Despite many large-cap stocks trading at attractive valuations and offering substantial potential upside, investors are largely overlooking them. Kotak Institutional Equities highlights this significant value, attributing the market's current behavior to a shift towards momentum investing, often termed the "greater fool theory," at the expense of traditional value investing.
The "Greater Fool Theory" in Play
Kotak's strategy note explains that investor apathy towards fundamentally strong large-cap companies stems from two main factors: the market's drive for "perfect" timing in relative net asset value (NAV) games, and a widespread adoption of momentum-driven strategies. This approach prioritizes buying assets in hopes of selling them at a higher price to an "even greater fool," rather than focusing on intrinsic value.
This dynamic means that even without a macroeconomic crisis, valuable companies may languish as capital flows into more speculative, rapidly appreciating assets, often in the mid-cap segment.
Case Studies: HDFC Bank, ITC, and ONGC
HDFC Bank Ltd.
Kotak points out that HDFC Bank, a financial sector giant, trades at multiples typically associated with ex-growth companies. This is despite the bank consistently delivering robust earnings per share (EPS) growth, with a 10% compounded annual growth rate (CAGR) projected for FY2024-26 and an anticipated 12% EPS CAGR from FY2026-2029. Furthermore, the bank is expected to maintain a healthy return on equity (RoE) of 15.1% over FY2024-26, followed by 14.2% for FY2026-29, even amidst various internal and external challenges.
ITC Ltd.
The diversified conglomerate ITC also presents a similar picture of undervaluation. According to Kotak, adjusting for the value of its non-tobacco FMCG businesses, other ventures, and cash, the company's core tobacco business trades at a mere 10.4 times its one-year forward EPS. This valuation stands in stark contrast to its diversified business portfolio and market leadership.
ONGC Ltd.
Oil and Natural Gas Corporation (ONGC) exemplifies extreme investor apathy. Despite a significant 70% surge in crude oil prices over recent weeks, ONGC's stock remains 17% below its pre-war levels. The government has also refrained from altering the pricing or taxation regime for upstream oil and gas production, alleviating fears of windfall taxes. Remarkably, its much smaller mid-cap counterpart, Oil India, has seen a 13% rise in the past month, while ONGC declined by 3% over the same period, underscoring the acute preference for mid-cap stocks over large-caps.
Implications for Investors
This market behavior suggests a disconnect between fundamental value and stock performance, particularly in the large-cap segment. For patient investors, Kotak Institutional Equities sees this as a "serendipitous development," presenting opportunities in overlooked, undervalued large-cap stocks that offer significant potential for long-term appreciation.