The five MAMAA stocks – Meta, Alphabet, Microsoft, Apple and Amazon – account for 22% of the market capitalization of the S&P500. This dominance of mega-corporations in market capitalization is a major trend in mature economies, and this trend is also spreading in emerging markets like India.
A structural change in the Indian economy, which has gained momentum over the past decade, is the formalization of the economy. Reforms such as the GST have hit the informal sector hard. The informal sector, which has thrived on tax arbitrage, is struggling in a highly competitive business environment. The inevitable consequence of this transition is the formalization of the economy. The formal sector regularly gains market share at the expense of the informal sector.
Consequently, the big ones are getting bigger, with increasing market and profit share.
In 1991, when India began to liberalize its economy, the top 20 companies accounted for about 14% of India Inc.’s net profit. This figure is constantly increasing. It rose to 52% in 2010, and now in 2022, the top 20 mega-corporations account for about 75% of India Inc’s net profit. But it is important to note that many highly profitable companies lag behind market capitalization. This discrepancy between earnings and market capitalization is significant.


What happens when fat people get bigger?
The dominance of mega-corporations is a global trend, which can be seen in mature market economies like the United States and Japan and in emerging economies like South Korea. These mega-companies have access to cheaper capital, superior human resources and the latest cutting-edge technologies, which will enable them to grow and strengthen.
In addition, their enormous resources allow them to withstand shocks much better than others. Therefore, most of these highly profitable blue chips should continue to do well.

Why the disconnect between earnings and market cap?
Interestingly, many companies in the Top 20 by earnings do not find a place in the Top 20 by market capitalization. More importantly, many companies that are not in the top 20 by earnings find a place in the top 20 by market capitalization. This is important because market capitalization largely indicates market perception.
A major disconnect between earnings and market capitalization can be seen in the case of Adani shares. Gautam Adani has proven expertise in executing major infrastructure projects, but the stratospheric valuations of Adani’s shares are cause for concern.

PSU majors like and , while highly profitable, are not highly valued as they are perceived by the market to be part of declining industries that only deserve a lower valuation multiple.
Moreover, these giants had never been wealth creators for investors. nor are they viewed by the market as potential wealth creators. , , and are cyclical commodity stocks. SBI, although India’s largest bank, also does not have a track record of wealth creation, unlike some private sector majors. But he is doing extremely well now.
The Bajaj twins, , and IT majors have an enviable track record of building incredible wealth that justifies their high valuation multiples and market capitalization.
The crux of the argument is that more than current profits, it is profit potential and the market’s perception of these companies’ potential to create wealth that determine stock prices and returns for investors. Since Nifty’s churn will only increase in the future, potential Top 20 entrants should be watched closely.
Dr. VK Vijayakumar is Chief Investment Strategist at