The value of the top 10 stocks in the Nifty index is on a declining trajectory with the market exuberance soaring as it chases companies with higher growth potential than betting big on value investing.

The market capitalisation of the top-10 Nifty companies in the overall index m-cap has plummeted to an all-time low of 20 per cent as of August-end from 39 per cent in March 2020.

The value of the top-10 companies, at ₹4.48 lakh crore, accounted for 39 per cent of the overall Nifty market cap of ₹11.34 lakh crore as of March 2020, according to data sourced from DSP Mutual Fund.

The value of these companies decreased by 20 per cent to ₹9.12 lakh crore of the Nifty market cap of ₹46.56 lakh crore as of the end of August.

Investment opportunity

Despite the overall market trading at an expensive zone, companies with strong fundamentals and resilient earnings remain compelling investments. In an otherwise overheated market, these undervalued stocks offer a a unique investment opportunity for foreign institutional investors seeking stability and quality.

Sahil Kapoor, Head of Products & Market Strategist, DSP Mutual Fund said the largest-cap companies are facing tough times with not only their market share falling to an all-time low but also their price performance hitting a record low.

Historically, he said when the top 10 companies underperform compared to the rest of the market during a ‘risk-off’ period when investors need to be cautious.

The recent surge in new listings in the equity market has made the top 10 companies attractive as more than two-thirds of these new stocks were launched at a price-to-earnings ratio of over 50 times, which means they have lower profitability compared to the top-10 companies, he added.

Mohit Khanna, Fund Manager, Purnartha Portfolio Management Services said, “Value-oriented sectors have delivered robust earnings growth or at the very least, provided earnings visibility with a strong order book.”

Growth sectors have lagged both in terms of earnings growth and cost of capital (discounting of future cash flows) and hence growth should outperform value in future, he added.

Puneet Sharma, CEO and Fund Manager of Whitespace Alpha said growth stocks are trading at premium levels, while market leaders in value sectors such as banking, infrastructure and traditional energy have remained relatively undervalued.

There is a strong investment case for market leaders that have remained stagnant. while the broader market has hit new highs. Sectors such as banking, infrastructure and FMCG have strong fundamentals but have underperformed relative to the 25 per cent rise in mid- and small-caps, he said.