Churn in constituents to have negligible impact on Nifty’s fundamentals

The churn will lead to a minor deterioration in Nifty 50 fundamentals, suggest Ravi Muthukrishnan and Pankaj Chhaochharia of Elara Capital in a recent report.


Ambuja Cement, Aurobindo Pharma and Bosch will make way for Grasim Industries, Titan and Bajaj Finserv in Nifty 50 index from April 2. The churn, analysts say, will see the weightage of the consumer discretionary, non-banking finance companies (NBFCs) and cement sectors go up by 82 basis points (bps), 61 bps and 60 bps in the Nifty 50 index.On the other hand, the exits will lead to a fall of 55 bps, 47 bps and 34 bps in the weightage of auto, pharma and private banks, respectively in the Nifty50 index’s composition. Moreover, the number of financials will increase to 11 and their weight will increase to 36.6 per cent from 36.4 per cent.During FY11-16, the weights of cyclical stocks (sectors other than IT, Pharma and Consumer Staples) had decreased from 75 per cent to 67 per cent due to their underperformance and the exclusion of three cyclical stocks. Post April 2018, Nifty 50 will have a representation of 39 cyclical stocks and their weight will be 77 per cent – the highest since 2011.The churn will lead to a minor deterioration in Nifty 50 fundamentals, suggest Ravi Muthukrishnan and Pankaj Chhaochharia of Elara Capital in a recent report.

While the EBITDA margin will remain unchanged (16.9 per cent in FY19E and 17.6 per cent in FY20E), the Nifty FY19E EPS is likely to marginally dip from Rs 567 to Rs 565 and FY20E EPS to decline from Rs 676 to Rs 674 in FY20.That apart, they expect net debt to equity to increase marginally (0.39 to 0.40 in FY19E and 0.30 to 0.32 in FY20E); and return on equity (ROE) to dip marginally (14.9 per cent to 14.6 per cent in FY19E and 15.7 per cent to 15.6 per cent in FY20E).During a calendar year, maximum of five stocks can be replaced and the stocks to be included in the Nifty 50 should have a free float market capitalisation which is at least 1.5x higher than the smallest constituent in the index.Going ahead, analysts at Elara expect Avenue Supermarts and Shree Cement to be the likely two inclusions in the September 2018 review of the index constituents at the expense of Lupin and Bharti Infratel. The September 2018 churn, they say, will further increase the weightage of cyclical sector stocks in the index, while that of telecom and pharma will dip.So, should you buy any of the new entrants ahead of their inclusion in the index?Elara Capital’s analysis of stock performance post their inclusion in Nifty 50 reveals that in 16 out of 24 instances, these stocks generated incremental positive returns on the day of their inclusion Nifty 50. However post the day of inclusion, stock performance reveals no clear trends.G Chokkalingam, founder and managing director of Equinomics Research advises investors look at the company’s fundamentals before investing rather than the inclusion in the Nifty 50 index. “Based on fundamentals, I prefer Grasim,” he says.Analysts at ICICI Securities remain positive on Bajaj Finserv with a 12-month price target of Rs 6,000 per share.“We stay positive on the stock due to sustained healthy performance of Bajaj Finance; strong profitable growth in general insurance business and) traction in individual new business premium. We maintain our target price at Rs 6000/share, based on SOTP valuation, implying a multiple of 19.8x on FY20E consolidated earnings,” they said in a recent note.

Jan-18 Free float earnings PE Ratio
Free float market-cap (Rs billion) FY18 FY19 FY20 FY18 FY19 FY20
Current Nifty 42,549 1,608 1,809 2,188 23.50 19.40 16.30
Exit stocks:
Ambuja Cement 192 8.7 8.6 10.9 22.1 22.3 17.7
Aurobindo Pharma 177 12 12.7 13.9 14.7 13.9 12.7
Bosch 178 4.2 5.2 6.4 41.8 33.9 27.6
Grasim 457 18.2 24.2 30.5 25.1 18.9 15
Titan 364 5.3 7.7 11.2 68.7 47.3 32.4
Bajaj Finserv 319 11.9 15.2 19.5 26.7 21 16.4
Proforma Nifty 43,141 1,820 2,208 2,637 23.7 19.5 16.4
Current Nifty EPS (Rs) 469 567 676
Proforma EPS (Rs) 465 565 674
Change (%) -0.8 -0.4 -0.2
Source: Elara Capital report

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