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Market Price Vs Market Capitilisation

Monday, September 10, 2018
By Clifton Desilva

Clifton Desilva, Director, Altina Securities

Here is a classic case of two companies with humble beginnings in the form of Reliance Industries and MRF both leaders in their respective fields as well as record creators on the Indian Stock market one as the most expensive stock in terms of market price and the other as the most valuable company in terms of market capitalization.

MRF was set up by Mamen Mappilia along with his wife in the backyard of his house and commenced the manufacture of balloons in Chennai. After having received Rs 14,000 from his family, Mamen went around selling balloons and soon thereafter diversified into manufacturing of contraceptives toys and gloves. By 1952 MRF began manufacturing tread rubber. As the industry was still in a nascent stage in India MRF emerged as a leader in tread rubber. Today the company has eight manufacturing facilities across India and exports to over 65 countries positing a revenue of Rs 15600 core with a net profit of Rs. 1131 crore and has cemented its position as a market leader largely through dominance in the motor cycle and car segment controlling 20% of the Indian tyre industry.

In the year 1961 the company went public and has the distinction of not issuing bonus shares or a stock split since inception.

As MRF had humble beginnings and has grown to emerge as the largest tyre manufacture in the country so is the case with Reliance Industries which also had humble beginnings. The company was co founded by Dhirubhai Ambani and Champkalal Damani as Reliance Commercial Corporation in 1960 a year before MRF went public. In 1965 the partnership ended and Dhirubhai continued the polyester business of the firm. In the year 1966 Reliance Textile Industries was incorporated. In the year 1977 the company went public and the issue was oversubscribed seven times. For FY18 the company reported a revenue of Rs 4,30,731 crore with a net profit of Rs 36,075 crore.

Today the stock price of MRF is the most expensive stock at Rs 72,000 while Reliance is a company with a highest market cap at Rs 8 lakh crore.

Most investors are of the view that companies whose stocks are most expensive have rewarded investors handsomely. On the Indian stock markets some of the companies that are quoting above the Rs. 10,000 mark include Page Industries – Rs. 33,500- Market Cap- Rs. 37,200 crore, Bosch- Rs. 21,400- Market cap- Rs 65,150 crore- Nestle- Rs. 10,500 – Market cap- Rs. 1,00,700 crore. Honeywell Automation- Rs. 21,608, Market Cap – Rs. 22,416 crore. Polson- Rs. 15,200 Market Cap- Rs 182 crore Rasoi Rs. 28,950 --Market Cap –Rs. 280 crore.

Take the case of just two stocks. Polson quotes at Rs. 15,200 with a market cap of just Rs. 182 crore. Rasoi quotes at Rs. 29,000 with a market cap of Rs. 280 crore while Reliance quotes at Rs. 1250 with a market cap of Rs 8 lakh crore.

A company may increase its earnings even modestly every year and may witness a surge in its stock but may not see much rise in its market cap. On the other hand a company like infoys or Colgate would reward its shareholders on a regular basis through high dividends, bonus shares; stock splits would see a huge rise in market cap. For eg. in the year 1977 when Reliance went public it had a pre issue net worth of Rs 6 crore and today 40 years later the market cap is placed at Rs 8 lakh crore fetching an astronomical returns to shareholders.

In summary MRF went public in the year 1961 and today is priced at Rs. 72,000 with a market cap of Rs. 30,250 crore whereas Reliance went public in 1977 and today has a market cap of Rs. 8 lakh crore.

So what is relevant to the investor to calculate returns is not the market price but the market capitalization.

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