Large-Caps: Providing An Emerging Opportunity

At a time when the markets are down and volatility is the name of the game, the Small-Cap index has already gone into a correction mode, the Mid-Cap index is inching towards 20 per cent correction, while the Large-Cap-dedicated Nifty 50 has shown resilience and arrested its fall to around 13 per cent. Even the year-to-date (YTD) performance of these indices shows that the large-cap index represented by Nifty 100 has fallen less compared to the broader indices. The article highlights why investors must presently focus on large-cap stocks to keep their investment plan on steady ground [EasyDNNnews:PaidContentStart]

Over the past six months, there has been a dramatic shift in the performance of the Indian equity market. From being among the leaders of the world’s equity markets, it has become a laggard. The Indian equity market has witnessed a sharp turn of performance. The dream run of the broader market came to a screeching halt sometime at the end of September 2024. After witnessing a return in excess of 25 per cent in the preceding year, these indices have generated negative return over the past six months. This has been so even on a year-to-date (YTD) basis as of March 12, 2025. So far, the going had been very smooth for investors. However, the confluence of various factors, including higher valuation, slowing down of the earnings and relentless selling of equities by FIIs has led to heightened volatility, which has now rocked the boat. 

Performance of Large-Cap, Mid-Cap and Small-CapDedicated Indices Since October 2024 

What is clear from the above graph is that though the small-cap index has already gone into a correction mode, the mid-cap index is inching towards 20 per cent correction while the large-cap-dedicated Nifty 50 has shown resilience and arrested its fall to around 13 per cent. Even the year-to-date (YTD) performance of these indices shows that the large-cap index represented by Nifty 100 has fallen less compared to the broader indices. The Nifty Small-Cap index has been the worst hit, declining by 20.63 per cent, followed by the Nifty Mid-Cap index, which has dropped 15.86 per cent. 

In comparison, the Nifty 100, which represents large-cap stocks, has shown more resilience, falling by 6.77 per cent. This trend clearly shows that smaller and mid-sized companies have faced greater volatility and selling pressure compared to their larger counterparts, mainly due to risk aversion among the investors in uncertain market conditions. 

Investing in volatile times requires patience and the right strategy. Traditionally, large-cap stocks perform better than mid-cap and small-cap stocks during market turbulence. This is because larger companies are more stable and well-established, making them a safer choice for investors. There are various other factors that may contribute to this shift. Primarily, large-cap companies often possess stronger balance-sheets, greater access to capital and more diversified revenue streams, which can provide a cushion against volatile times. Additionally, during periods of uncertainty, investors tend to flock to perceived safer assets, and large-cap stocks often fit this bill. 

Furthermore, the recent outperformance of large-cap stocks could also reflect the changing market dynamics and investor sentiment. As economic conditions evolve and global factors come into play, investors may reassess their risk appetite and gravitate towards more established, blue-chip companies. This is clearly visible in the current situation where large-cap stocks are making a comeback after few years of underperformance. This could be a good time for investors to rethink their exposure to large-cap stocks. 

Returns History: Understanding LargeCap Performance Through Time

To gain deeper insights into the relative return performance of large-cap stocks, we conducted a historical analysis spanning back to the start of the millennium. This analysis is based on the rolling returns of large-cap stocks, represented by the Nifty 50 index. By studying rolling returns, investors can capture return trends over different timeframes rather than relying on point-to-point returns, which may be affected by short-term market volatility. Such an approach provides a more comprehensive understanding of how large-cap stocks have performed across multiple market cycles, including bull and bear phases. 

Rolling return analysis is particularly useful for identifying long-term investment trends, assessing volatility, and comparing current returns to the historical averages. It helps investors gauge whether the current market conditions are favourable or if the returns are lagging relative to the historical benchmarks. Additionally, this method minimises the impact of extreme market events and offers a more balanced view of an index’s performance over time. 

The accompanying chart illustrates the historical three-year annualised rolling returns of the Nifty 50 index. Observing these trends, we note that the current three-year annualised return of 11.41 per cent is below the historical median of 12.37 per cent. This suggests that while the returns remain positive, they are slightly subdued compared to long-term averages. Several factors could contribute to this underperformance, including global economic uncertainties, changing interest rate policies, geopolitical risks, and domestic market cycles. Nonetheless, these are the times when you should start considering adding such stocks to your portfolio. 

