Comments
The big guns of the Sensex today may disappear from the benchmark index altogether within the next ten years. This includes current index heavyweights, such as Reliance Industries, SBI, ONGC, Bharti Airtel, HDFC, Tata Steel and L&T, according to a recent report by equity advisory Ambit Capital.
Churn analysis Surprised? Don’t be. Indices are regularly rebalanced to accurately reflect a changing stock market. In studying the churn in the Sensex over 10-year windows, Ambit found that the churn peaked at 67 per cent (or 20 replacements in the 30-stock index) in the years following the 1991 reforms (1993-95). It then fell to a low of 27 per cent (eight replacements) in 2004-14.
Ambit predicts that the current government will overhaul the way business is done in India so dramatically that a whole new generation of companies will graduate to the main index while 15 of the current constituents will de dropped.
Changing benchmark constituents are a fact of life, then. To prove this, the report points to blue chips of the past that are no longer in the reckoning, including Century Textiles, GSFC, Bombay Dyeing, and Ballarpur Industries, when industry was disrupted by the abolition of the Licence Raj. Ambit expects the Modi Government to force the next big disruption — dismantling crony capitalism and the subsidy culture, and directing savings away from land and gold to the financial system.
‘Interesting perspective’ Market analysts, in general, appear to agree with the conclusions of the report. Rajeev Thakkar, Director, PPFAS Mutual Fund, believes the report offers an interesting perspective into how economic disruptions will change the stock markets. “The report shows that what’s good for the economy — such as transparency, for example — may not immediately reflect in higher corporate profits.”
All that the report highlights in the telecom sector, Thakkar says, are valid concerns. Ambit predicts that both Airtel and RIL (which is expected to launch 4G services through Reliance Jio) will exit the Sensex by 2025. “Despite the fact that telecom penetration has a long way to go in India, there is no clear business vision. A company’s path to profitability is doubtful, especially when technology itself changes so constantly.”
“From 2004-07, real estate stocks performed fantastically,” says Gaurang Shah, Vice-President, Geojit BNP Paribas. Now, you wouldn’t touch it with a bargepole. “For the long-term, it’s also wise to stay away from companies with government holding or businesses affected by changes in government policy.”
Financial services to lead If not these, then which ones should a long-term investor buy now? Saurabh Mukherjea, CEO of Institutional Equities at Ambit and lead author of the report, says Ambit’s next report — to be released within a fortnight — will predict which 15 companies will graduate to the benchmark index.
“As annual per capita income in India comes within the $2,000-4,000 band, discretionary consumption will blossom, It’s only then that stocks associated with this will do well. Also, as people become wealthier, savings will go up. I expect financial services to be a greater proportion of the index over the next 10 years.”
Comments
COMMENT NOW
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.