$1 trillion m-cap stock: HDFC Bank, RIL or Bajaj Finance? It may emerge by 2032, says ICICI Securities

ICICI Securities in its latest strategy note said it expects India's first trillion dollar company by market capitalisation (m-cap) to emerge by 2032. The domestic brokerage said it is likely that 30-40 stocks with $100 billion size may exist in 2032, based on the historical average number of companies with m-cap greater than a-tenth of the most-valued company's m-cap.

HDFC Bank Ltd is the most likely stock with a hurdle rate of 25.5 per cent, the brokerage said adding that Reliance Industries Ltd (RIL) could make it if its profit growth trajectory jumps up to 21 per cent. ICICI Securities said Bajaj Finance Ltd will need to maintain its past growth rate of 35-40 per cent over the next decade to reach $1 trillion m-cap.

"HDFC Bank’s hurdle rate of 25.5 per cent against its historical profit growth trajectory of 20 per cent makes the stock a prime contender with scope for valuation re-rating. RIL could make it if its longer- term profit growth trajectory jumps to 21 per cent. Bajaj Finance will need to maintain its past growth rate of 35-40 per cent over the next decade to reach the $1 trillion m-cap mark, assuming no P/E re-rating," it said.

The brokerage noted that the highest m-cap for any stock in 2001 stood at $10 billion, before scaling up to reach $100 billion by 2007 under the influence of a bull market driven by a notable lift in the corporate profit cycle – expressed in terms of an all-time high profit after tax-to-GDP ratio of 7 per cent.

"Consequently, the m-cap to GDP ratio hit the all-time high of 160 per cent. Surprisingly, the peak P/E ratio of the market, although high, was not outlandish at 21 times in 2007,thereby showcasing the illusory nature of point in time P/E ratios and the fundamental groundings of CAPE ratio (cyclically adjusted P/E ratio). CAPE during 2007 peak stood at an outlandish 35 times as compared to a point in time forward P/E of 20 times," it noted.

The macro framework, it said, is based on the assumption of reaching peak corporate profitability (7 per cent profit to GDP ratio) in the listed space, driven by gradual advancement towards peak GDP growth of 9 per cent.

Other key assumptions include – ratio of the largest stock’s mcap to aggregate m-cap sustaining at long-term average of 5-6 per cent and no re-rating in P/E ratios from current levels. "Micro-level verification is done by screening stocks that have exhibited historical PAT growths in the vicinity of the hurdle rate required to reach a $1 trillion m-cap by 2032, assuming no P/E re-rating," ICICI Securities said.

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