Several investment themes and philosophies exist in stock markets at any point of time. Professional investors know there is no holy grail when it comes to market mantras, but we all do seek frameworks that deliver a better-than-average rate of success. Focusing on market or category leadership is one such framework. While this is a well-known framework, but it gets forgotten or under rated in easier stock picking conditions such as 2021. In the Indian context, market leadership couldn’t have been more important after demonetization in 2016, GST implementation in 2017 and now in the era of Covid-19. Leaders have flourished, as relatively smaller players are still recovering from the impact of these reforms and the pandemic. 

In the Indian public equities space, barring the large-caps (top 100 companies), we believe there are close to 175 market leaders in the mid-small cap universe (market cap above Rs 1,000 crore). Stock price data since 2010 leans heavily in favour of these market leaders, both in terms of consistency and quantum. Firstly, if one looks at the best performing quartile of stocks every year since 2010, more than half come from the ‘market leader’ stable, every single year. Then it’s the quantum. If an investor had constructed a simple equal weighted portfolio of ‘market leaders’, this portfolio would have multiplied 11 times (11x) between 2010 and 2020. More importantly, there are clear reasons for this. As markets became more organised and getting debt become difficult, larger companies with strong balance sheets and well-established supply chain with higher bargaining power have flourished. A phenomenon that should continue, in our view. 

So, should we be looking at market leaders any differently now? Well, no and yes. What hasn’t changed is the context. Leaders should dominate further and big should get bigger in most categories. What has changed are two things. First, driven by a lack of good choices during 2017-19 and now by the broad-based post Covid market rally, the valuations for most market leaders don’t look that cheap currently. As a result, further valuation re-rating should be slower or tough. Second, and more importantly, one will need to be very choosy about the categories itself. New age categories and sub-sectors such as fintech, gaming, logistics, decarbonisation and others are emerging fast, while several categories are getting pushed into the ‘old-world’ and ‘non-sustainable’ buckets. In the non-sustainable categories, even the leaders will face terminal growth challenge. Thus, while during 2010-2020 it was sufficient to zero down the market leaders, now it is the ‘right-category’ first and then the market leader approach that may succeed. 

The author is senior VP and fund manager (Equity), Kotak Mahindra Asset Management Company

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