We further researched into the details of the three-year rolling returns, and the following table gives a glimpse of the returns. 

The statistical analysis of Nifty’s three-year rolling returns gives further valuable insights into historical performance, volatility, and current trends. Over the 5,512 rolling periods analysed, the mean return stands at 14.40 per cent, serving as a benchmark for evaluating the current performance. The standard deviation of 11.84 per cent highlights the level of volatility, indicating the extent of return fluctuations over time. The observed minimum return of -16.57 per cent reflects the worst-case scenario, while the maximum return of 58.88 per cent marks the highest recorded gain in the dataset. 

Examining the distribution further, quartile 1 (7.40 per cent), median (12.37 per cent), and quartile 3 (18.31 per cent) provide a more detailed view of how the returns are spread, with 50 per cent of the observations lying between 7.40 per cent and 18.31 per cent. Notably, the current return of 11.41 per cent is below the historical mean, indicating a period of relatively subdued performance. Positioned closer to the 25th percentile than the 75th, the current return suggests that Nifty is experiencing a moderate phase within its historical performance range. Given the inherent market volatility, there remains potential for either a recovery towards the mean or further movement below its long-term average. 

Valuation of Large-Caps

To determine whether it will decline further or rebound toward the mean, we will analyse the index’s valuation and compare it with the historical data to assess its current positioning. The chart below depicts the journey of the PE ratio of Nifty 50 since the year 2000. It clearly shows that the valuation of large-caps represented by Nifty 50 is below its long-term average. 

The following chart shows the movement of another valuation metric of price-to-book (PB) value ratio of Nifty 50 since the year 2000. Even this valuation ratio shows that the large-cap stocks on an average are trading below the long-term mean. 

It clearly shows that the current valuations of large-cap stocks is below its historical averages, and it is imperative to note that they remain well within reasonable boundaries. The current price-to-earnings (PE) ratio of 19.97 and a price-to-book value (PBV) ratio of 3.34 indicate that both are below their respective means. This suggests that the valuations may appear below the means and are not very attractive for now. The following table shows the important statistics of PE and PB of Nifty 50: 

How the Current Valuation Predicts Future Returns 

Further, we tried to predict the future three-year return of the Nifty 50 index based on historical relationships between PE and PB ratios, and the subsequent market performance. We considered data from the start of the year 2000. The next step involved calculating the three-year forward return of Nifty 50 by measuring the percentage change in the index value over a three-year period, effectively allowing us to analyse how different valuation levels have impacted returns in the past. 

To make this analysis more structured, the PE and PB values are categorised into predefined ranges (bins), and the historical average returns for each range are computed. This helps in understanding typical market behaviour when the index trades at a certain PE or PB level. The code then extracts the latest available PE and PB values, determines which predefined range they fall into, and looks up the corresponding average historical return for those ranges. In cases where valid historical data exists for the latest PE and PB levels, we have calculated the median of the predicted returns from both the metrics to provide a final estimated return. 

The goal of this analysis is to use historical patterns to estimate future market returns, assuming that valuation levels play a key role in influencing long-term performance. While this approach provides a data-driven estimate, it is important to note that market conditions evolve and external factors such as macroeconomic trends, interest rates, and geopolitical events can significantly impact the returns. Despite these limitations, this model helps investors assess whether the market is currently overvalued, undervalued, or fairly priced based on the past trends, thereby aiding in investment decision-making. 

The following chart shows how different PB and PE levels have generated returns in three years. 

The PE chart does not show a neat downward slope of future returns as shown in PB because of several confounding factors. The relationship between PE ratios and future returns can break down in unusual market environments. If the analysis period had coincided with a strong bull market or a post-recession rebound, high PE stocks may have still delivered robust returns. For example, after the 2008–09 financial crisis and the 2020 pandemic shock, earnings (the ‘E’) temporarily collapsed even as the prices recovered, causing very high PE ratios that were followed by strong market gains. 

