REBALANCING OF INDICES SEPT’24: EVERYTHING YOU NEED TO KNOW

The Index Maintenance Sub-Committee (Equity) of NSE Indices on Friday dated August 23, 2024 made the changes in the 50-stock index and the same will become effective from September 30, 2024 (close of September 27, 2024).

This update, effective from September 30, 2024, follows a review based on market capitalization and liquidity
The NSE Indices Committee revealed its September 2024 adjustments, impacting indices like NIFTY 50, NEXT 50, NIFTY 100, and NIFTY Bank. Here’s a breakdown of the key inclusions and exclusions:

NIFTY 50

The following companies are being included:

The following companies are being excluded:

NIFTY BANK

The Nifty Bank Index comprises of the largest and the most liquid Indian Banking stocks. It provides investors and market intermediaries with a benchmark that captures the capital market performance of the Indian banks. The Index comprises of a maximum of 12 companies listed on National Stock Exchange of India (NSE). Nifty Bank Index is computed using free float market capitalization method.

The following company is being included:

The following company is being excluded:

NIFTY NEXT 50

Nifty Next 50 represents 50 companies from Nifty 100 after excluding the constituents of Nifty 50. The cumulative weight of index constituents that are not available for trading in F&O segment (Non-F&O stocks) is capped at 10% on a quarterly rebalance dates. The weightage of non-F&O stocks in the index is individually capped at 4.5% on quarterly rebalance dates.

The following companies are being included:

The following companies are being excluded:

Nifty Midcap Select

This index has a base date of October 03, 2005, with a base value of 1000. Stocks within Nifty Midcap 150 index that are available for trading on NSE’s Futures & Options segment are eligible to be the part of the index.  The stocks are selected based on market cap, and average daily turnover. The weight of each stock is based on its free float market capitalization. The index is reconstituted semi-annually.

The following companies are being included:

The following companies are being excluded:

NSE Indices September 2024 Rebalancing: Key Changes and Implications for Investors

The National Stock Exchange (NSE) of India recently announced the September 2024 adjustments to several of its key indices, including the NIFTY 50, NEXT 50, NIFTY 100, and NIFTY Bank. These changes, which will come into effect soon, are crucial for investors, fund managers, and analysts as they will lead to significant portfolio rebalancing and could have substantial implications for the involved companies.

Key Changes in NIFTY 50

One of the most prominent updates concerns the NIFTY 50, India’s premier stock index that tracks the performance of 50 of the largest and most liquid Indian securities. Two notable companies—Trent Ltd and Bharat Electronics Ltd—are set to join the NIFTY 50 index, replacing Dr. Reddy's Laboratories (DIVISLAB) and Larsen & Toubro Infotech (LTI MINDTR), which will exit the index.

This reshuffling marks a significant moment for the companies involved:

Trent Ltd. is a significant player in the retail industry, reflecting the increasing relevance of consumer-oriented businesses within the Indian economy. The company is involved in retailing apparel, footwear, accessories, toys, games, food, groceries, and other non-food products through its various retail formats and concepts. Trent Ltd. is part of the Tata Group, which held approximately 37% of the company's shares as of March 2024 (with Tata Sons Pvt Ltd holding 32.45%). The Tata Group consists of 100 operating companies across diverse business sectors and operates in over 80 countries across six continents.

Retail Format Stores- As of FY24, Trent Ltd. operates over 875 stores, a significant increase from the 681 stores it had in FY23, spread across different store concepts.

Improvement in Loss-Making Operations- In FY24, Trent Ltd. achieved a 50% year-on-year revenue growth with an operating profit margin of 16%, driven by the expansion of Zudio stores and strong like-to-like sales. However, its non-apparel segments (such as Landmark and Booker India) and joint ventures like Star Bazaar continued to incur losses, although losses at Star Bazaar and Booker decreased compared to FY23

Bharat Electronics Ltd. (BEL) is a government-owned enterprise specializing in aerospace and defence electronics, underscoring the growing emphasis on the defence and technology sectors in India's development narrative. Established in 1954, BEL manufactures and supplies electronic equipment and systems primarily for the defence sector, though it also has a limited presence in the civilian market. The company was created under the Ministry of Defence to address the electronic needs of India's military. As a diversified conglomerate, BEL provides a wide range of products and systems to the Indian armed forces, including radars and fire control systems, missile systems, communication and C4I systems, electronic warfare and avionics, naval systems and antisubmarine warfare systems, electro-optics, tank electronics, and gun upgrades, among others

On the flip side, Dr. Reddy’s Laboratories and L&T Infotech exiting the NIFTY 50 signals shifts in sectoral weightages and might influence how sectors like pharmaceuticals and IT are perceived in the broader market.

