scorecardresearchPidilite Industries to be included in Nifty? What it means for the stock and you as an investor in the company

Pidilite Industries to be included in Nifty? What it means for the stock and you as an investor in the company

Updated: 19 Oct 2022, 12:43 PM IST
TL;DR.
According to reports, this will be an ad hoc inclusion on account of the mortgage major’s expulsion from the Nifty index—tracked by funds with assets of over $30 billion—on account of its merger with HDFC Bank, which has entered the final stages.
According to reports, this will be an ad hoc inclusion on account of the mortgage major’s expulsion from the Nifty index—tracked by funds with assets of over $30 billion—on account of its merger with HDFC Bank, which has entered the final stages.

According to reports, this will be an ad hoc inclusion on account of the mortgage major’s expulsion from the Nifty index—tracked by funds with assets of over $30 billion—on account of its merger with HDFC Bank, which has entered the final stages.

Adhesive maker Pidilite Industries is likely to replace Housing Development Finance Corporation (HDFC) in the Nifty 50 index. According to reports, this will be an ad hoc inclusion on account of the mortgage major’s expulsion from the Nifty index—tracked by funds with assets of over $30 billion—on account of its merger with HDFC Bank, which has entered the final stages.

Since both HDFC and HDFC Bank are members of the Nifty and Sensex, the merger will result in HDFC being removed from the benchmarks and the number of index constituents dropping from 50 to 49 in the Nifty and from 30 to 29 in the Sensex.

According to the methodology book from NSE indices, "in case of a merger, spin-off, capital restructuring or voluntary delisting, equity shareholders' approval is considered as a trigger to initiate the replacement of such stock from the index through additional index reconstitution. For all other cases, replacements will be initiated based on notifications issued by the Exchange."

First, let's understand the eligibility criteria for inclusion in the Nifty

The stock should have traded at an average impact cost of 0.5 percent or less in the last six months for 90 percent of the observations and should also have at least twice the float-adjusted market capitalisation of the current smallest index constituent. The company must be domiciled in India and traded on the exchange. The stock must be available for trading in the futures and options segment on the NSE to be eligible for inclusion. Market capitalisation, liquidity and trading frequency are other criteria that are considered to include a stock in an index.

Apart from Pidilite, Ambuja Cements, Tata Power, and SRF are in the running to replace HDFC, according to a report by Edelweiss.

Now, how should you approach stocks that get added to the index?

Logically, investors assume that stocks getting included in the index should gain whereas stocks that get excluded from the index should decline. However, it is also important to consider how these stocks performed before their inclusion. If the stocks have already appreciated enough on news of the inclusion, they might not see a massive upside post the inclusion.

Investors should also check the sector trend of the stock getting included, its past earnings and other fundamental ratios before investing in the stock like with every other stock.

It is also important to note that once the stock gets included in the Nifty, its trading volume automatically surges which might lead to a jump in its stock price mostly because all the passive index funds have to buy the stock post its inclusion.

Let's take the case of Pidilite and its likely inclusion in the Nifty

Despite the news of its inclusion in the Nifty, the stock has been completely flat in October so far following a 2 percent decline in September. However, it surged 11.5 percent and 17 percent in August and July, respectively.

The stock has jumped 8 percent in the last 1 year and 9 percent in 2022 YTD.

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Pidilite Industries stock price trend

According to Pranjal Kamra, CEO - Finology Ventures, the HDFC and HDFC Bank merger would result in leaving a vacant slot in the Nifty50 league. Amongst all probable candidates, Pidilite is being considered a preferred option, which could boost its stock price, Kamra predicted.

"As per sources, if the inclusion goes ahead, this would entitle Pidilite to around 0.45-0.5 percent weightage in the broader index. Moreover, passive funds will have to rebalance their Nifty50-tracking funds and include Pidilite. This will, by mechanism, be another positive for its stock price. However, that price rise would be a one-time effect and we expect the company to maintain a stable movement going ahead," said Kamra.

Meanwhile, Sunil Damania, CIO, MarketsMojo also noted that there is a high probability that Pidilite may get included in the Nifty50 increasing the Pidilite counter. The stock would see more allocations purely because passive funds would have no other choice but to include buying Pidilite, he added.

Technical View

Chandan Taparia, VP, Equity & Technicals, Broking & Distribution, MOFSL noted that Pidilite is one of the wealth creator stocks which is moving upwards on year on year basis for the last 11 years since 2012.

"Every year it delivered decent gains at a higher base and it’s up by around 10 percent in this year till date. The major trend of the stock is positive but recently it slightly corrected from 2,918 to 2,600 zones. It managed to negate its short-term negative pattern with the support of 2600 zones. Falling crude prices support to the price structure and hold of current zones could take it towards lifetime high of 2,918-3,000 zones," Taparia forecasted.

Prabhudas Lilladher has also picked Pidilite as its top medium-term technical pick.

"The stock after making the all-time high of 2,918 has witnessed a short correction to again bottom out near 2,600 levels near the channel pattern on the daily chart with a higher formation pattern showing strength and is anticipated for a further upward move in the coming days. The RSI indicator also has shown a trend reversal from near the oversold zone and suggesting immense upside potential to retest the peak zone once again. We suggest buying the stock for an upside target of 2,980 keeping the stop loss of 2,590," said the brokerage.

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First Published: 19 Oct 2022, 12:43 PM IST