India’s Changed — and Changing — Equity Markets
Key findings
- We segmented the Indian equity market into established firms, newly investable firms and recent listings to study patterns in factor, thematic and industry exposures.
- Established firms, mostly multinationals, were generally more profitable, while newer firms were more domestically oriented. Recent listings, primarily digital and fintech, had the highest growth prospects and the highest valuations.
- The value of buyout and venture-backed firms has increased substantially since 2020, creating a pipeline of potential new public listings. Venture firms tended to be in consumer services like the newer entrants in the public markets.
At the beginning of 2024, we flagged the Indian equity market as a key indicator of the global power shifts observed after the COVID-19 pandemic. Since 2020, holders of Indian equities have benefited as India's weight in the MSCI Emerging Markets Investable Market Index (IMI) has grown, hitting a historical high of 20% at the end of June.
In those four years, over 300 companies have joined the MSCI India IMI, adding substantial diversity. We found that the newest joiners' industry, thematic and factor profile differs from incumbent, established index constituents. To gauge how the equity market may change in the future, we also analyzed the pipeline of private firms that may publicly list in the years to come. Our findings have implications for investors as they assess the market's increasing breadth and weight in emerging markets.
Three distinct segments: core, new access and new offering
We divided the MSCI India IMI into three groups: core, new access and new offering. Core comprises the index's constituents before 2020. These firms represented over three-quarters of the country's free-float capitalization as of June 28, 2024. New access includes established public companies that became accessible to global investors after 2020. New offering includes new public listings since 2020. It accounted for about 20% of the market by number, but just under 7% by capitalization.
Over half of the MSCI India IMI's constituents joined since 2020
Data as of June 28, 2024.
Higher-quality, lower-growth index core ringed by energetic upstarts
A range of industry, thematic and fundamental factor exposures highlight the heterogeneity of the three constituent groups we studied. Core, which includes conglomerates such as Reliance Industries Ltd., was tilted toward established industries including software, energy and autos. Most were large multinationals, whereas firms in the new-access and new-offering groups generated a greater proportion of their revenues from domestic sources. Core firms were typically more profitable and of higher quality than firms in the other two categories.
Core firms were less risky and more international
Factor exposures are standardized z-scores as of June 28, 2024, based on the MSCI India Equity Risk Model. Bold indicates those factors with the greatest differences across the three market groups. A higher value to foreign sensitivity indicates firms with a larger fraction of foreign assets and sales.
In contrast, new access, which includes entities such as HDFC Bank Ltd., was concentrated in financials, especially regional banks, and industrials, such as building products. Firms in this group often had richer valuations and lower profitability than core firms.[1]
Newer firms were focused more on financial and consumer services
Industry weights are absolute for each group and are as of June 28, 2024. Weights do not sum to 100% for each group because we only display sub-industries with the widest variation in weights. Bold indicates those sub-industries with the greatest differences across the three market groups. Weights are based on the Global Industrial Classification Standard (GICS®). GICS is the global industry classification standard jointly developed by MSCI and S&P Global Market Intelligence.
New offering, composed of upstarts such as Zomato and Jio Financial Services Ltd., was heavily tilted toward financial services, such as payment processors, and consumer services, such as restaurants and leisure. Firms in this group had the greatest exposure to digital and fintech businesses, based on the MSCI Thematic Exposure Standard, and carried the highest valuations and growth expectations among Indian equities. As the name suggests, this group is likely to be responsible for much of the future expansion of India's equity market.[2]
Upstarts heavily oriented to the digital economy and innovation
Relevance scores are as of June 28, 2024, and based on the MSCI Thematic Exposure Standard. Only themes with the widest variation are displayed. Bold indicates those themes with the greatest differences across the three market groups.
Private markets hint at pipeline of venture-backed services firms
Looking ahead, what changes might occur in the factor, thematic and industry exposure patterns we have identified? To seek a fact-based assessment, we used the MSCI private-capital data universe to profile potential new market entrants.
Indian private markets have boomed over the past decade, similar in scale to the growth its public markets have experienced. The net asset value (NAV) of buyout and venture capital (VC) funds has grown fourfold and fivefold, respectively, from 2014 through 2023.
The growth in buyouts was largely driven by a post-pandemic surge in communications services.[3] In contrast, the growth in VC funds, which had an NAV of nearly USD 40 billion at year-end 2023,[4] was primarily in technology, particularly the software industry. Prior to 2020, VC funds were underweight that sector. When measured by market value, technology accounted for a quarter of Indian venture-backed companies, twice the weight of technology in public equities.
Compared to India's public equities, VC has offered more exposure to the consumer-discretionary sector, especially services.[5] Internationally, VC sector exposures have tilted toward technology, health care and communications, making the Indian market distinct in this regard. If new-offering firms thrive, it could be an encouraging signal for more primary issuance and exit opportunities for venture-backed firms.
Recent growth in buyouts and VC were driven by different sectors
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Data period from January 2006 through December 2023. Private-company weights are for Indian equities only and are relative to the MSCI India IMI. They are based on the portfolio company holdings of the MSCI private-capital data universe. Only sectors with the widest variation are displayed.
Future entrants could alter the market's profile
India's public equity market features a core of established, higher-quality firms. On its periphery are firms that have only recently become accessible to international investors and others that are newly listed, the latter heavily composed of digital innovators. Our analysis of private companies suggests that the pipeline of technology and consumer-services firms could change the makeup of the public market if past IPO trends continue. Understanding how Indian equities have changed over the last four years, and may change in future, could be imperative for global investors.
1 Valuations are relative to the Indian equity market. Relative to other countries, India had the highest trailing price-to-earnings ratio among major countries, both developed and emerging, as of June 28, 2024.2 Initial public offerings (IPOs) in India have risen since 2020. According to the World Federation of Exchanges, India had 241 IPOs in 2023.3 Chinese private markets experienced a similar spike in communications services starting in 2020, although the upswell was concentrated in VC rather than buyouts.4 By comparison, the approximate full-float capitalization of the new-offering group was just over USD 200 billion as of year-end 2023.5 Consumer-discretionary stocks composed 13% of the MSCI India IMI as of June 28, 2024.
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