NOT Reliance or TCS...This could be India's First Trillion Dollar Stock

Recently, India surpassed UK to become the fifth largest economy in the world and the International Monetary Fund estimates India would be a $3.5 trillion economy at the end of 2022.

While we celebrate this milestone, it is nothing short of surreal that on the other hand, the market cap of Apple Inc crossed $3 trillion in January this year!

The stock has corrected since but even at the current prices, the market cap stands just above $2.5 trillion.

Imagine that for a moment- the market cap of a single company is over 70% of our entire economy!

Apple's peers aren't far behind. Microsoft is worth about $1.9 trillion; Amazon has about a $1.3 market cap and Google's market valuation is just shy of $1.4 trillion.

While historically, this exclusive club of trillion-dollar market cap companies has been dominated by companies from the US, a significant shift is expected in the future, particularly from China and India as a new world order emerges.

Interestingly, Apple was not the first one to cross this milestone; the honour goes to Petro-China, which achieved the feat in 2007. However, it was short lived and its market cap has gone down by 80% since then.

It is widely believed by experts that India would become a $5 trillion economy by 2026-27 and $10 trillion by 2033-34.

What does that mean for the stock market, you wonder?

Looking back at the historical market cap to GDP ratio data, we can determine the average long-term ratio stands at around 80%

This means that if the Indian economy would grow as expected to $10 trillion by 2034, the total stock market capitalisation should also grow approximately to $8 trillion, i.e. over 2.5x from current levels.

India's Market Capitalization: % of GDP - Historical Data

And with the overall market capitalisation of the Indian stock market set to increase, it is only a matter of time before India too joins the elite club of trillion-dollar market cap stocks.

If you ask a stock market investor today, which Indian company would be the first to touch the $1 trillion market, the obvious answer would be either Reliance Industries or Tata Consultancy Services (TCS).

And there is nothing wrong with this answer either, as these two are India's most valuable companies with long standing records of creating wealth for their shareholders.

Over the last few years, these companies have topped the list consecutively with no other company remotely close to challenge them.

Currently, Reliance Industries leads with the highest market cap of $219 billion and TCS follows distantly behind with a valuation of $144 billion.

But what if I told you that there is a strong possibility of another company that could steal the show and win the coveted crown instead, leaving Reliance and TCS far behind...

Why Reliance Industries may NOT become a 'Trillion Dollar Stock'

In his two decades at the helm, Mukesh Ambani has transformed Reliance Industries and the company's diversification has gone into overdrive over the past six years.

Since 2016, Reliance's market value has more than quadrupled, making it India's most valuable company.

Primarily, retail, telecom and new energy segments account for the company's largest sectoral investments.

However, at 65 years of age, Ambani like a generation of aging tycoons across the world is grappling with the transition from creating wealth to passing it on.

After all, Ambani is well aware of the risks posed by succession, given the travails of prominent families elsewhere including his own.

Having gone through a bitter years-long battle for control of Reliance Industries with his younger brother Anil, Mukesh Ambani definitely wouldn't like to have a repeat of the same saga playing out amongst his three children.

At Reliance's 45^th AGM last month, Ambani laid bare his succession plan, identifying son Akash for digital services, daughter Isha for retail leadership and youngest son Anant for new energy unit.

While no specific timelines for a listing of the company's retail and digital services businesses were indicated, it is widely expected by market participants that both businesses will be listed separately within the next few years.

But while the future looks very promising for the Reliance group, here is where it gets interesting...

This also means that the fastest growing revenue contributors are going to be split into separate entities, amongst the three siblings.

Retail and digital services already contributed to 24.5% and 12.3% of total revenues respectively for the financial year ended in March 2022. That's almost 37% of the company's overall top line.

In the AGM, Ambani also highlighted that he expected retail to soon become the largest top line contributor to the Reliance group in the future.

If we were to take retail and digital out of the equation, we are left with the once dominant oil to chemicals business.

And that alone is unlikely to propel Reliance Industries towards a stock market valuation of $1 trillion dollars.

Why TCS might NOT be the first Indian 'Trillion Dollar Stock'

In 2018, Tata Consultancy Services (TCS) became the first Indian IT company to breach the $100 billion market cap barrier and since then continues to maintain its position as the second most valued Indian company on the bourses with a valuation just short of $150 billion.

This is a phenomenal achievement for a company listed only in 2004. If one had invested in one TCS share at the issue price of Rs 850 in the IPO in 2004, the value of that investment today over 18 years would be around Rs 27,000, a return of almost 3,000% on their investment.

Back then, the environment was very conducive for such growth. A global market was available, entry barriers were limited as it was primarily a services game and opportunities were still nascent. And the company with its highly skilled management utilised the opportunity to the maximum.

But that was then... One has to remember that the golden years of IT growth is a thing of the past as disruptions have gone up significantly and so has competition.

Earlier this year, TCS- the largest information technology services provider in India and the second-largest globally set a goal of $50 billion in revenue by 2030.

Interestingly, the growth required to reach this goal is lower than the company's own standards. TCS will need to grow at a CAGR of 8.9% over the next eight years to achieve its goal.

It seems the company acknowledges that it has now reached a scale in which consistent high growth is getting tougher.

