Reliance Industries (RIL) is not just India’s most valuable company but also most important from the stock market point of view. With its price more than doubling from March lows, the stock has cemented its position as the biggest weight in the benchmark Sensex and Nifty indices.
Currently, the it accounts for nearly 15 per cent of the Sensex weightage and 13 per cent of the Nifty. Early-March, it’s weightage in the Sensex and Nifty indices was just 9.2 per cent and 8.1 per cent respectively.
While RIL has been India’s most valuable firm for some time now, it wasn’t the biggest weight. This is because, both Sensex and Nifty calculate weightages based on free-float market capitalisation (mcap)—it excludes shares owned by promoters or those under lock-in. So while RIL’s total mcap was the highest, only half of it was free-float given the promoter shareholding of slightly over 50 per cent.
On the other hand, HDFC Bank---which until recently was India’s biggest weight—has its entire market cap as free-float due to relatively low promoter holding. In May, RIL dislodged HDFC Bank as India’s top index weight. Since then, it has stolen a march over other stocks thanks to sharp gains its stock price.
The benchmark Sensex has rallied nearly 9,000 points from its March lows. RIL alone has accounted for nearly a third of the gains. The second biggest contributor has been HDFC accounting for nearly 12 per cent of the index gain.
"Large part of the marker rebound is due to RIL, whereas private sector banks—the traditional overweights--- have not participated that much,” says Abhimanyu Sofat, VP-Research, IIFL.
On Monday, the stock hit fresh all-time high of Rs 1,804 in intra-day trade before settling at Rs 1,747, down 0.7 per cent over previous close
While the positive news flow since March has helped both RIL as well as the overall market post strong gains. However, over-dependence on one stock poses a risk to the market. If the outlook for the stock or the sector takes a negative turn, it will weigh on the entire market.
However, analysts believe RIL’s growing weight isn’t a headache.
“The index has always been dominated by a few sectors or few stocks. The weight of banking and finance had gone up almost to 40 per cent. The long-term outlook for RIL is positive, they have become net debt-free ahead of schedule, which is a big positive for the stock,” said Siddhartha Khemka, VP - Head of Research (Retail), Motilal Oswal Financial Services.
Analysts say other comfort factor is that RIL is no longer just a pure oil & gas company. It’s diversification in other verticals such as telecom and retail means less reliance on just one sector.
“But we should not be much bothered about RIL’s growing weight. Earlier it was an oil and gas company now it is a digital services company. If we segregate it, they are two different companies there is an internet company, and there are other businesses. At some point the Jio business will get spun off separately then the issue will get sorted,” said Sofat.
The Mukesh Ambani-led firm’s weightage will grow further next year when its partly paid shares get converted into fully-paid. Also, if the stock continues to outperform its weightage will continue to increase. In the past a stock or sector’s growing weight has been a cause of a concern for the regulator.
Last year, stock exchanges had floated a discussion paper proposing to cap a sector’s weight at 25 per cent. However, to due to negative market feedback, the exchanges dropped the idea.