Key Changes in BANK NIFTY

Canara Bank was merged with erstwhile Syndicate Bank in FY21. Canara was incorporated in 1906 and nationalised in 1969 - along with 13 other major commercial banks of India – by the Government of India. The bank is headquartered in Bengaluru. Canara Bank was merged with erstwhile Syndicate Bank (e-SB) on April 1, 2020.

Key Changes in NIFTY NEXT 50

Bharat Heavy Electricals Ltd. is an integrated power plant equipment manufacturer involved in the design, engineering, manufacturing, erection, testing, commissioning, and servicing of a broad range of products and services for key sectors of the economy, including power, transmission, industry, transportation, renewable energy, oil & gas, and defence. As the flagship engineering and manufacturing company of India, BHEL is owned and operated by the Government of India.

DIVIS LAB, Incorporated in 1990, Divis Laboratories Ltd manufactures and exports API's, Intermediates and Nutraceutical ingredients.

JSW Energy Ltd., along with its subsidiaries, is primarily focused on power generation from its assets located in Karnataka, Maharashtra, Nandyal, and Salboni. It serves as the holding company for the JSW Group's power division. Additionally, the company has a joint venture involved in mining activities and an associate company that manufactures turbines.

Larsen & Toubro Infotech Ltd. provides a comprehensive range of IT services, including application development, maintenance, outsourcing, enterprise solutions, infrastructure management, testing, digital solutions, and platform-based services to clients across various industries.

Macrotech Developers Ltd. primarily focuses on real estate development and is one of the largest real estate developers in India based on presales and development pipeline. The company has a strong presence in the Mumbai Metropolitan Region (MMR) and Pune, and it expanded into the Bengaluru market in November 2023.

NHPC, a Mini Ratna Category I public sector enterprise, is the Government of India's leading hydroelectric generation company. The company mainly focuses on generating and selling bulk power to various power utilities. Additionally, NHPC is involved in project management, construction contracts, consultancy services, and power trading.

Union Bank of India is engaged in the Business of Banking Services, Government Business, Merchant Banking, Agency Business Insurance, Mutual Funds, Wealth Management etc.

Key Changes in NIFTY Midcap Select

COLGATE product portfolio features a range of SKUs, including toothpaste, tooth powder, toothbrushes, mouthwash, and personal care items, all sold under its well-known brands, Colgate and Palmolive. Its flagship brand, Colgate, is one of the most recognized oral care brands in India, with a domestic market penetration of approximately 88%.

Dixon Technologies (India) Limited, established in 1993, is an Electronic Manufacturing Services (EMS) company operating across various electronic product segments, including consumer electronics, lighting, home appliances, CCTV cameras, and mobile phones. The company also provides reverse logistics services and manufactures security surveillance equipment, wearables, audibles, and AC-PCBs. Recently, Dixon formed a joint venture with Imagine Marketing Private Limited to design and manufacture wireless audio solutions in India.

Indus Towers Limited

Indus Towers Limited is engaged in the business of setting up, operating and maintaining wireless communication towers.

SRF Ltd.

Incorporated in 1970, SRF Ltd manufactures and sells technical textiles, chemicals, packaging films, aluminium foils, and other polymers.

Eligibility Criteria for Selection of Constituent Stocks Nifty 50

1. Market impact cost is the best measure of the liquidity of a stock. It accurately reflects the costs faced when actually trading an index. For a stock to qualify for possible inclusion into the Nifty50 index, it should have traded at an average impact cost of 0.50% or lower during the last six months for 90% of the observations, for a basket size of Rs. 100 million.
2. Only the companies that are allowed to trade in F&O segment are eligible to be constituent of the index.
3.  The Company should have a minimum listing history of 1 month as on the cutoff date.

