Companies that are part of the benchmark Nifty50 index for more than a decade continue to have considerable sway over it. The high influence of old companies in the index weakens the case for a rerating, a report by Business Standard said, quoting a note by BNP Paribas.
BS noted that 33 out of the 50 companies have been part of the index since 2012 and these companies account for 90 percent of the profit pool. Further, they have a combined weighting of 83 percent in the Nifty, BS added.
The highest weightage in Nifty50 is of RIL followed by HDFC Bank, Infosys, ICICI Bank, HDFC, TCS, Kotak Bank, ITC, HUL and L&T. All these stocks have been a part of the index for a decade.
“The 17 new stocks have only 14 percent weight in Nifty50 and account for only 10 percent of its profits. Against this, materials, utilities and oil & gas (except Reliance Industries) have only 7 percent weight in the index, but contribute 25 percent to its profits bringing down the weighted average. Thus, we believe the newly introduced stocks do not justify a significant rerating of the index,” said Kunal Vora, head of India equity research, BNP Paribas, in a note.
The report further pointed out that of the Nifty50 constituents that remain constant since the 2011-12 financial year, 18 have reported double-digit earnings compound annual growth rate (CAGR) over the past decade, of which seven have managed over 15 percent CAGR.
Of these seven companies, four are from sectors such as metals, utilities and energy, it highlighted.
On the other hand, the 17 new entrants into Nifty50 have a fairly strong earnings growth momentum, said the report.
Of these, 13 have a profit history over the last decade and reported double-digit earnings CAGR during that period (except Nestle India), with nine delivering more than 15 percent earnings CAGR, the note added.