Nifty 50 index : BEL, the Defence PSU, and Trent, the Tata Group company, will join NSE’s benchmark index in the next week’s September rejig of the Nifty 50 index. LTIMindtree and Divi’s Laboratories are estimated to be dropped out from the Nifty 50 index, as suggested by the Nuvama Alternative & Quantitative Research. These changes are part of the semi-annual review of the broader market indices conducted by the Index Maintenance Sub-Committee (Equity) of NSE Indices.
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Eligibility Parameters for Inclusion in Nifty 50
The bi-annual review is single-handedly the most important mechanism to ensure that the Nifty 50 index remains a well-defined representative sample of the stock market. Only those stocks available for trading in the F&O segment of NSE are eligible for inclusion in the Nifty 50 index. This makes sure that the index includes very liquid stocks, which would make it a more robust benchmark for the Indian equity market.
Nuvama believes the stocks will experience significant inflow and outflows due to this reshuffle. It estimates inflow in case of Trent at $500 million, just like in Bharat Electronics Ltd (BEL) at $440 million, due to inducting these companies. LTIMindtree, and Divi’s Laboratories should lead to outflow worth $210 million and $260 million, respectively because of removing these three stocks from the Index. These fund flows can have a significant bearing on the stock prices of these companies as index funds and passive investors alter their portfolio to reflect the new composition of the Nifty 50 index.
Now, diving deeper into Bharat Electronics Ltd (BEL) and Trent:
State-owned Defence PSU Bharat Electronics Ltd has delivered consistent performance of late and has received an impetus from increased government focus on domestic defence manufacturing through which its stock has begun to gain traction. Among the beneficiaries of India’s intentions to curtail its defence imports, BEL, which manufactures sophisticated electronics for Indian Armed Forces, is one of the principal beneficiaries. That it has made it into Nifty 50 indicates growing confidence in long-term growth prospects.
Trent, the retail arm of the Tata Group, has been enjoying steady growth primarily due to its dominant position in the fashion retail space. Now with greater consumer preference for branded apparel and retail experience, Trent is well placed to ride at the top of the sector. Its inclusion in the Nifty 50 says something about how important a retail space has grown for India’s bouquet of economic business.
Exemptions: LTIMindtree and Divi’s Laboratories
On the other side of the revamp, LTIMindtree, offshoot of L&T Infotech and Mindtree merger, will be exempted from the index. The much-awaited synergies from the said merger that created a behemoth IT services company did little for the stock’s prospects in terms of meeting the liquidity and market performance metrics to stay in the Nifty 50.
Another big name is Divi’s Laboratories, an API manufacturing pharmaceutical house, which is to be replaced. Chances are it’s also under some stress to maintain the super growth which it saw during the pandemic, as the demand was at its peak. The stock of late has shown uninspiring performance. This, along with liquidity concerns for the stock, led to its exclusion from the index.
Broader Market Dynamics and Regulatory Challenges
Currently more than 70 stocks qualify to be on F&O based on just the quantitative criteria, though none of them make it to the Nifty 50 due to regulatory hurdles. In fact, the Securities and Exchange Board of India, the key regulator of the F&O segment, itself hasn’t been able to approve new inclusions into the F&O space of the last few years. This constrains the eligible pool of stocks that otherwise would have qualified to be part of the Nifty 50 index, allowing room for only a few large-cap stocks to be added or dropped.
Nifty Bank Rejig: Canara Bank and Bandhan Bank
Besides changes in Nifty 50, Nuvama also sees changes in the Nifty Bank index. The reshuffle could see Canara Bank replace Bandhan Bank. In Canara Bank, one of the oldest and largest public sector banks in India, market stability and performance have indeed been quite robust. Concerning Bandhan Bank, which had a meteoric rise through microfinance, challenges came up in the last few quarters mainly through asset quality issues and regional economic factors affecting its customer base.
The Nifty Bank index, comprising the big banking stocks, is one to watch as this basket of stocks would flag the performance of the Indian banking industry, crucial to the overall economy. Inclusion of Canara Bank coupled with the exclusion of Bandhan Bank speaks of a shift toward larger established banks that have weathered challenging market conditions.
Nifty Next 50: New Additions and Removals:
The Nifty Next 50 index, that serves as a feeder index to the Nifty 50, has some influential inclusions in the September reshuffle. As per the estimates by Nuvama, the likely inclusions in the Nifty Next 50 include JSW Energy, NHPC, Union Bank of India, Hindustan Zinc, and Indian Overseas Bank. The portfolio stocks are mixed and diversified in terms of sectors, which may include energy, metals, financial services, among others, all reflecting well the broad nature of this Nifty Next 50 index.
JSW Energy, NHPC, and Hindustan Zinc have functioned reasonably well in their respective sectors and have enjoyed a buoyant demand along with government-friendly policies. The two public sector banks that have seen improvement are Union Bank of India and Indian Overseas Bank.
Exclusion from the Nifty Next 50 index is likely for several large, very well-known companies. The stocks excluded include Colgate Palmolive India, SRF, Marico, SBI Cards & Payment Services, and Berger Paints. Exclusion here reflects a change in the dynamics of the market which sees newer or better-performing stocks supplant those excluded. Colgate Palmolive India and Marico have been two FMCG stocks that have struggled with increasing competition and mounting pressure on margins, which may be why they do not feature in this list today. Another company is SRF and Berger Paints as two industry leaders who have also lost their position in the index because of volatility in the market performance and lack of liquidity.
Conclusion
The Nifty 50 September rejig mirrors the changing Indian stock market and the role of defence, retail, and banking sectors are going to play at the forefront in the future. Inclusion of Bharat Electronics Ltd. and Trent appears good for their future growth prospects. But the exclusion of LTIMindtree puts a litmus test on whether the companies would be able to sustain the market performance and liquidity standards.
The shifts in the Nifty Bank and Nifty Next 50 indices seem an attempt to make these stocks better representatives of companies that had shown resistance and robust fundamentals. While effective, such changes will likely lead to considerable fund inflows and affect stock prices and overall market sentiment.