Eligibility Criteria for Selection of Constituent Stocks in Bank Nifty

1. Companies should form part of Nifty 500 at the time of review. In case, the number of eligible stocks representing a particular sector within Nifty 500 falls below 10, then deficit number of stocks shall be selected from the universe of stocks ranked within top 800 based on both average daily turnover and average daily full market capitalisation based on previous six months period data used for index rebalancing of Nifty 500.
2. Companies should form a part of the Banking sector.
3. The company's trading frequency should be at least 90% in the last six months.
4. The company should have a minimum listing history of 1 month as on the cut-off date.
5. Only the companies that are allowed to trade in F&O segment are eligible to be constituent of the index.
6. Final selection of 12 companies shall be done based on the free-float market capitalization of the companies.
7. Weightage of each stock in the index is calculated based on its free-float market capitalization such that no single stock shall be more than 33% and the weightage of the top 3 stocks cumulatively shall not be more than 62% at the time of rebalancing.

Impact on Portfolio Flows

When a company is added to a major index like the NIFTY 50, it generally sees a surge in demand for its shares. This is because index funds and ETFs that track the NIFTY 50 will need to purchase shares of the newly included companies to align with the updated index composition. For Trent and Bharat Electronics, this could translate to significant inflows, pushing their stock prices higher. Conversely, companies that are removed from the index often face selling pressure as these same funds divest their holdings. For Dr. Reddy’s Laboratories and L&T Infotech, this could result in outflows, potentially leading to a decline in their share prices.

Market Volatility: The announcement of changes can lead to short-term volatility, especially in the stocks being added or removed. Traders often anticipate these changes and adjust their positions accordingly, leading to price fluctuations.

Strategic Positioning:

• Institutional Investors: Large institutional investors, such as mutual funds and pension funds, often adjust their portfolios in anticipation of these changes to optimize returns and minimize tracking error.
• Retail Investors: Retail investors might follow the trends set by institutional investors, leading to additional price movements. However, retail investors should be cautious as market prices may have already adjusted by the time they react.

Broader Implications for Investors

For investors, these index rebalancing events provide both opportunities and risks.

Opportunities- The inclusion of a stock in a major index can be a positive signal, suggesting that the company has reached a certain size, liquidity, and stability. Investors may look to add these stocks to their portfolios ahead of the anticipated inflows.

Risks- On the other hand, stocks being removed from an index could experience downward pressure. However, for long-term investors, this might present a buying opportunity if they believe in the company’s fundamentals.

Strategic Considerations

Investors need to consider these index changes in the context of their broader investment strategy.

1. Portfolio Rebalancing: Investors might consider rebalancing their portfolios based on these index changes. Adding exposure to stocks that have been included in the indices and reducing exposure to those that have been excluded can be a prudent strategy, especially for those closely tracking index performance.

2. Liquidity Considerations: Stocks entering the indices may see improved liquidity, which can be beneficial for investors looking to enter or exit positions. Conversely, stocks leaving the indices might face liquidity challenges, which could impact their pricing.

3. Long-Term Impact: While the immediate impact on stock prices can be significant, long-term investors should focus on the fundamental strength of the companies rather than the short-term price movements caused by index rebalancing.

Index Re-Balancing

Index is re-balanced on semi-annual basis. The cut-off date is January 31 and July 31 of each year, i.e. For semi-annual review of indices, average data for six months ending the cut-off date is considered. Four weeks prior notice is given to market from the date of change.

Reasons for Re-balancing

The Nifty 50 index is reviewed twice a year, based on six-month data ending January 31 and July 31. The index represents 50 stocks.

• Reflecting market realities
• Maintaining relevance and performance
• Enhancing investor confidence
• Improving liquidity
• Adapting to sectoral shifts
• Meeting methodology criteria
• Benchmark integrity

Conclusion

The NSE's September 2024 index adjustments are more than just a routine exercise; they are a reflection of the evolving landscape of the Indian stock market. With Trent and Bharat Electronics joining the NIFTY 50, and the exit of Dr. Reddy’s and L&T Infotech, the stage is set for shifts in market dynamics. Investors should stay informed and consider how these changes align with their investment objectives, taking into account the potential impacts on their portfolios. As always, a balanced approach, combining both passive and active strategies, can help navigate the complexities of such market events. Investors need to consider the short-term volatility but should remain focused on the long-term fundamentals of the companies affected. Strategic portfolio rebalancing, particularly by institutional investors, could offer opportunities, but retail investors should be cautious of market timing and potential liquidity risks.

References

www.icicidirect.com/research/equity

www.nseindia.com/resources/exchange-communication-circulars

www.nseindia.com