And the numbers seem to corroborate this-

In the first 10 years of its listing, the CAGR for the stock was 27.8%. Over the last 10 years, the CAGR has declined to 16% and if we were to look at the last three years data, it has dropped even lower to 13%.

Similarly, the compounded sales growth for a 3-year period is at just 9% as compared to 15% over a 10-year period.

Hence, assuming a CAGR for the stock under 10%, it would probably take about 20 years for TCS to reach a trillion-dollar valuation.

Of course, this is a crude way to determine a company's valuations, but yet it looks highly unlikely that the company's market cap could increase from $145 billion to $1 trillion, i.e. 7x within a short span of time.

Hence, although TCS will continue to remain amongst the most valued companies in India, it might not just be the first one to get to the trillion-dollar mark.

This Could Potentially be the First 'Trillion Dollar' Stock of India

4^th April, 2022 - Do you remember what happened on that day?

Well, let me jog your memory- India's largest housing finance company, HDFC Ltd announced that it will merge with the country's largest private lender HDFC Bank to create a financial services conglomerate.

This is the biggest merger in the history of India Inc, and the combined market capitalisation will enable HDFC Bank to overtake TCS and become No. 2 in valuation after Reliance Industries Ltd.

At current prices, the market cap of HDFC bank and HDFC Ltd stand at $103 billion and $55 billion and at no. 3 and no. 8 respectively on the list of companies with highest market capitalization in India.

The merger is a coming together of equals. There will be enormous synergies between the two entities including but not limited to reduction in cost of funding, cross selling opportunities, etc. which will increase the future earning potential of the combined entity.

For HDFC, the biggest gain will be access to well diversified low-cost funding and a huge base of 68 million customers of HDFC bank.

On the other hand, the merger will enable HDFC Bank to build its housing loan portfolio. The housing loan market is at the cusp of a strong up-cycle along with tailwinds for the real estate sector.

HDFC Bank has access to funds at lower costs due to its high level of current and savings accounts deposits. With the merger, HDFC Bank will be able to offer more competitive housing products.

The Pradhan Mantri Awas Yojana or "Housing for All" has been a boon for the housing finance sectors.

The rise in Housing for All-led construction activity along with rising income levels continues to boost mortgage demand in India.

India has a very low mortgage penetration rate of just 10% as compared to 56% in Singapore and 68% in US.

Hence, it implies that housing loans in India will have an exponential growth trajectory for decades to come.

In a recent note to shareholders, Deepak Parekh, the chairman of HDFC Ltd wrote that he expects India to double its home loans to around $600 billion by 2027.

Hence, experts see huge growth potential in housing for the company, especially now that its borrowing costs would be lower post the merger.

HDFC Bank already had a huge opportunity with the under-penetration of banking services in the country.

India's retail loans-to-GDP ratio stands at mere 13%, whereas the same for the US stands at 76%, and for the UK, at 88%.

With the Modi led government rolling out multiple programs for uplifting the poor, there has been a considerable widening and deepening of the Indian financial system and the banking sector is at the cusp of a new dawn.

Banking, Infrastructure and Housing are expected to be the key drivers of India's GDP over the next decade as it forges ahead towards becoming the third largest economy in the world.

And there is no other organization better placed than HDFC bank after the merger to capitalise on this opportunity as it will be able to cater to all three of these important segments.

Along with housing and banking, the resulting larger balance sheet post the merger would also allow underwriting of large ticket infrastructure loans in leading corporates and drive HDFC Bank to power the country's infrastructure sector.

Post the merger, HDFC Bank will be in a different league as the combined entity will be a ?18 lakh crore (loan book) behemoth.

Sashidhar Jagdishan, Managing Director, HDFC Bank expects a huge uptick in cross-selling of opportunities as 70% of HDFC Ltd customers do not deal with HDFC bank.

Home loan customers typically keep deposits that are 5 to 7 times those of other retail customers.

This gives us an idea about the size of the opportunity as the bank can easily bundle its other offerings with a home loan.

Generally with home loans, there is a propensity for a customer to take new consumer durables as well. Hence, this kind of bundling will not only increase business but also result in a significant increase in margins for the bank.

"From our 68 million customer base, 5 million customers have taken housing loans from other banks. That itself is Rs 15 lakh crore...! Just imagine, if I start penetrating that, I can create another HDFC Bank," says Jagdishan.

And that's literally the plan! The bank plans to nearly double its network in the next three to five years by opening 1,500 to 2,000 branches every year.

We believe that the runway is huge, and we can potentially add an HDFC Bank every five years, Jagdishan said in the bank's latest annual report.

Since 1995, HDFC Bank has delivered sustainable business growth with over 22% CAGR coupled with prudent asset quality across cycles.With the merger advancing ahead, HDFC Bank aims to double its balance sheet in the next five years, exhibiting growth of 15% CAGR.

If we do a rudimentary calculation based on this, there is a strong possibility that HDFC Bank could be the first company to cross the trillion-dollar market cap threshold along with the Indian economy crossing the $10 trillion dollar mark in 2033-34.

HDFC Bank has always been a cut above its competition, but the merger with HDFC Ltd will launch it into a different orbit.

This would have been unthinkable even 5 years back, but if HDFC Bank is able to seize the huge opportunity that lies before it, a $1 trillion Indian company in the next decade might not just be a pipe dream...

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