Emerging Giants Newsletter – August, 2018

Disconnect between the performance of headline indices (Nifty/Sensex) and the broader markets continued in July 2018. Equity inflows continued to chase a smaller sub-set of stocks viewed as relative defensive bets. Hence benchmark indices like Nifty remained optically elevated even as the broader markets languished. This disconnect has not been restricted to just poor quality companies but even good quality mid and small cap stocks have been witnessing a widening of valuation discount versus their larger cap counterparts. For instance, the top 20% RoCE stocks (averaging close to 40% RoCE) in the BSE large cap space now trade at average P/E (trailing twelve months) of 35x which is substantially higher than 24x average for the mid-caps and 16x for the small caps despite similar return rations and earnings growth.