Also, a bullish or extraordinary market period can override valuation effects, sector and growth dynamics, which can favour high-PE stocks. Furthermore, supportive macroeconomic conditions make it hard to draw a straight line correlation. All these factors together explain why a simple ‘higher PE = lower future return’ pattern didn’t hold in the analysed sample, reminding us that valuation metrics are just one piece of a complex puzzle when predicting stock performance. In short, unique conditions like rapid earnings’ recoveries or exuberant bull runs can lead to high valuations without low future returns, obscuring the expected downward trend in performance as PE rises. 

If we look at the PE ratio (PER) of the individual constituents of the Nifty 50, we find that between September 2024 and March 2025, the valuation of Nifty stocks has undergone a significant shift. In September 2024, 42 per cent of Nifty stocks had a PER more than +1 standard deviation (SD), indicating a high valuation. However, by March 2025, this percentage had dropped to 14 per cent, suggesting a decline in highly valued stocks. 

Conversely, the proportion of stocks with a PER less than -1 SD increased from 4 per cent in September 2024 to 16 per cent in March 2025, reflecting a growing number of undervalued stocks. Additionally, stocks in the PER more than -1 SD but less than the mean category increased from 26 per cent to 42 per cent, highlighting a shift toward more moderate valuations. This trend suggests that the overall market valuations have become more balanced, with fewer overvalued stocks and a greater concentration of stocks trading near or below their historical mean. 
 

Sectors in the Limelight

The Nifty 100 index representing large-caps has fallen by 14.66 per cent from 26,885.25 (October 1, 2024) to 22,942.70 (March 11, 2025). We have tried to understand which sectors that form part of Nifty 100 have shown resilience. Here’s a comparison and reasons why stocks in certain sectors might be considered: 

1. Nifty Financial Services: This index fell by 5.21 per cent, significantly less than the Nifty 100. Financial services, including banks and non-banking financial companies (NBFCs), are preferred in a falling interest rate scenario. The relatively lower decline could be due to their essential role in the financial system and the potential for recovery in economic downturns.

2. Nifty Private Banks: Although it fell by 10.02 per cent, this is still less than the Nifty 100’s decline. Private banks are generally seen as more resilient due to better asset quality and management compared to public sector banks. Their ability to adapt to changing market conditions and maintain profitability makes them attractive.

3. Nifty Metal, Nifty Pharma and Nifty Healthcare: These sectors have experienced lower declines, with Nifty Metal down by 12.97 per cent, Nifty Pharma by 12.72 per cent, and Nifty Healthcare by 11.60 per cent. These sectors are showing sign of resilience in volatile and regulatory changes. 

In summary, sectors like financial services and private banks are attractive due to their stability, while PSU banks and cyclical sectors like metal, pharmaceuticals and healthcare offer potential for value investing or long-term growth. 

Reasons for Investing in Indian LargeCap Stocks in March 2025 

India’s large-cap stocks currently offer a mix of stability and growth. With GDP growth holding steady at 6-7 per cent, controlled inflation (~4-5 per cent), and policy continuity post-elections, including infrastructure spending and rate cut, large-cap stocks are primed to benefit. Valuations remain favourable now, offering a margin of safety amid global uncertainties like recession risks in the U.S. While risks like geopolitical tensions or oil price spikes persist, large-caps remain strategic picks for balancing stability with India’s structural growth story.
 

Methodology 

To come up with a list of performing large-cap stocks, we took into consideration five crucial parameters. The first includes market capitalization. The second, third and fourth parameters obtained from the Profit & Loss Account include Sales, Operating Profit and Net Profit. We have also taken into consideration the efficiency of the companies by analyzing profit margins. Lastly, we factored in the returns earned by investors by means of dividends. This is because we want investor-friendly companies to be featured on our list. Each parameter was then ranked by awarding it a carefully determined weightage based on its significance. We then segregated the companies into two categories as follows: 

Turnaround Performance: These companies include those that successfully managed to turnaround the losses incurred in FY23 into profits in FY24. 

Thriving Companies: This list includes all those companies that have seen their profits increasing on yearly basis for FY24. 

All the raw financial data is sourced from Ace Equity and price-related information is as of March 13, 2025.


Financial Snapshot Thriving Companies

Click here to download PDF of LargeCapdata

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