While 25 stocks made their way into Nifty since FY13, these stocks may be added in March

Elara Capital

The National Stock Exchange (NSE), on August 28, announced the exclusion of Lupin, which will be replaced with JSW Steel, from the Nifty index. While index rejig keeps happening periodically, during FY13-18 as many as 25 stocks were replaced in the Nifty index.

Stocks which entered Nifty in FY13 include names like Asian Paints, Bank of Baroda, Lupin, and UltraTech Cement. In FY14, IndusInd Bank, United Spirits, NMDC and Tech Mahindra were added.

In FY15-16, as many as 5 stocks were added, namely Idea, Zee Entertainment, Yes Bank, Adani Ports, Bosch. In FY17, 5 stocks - Aurobindo Pharma, Bharti Infratel, Eicher, Indiabulls Housing Finance and IOC – were added.

In FY18, 4 stocks that moved in were HPCL, UPL, Bajaj Finance and Vedanta.

During FY11-16, the weights of cyclical stocks (sectors other than IT, pharma and consumer staples) decreased from 75 percent to 67 percent due to their underperformance and the exclusion of three cyclical stocks.

Post FY16, they outperformed leading to the inclusion of one additional cyclical stock in April 2018. However, post April’18, defensives are gaining momentum due to (a) outperformance because of deteriorating global and domestic macro-economic environment); and (b) likely inclusion of defensive stock (both in Sep’18 & Mar’19 revision).

Sector weight of industrial, utilities, telecom and healthcare are at the lowest level since FY11. However, sector weight in private banks, financials and consumer discretionary sector are at the highest level since FY11.

We have an overweight stance on cement and PSU banks which had reached lowest level in terms of sector weight in FY18. They have now seen a rebound due to improvement in cement volume and bottoming out of the entire NPA recognition cycle.

Nestle and Godrej consumer are likely to be added in Mar’19 revision:

Based on our analysis of current free float market cap, we expect Nestle and Godrej Consumer to be added in March 2019 during Nifty 50 constituent revision at the expense of UPL & Bharti Infratel.

This revision will lead to (a) further improvement in Nifty fundamentals; (b) expansion in Price to earnings multiple; (c) shrink in Nifty 50 EPS; and (d) weight increase in Consumer Staple at the expense of Telecom (Bharti Infratel) and Materials (UPL).

Nestle and Godrej consumer current free float market capitalization is 1.5x of UPL free-float market capitalization (smallest constituent in the index post-September 2018 revision) which is the key criteria for inclusion in Nifty 50.

This analysis is based on assumption that current free float market capitalization emerges as the average free-float market capitalization during August 2018 – January 2019.

What is Nifty 50 stock selection criteria?

A) Liquidity: For inclusion in the index, the security should have traded at an average impact cost of 0.50% or less during the last six months for 90% of the observations for a portfolio of Rs. 100 million.

B) Float-Adjusted Market Capitalization: Companies will be eligible for inclusion in Nifty 50 index provided the average free-float market capitalization is at least 1.5 times the average free-float market capitalization of the smallest constituent in the index.

C) Listing History: A company which comes out with an IPO is eligible for inclusion in the index if it fulfills the normal eligibility criteria for the index - impact cost, float-adjusted market capitalization for a three-month period instead of a six-month period.

D) Trading Frequency: The company’s trading frequency should be 100% in the last six months.

Index Reconstitution:

The index is reconstituted semi-annually considering 6 months data ending January and July, respectively. The replacement of stocks in Nifty 50 (if any) is generally implemented from the first working day after F&O expiry of March and September.

In case of any replacement in the index, a four weeks’ prior notice is given to the market participants. As part of the semi-annual reconstitution of the index, a maximum of 10% of the index size (number of companies in the index) may be changed in a calendar year.

However, the limit of maximum 10% change shall not be applicable for any exclusion of a company on account of the scheme of arrangement as stated above.