is driving them

Shankar Sharma, the co-founder and vice-chairman of First Global, is known for his bearish stance on Indian equities. That, however, seems to be changing.

“This is the most logical bull market I have ever seen,” says Sharma, who has been bullish for quite some time now. He is also armed with his own share of arguments to validate that belief.

Talking to Outlook Business, Sharma explains how big companies are becoming bigger and why that is driving the markets instead of the economy.

Edited excerpts from the interview:

With a price-to-book (P/B) ratio of 4 and a trailing price-to-earnings (P/E) ratio of 32, do you think that the current valuation of the Indian markets is justified?

Absolutely. This is the most logical bull market I have ever seen. In just one year, a few large companies have earned what they used to earn over four to five years. While big is becoming bigger, the smaller ones are getting mauled in the new Indian equities landscape. The big companies are snatching away market share from the smaller ones and in recent times, they have recorded disproportionate gains. Nifty is all about the 50 largest listed companies. So, till the time a majority of these keep performing well, the market will continue its ride.

So, does the Indian equity market have no correlation with the Indian economy?

The equity market is a collection of companies. Till the time the companies, which are part of the Nifty, perform well, the index will move up. The equity market is a function of companies, not the economy. Keep in mind that the IT sector is the second-biggest constituent of the index with over 18% weightage. Moreover, metals, pharma and automobiles derive a significant chunk of their earnings from abroad. Today, a big chunk of the Nifty earnings comes from abroad and it is growing at a brisk pace. So, judging Indian equities using the prism of the domestic economy would give you a faulty picture.

When do you see the economy impacting equities?

Equity markets thrive and survive on earnings growth. So, the companies that are dependent on the domestic economy for earnings growth would bear the brunt of the sluggish Indian economy. This has been reflected in the underperformance of banks and their financials in the past few years. But, with the normalisation of the provisioning cycle, banks, too, are participating in the current leg of the rally.

Do you see a spike in inflation putting the brakes on the index upmove?

My view on inflation is completely contrarian when compared to most of the market participants. For India, inflation is good and if inflation is coming back to India, then we should not get worried. For many years, the western world has been trying for inflation but has not succeeded. During the inflationary period, Indian companies successfully pass on the price hike and the large population helps produce meaningful growth in revenue as well as profit.

The consensual street estimate for FY20-24 is 22% compounded annual growth rate. Do you believe in the massive earnings growth as projected by brokerage houses?

Understand the fact that brokerages exist to give rosy projections. No brokerage house would survive without giving a rosy projection. For the last six years, most of these brokerage houses projected 20% earnings growth at the beginning of year and we ended with not even half of that projection. Having said that, I do believe that the current bull run has a lot of steam left.