Exit consumer stocks, enter the financials

Bhavana Acharya BL Research Bureau | Updated on January 27, 2013 Published on January 27, 2013

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The Sensex has quadrupled in value over the last twenty years. But only nine of the original Sensex constituents still remain in the index.

When we talk of the most tracked market index, the BSE Sensex, over 20 years, we often think of it as one number. But the stocks that have constituted the Sensex have changed quite a bit over 20 years.

Remember Bombay Dyeing, MTNL, Century Textiles, Premier Auto, Ballarpur Industries and Mukand Iron? These were once market-moving bellwethers. They formed a part of the Sensex until 1996, when a major rejig saw half the Sensex constituents shown the door. In fact, just nine of the current Sensex constituents have been a part of the index from 1994.

Consumer gives way

Reliance Industries (though the company has changed quite a bit due to mergers and restructuring), of course, is the stalwart remaining with the index over the years. Nor has the might of this stock waned much. The stock accounts for 9 per cent of the marketcap (free-float) of the Sensex now against 12 per cent (full float) in 1994.

Another cornerstone is Hindustan Unilever. This stock, together with Nestle, carried a weight of 15 per cent of the Sensex marketcap in 1994. The FMCG sector was also the one with the most weight in the index. The FMCG sector is now represented only by HUL, which also accounts for just about 3 per cent of the index capitalisation.

In fact, the consumer theme was far more prominent in 1994 than now. Together with FMCG stocks, other consumer sectors — auto, hotels and durables — accounted for a good 38 per cent of the Sensex. Philips Corp was removed in 1996 and Indian Hotels was pushed out in April 2000 for the then Reliance Petroleum.

The weight consumer-themed stocks now carry in the Sensex is about 28 per cent, thanks mostly to ITC, which has 13 per cent of the Sensex free-float marketcap.

Also losing out between 1994 and now was the capital goods sector. The exit of Cummins India and Siemens in 1996 left just BHEL in the index. Paper (Ballarpur Industries) and fertilisers (GSFC) are two sectors that are missing now, but were a part of the Sensex then. The removal of ACC, Grasim and Jaiprakash Associates in the past couple of years has left the cement sector out of reckoning now.

The age of banking

So, who stole their thunder? For one, banking and finance stocks, which currently account for 25 per cent of the Sensex cap and which were altogether missing in 1994. ICICI and SBI made their way into the index in the grand reboot of 1996. The software sector too muscled its way in, with Infosys, TCS and Wipro still in the index, while HCL Technologies made a brief appearance.

Valuations ebb

On an annualised basis, the Sensex has returned only 9.2 per cent between 1994 and now. Just goes to show that clinging onto the index for years on end is not a very profitable strategy! But investors can take heart from the fact that the valuations for markets are much cheaper than in 1994.

Think a Sensex price-earnings multiple of 18 times is a bit too much to ask for?

How about 48 times? That was the Sensex PE in 1994. Price-to-book value was also a whopping 6.4 times. Of course, this was also the peak in valuations, with both PE and PBV dropping to lower levels after that.

The index moving to the free-float computing method in 2003 changed the individual stock weights and thus valuations. The market also had many more bear spells post 1994, which brought PEs down.

Published on January 27, 2013
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