>EQUITY STRATEGY: The 100 Billion Dollar Club.

The 100 Billion Dollar Club. We analyze Indian companies and their attributes such as (1) IPR (brand and technology), (2) financial and industrial assets and (3) natural resources that can propel them to US$100 bn market capitalization over a period of time. We also look at global experience to draw conclusions for India; every decade throws up new and interesting names. Finally, we assess operating factors that are required to achieve and sustain US$100 bn market capitalization.

■ Asset-based companies: A few banks can and will get there Other than financial services companies, we are skeptical of any other asset-based company entering the US$100 bn league from India. Asset-based companies require constant reinvestment to grow and return on invested capital is not high enough in ‘mature’ businesses to create meaningful value. Most will trade at and around book value.

■ IPR-based companies: A rarity in India and will likely remain so Infosys and TCS can make it to the US$100 bn league on a 15-16% CAGR in earnings up to FY2021E and 14-15X P/E multiple. However, their headcount-led services business could face issues of (1) scalability, (2) manpower and (3) margin pressure. We don’t see circumstances changing meaningfully in India for creation of large IPR-based companies.

■ Resource-based companies: Few candidates but right policies critical RIL and ONGC are obvious candidates to get to US$100 bn market capitalization fairly quickly. For RIL, the migration to a resource-based company from an asset-based cyclical play would be critical. RIL’s ROIC has not been very high historically and has been supported by favorable fiscal incentives. For ONGC, a combination of (1) favorable government policies on pricing and (2) volume growth from domestic fields (its R/P and RRR are quite high and lend credibility) and judicious overseas acquisitions could drive its market capitalization to the coveted mark.

■ Global experience: Banks, IPR, natural resource plays dominate the league BFSI companies (23), IPR companies (16) and natural resources companies (23) dominate the top-100 global market capitalization companies currently. This list has changed dramatically in every decade. Not only have the companies in the top-100 list changed over the past three decades with (1) new companies from previously closed economies getting listed and (2) assetbacked industrial companies losing prominence, even sectors in the top-100 list have changed over the past few decades with the emergence of the IT/media era.

To read the full report: EQUITY STRATEGY