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NSE Makes a Mockery of the Nifty 50 By Having…51 Stocks

Nifty-Indexes.png

NSE’s Index Maintenance arm, IISL, has changed the Nifty 50 Index – the top 50 stocks by free float market cap which form the benchmark index with the following exclusions. (From April 1, 2016)

Removed:

  • Cairn
  • Vedanta
  • Punjab National Bank

Added:

  • Auro Pharma
  • Bharti Infratel
  • Eicher Motors
  • Tata Motors DVR

What? Removed Three and Added Four?

Precisely.

This is annoying. There are supposed to be 50 stocks in an index named, for goodness’ sake, Nifty 50. The index name was specifically changed from “CNX Nifty” to “Nifty 50” in November 2015, just three months ago! The significance of the number 50 was: there are 50 stocks in this index.

And now you have 51?

This is stupidity because now a lot of algorithms have to be changed, which assumed, perhaps naively, that the Nifty 50 would have only 50 stocks.

But Why The DVR?

And the 51st stock is: The Tata Motors DVR.

This is a differential voting rights share of Tata Motors. Which is already in the Nifty!

Why would you have BOTH the Tata Motors share and it’s DVR in the same index? This sounds like utter nonsense – you could just consider the DVR as a part of the marketcap of the Tata Motors share and still retain 50 stocks.

Other changes: Removing Cairn and Vedanta makes sense as their free float market cap was under Rs. 9000 cr. after their steep fall – replaced by Eicher and Infratel (who have more than 20,000 cr. in free float market cap). This also shifts the index more towards an industrial outlook rather than the commodity plays that Cairn and Vedanta are.

The new changes – and note that the numbers change for the major indexes:

Nifty Indexes

 

What Happens?

  • The Nifty EPS should increase, because Auro Pharma, Eicher and Bharti Infratel have positive earnings (and Cairn and Vedanta are negative)
  • There isn’t so much interest in Nifty ETFs that stocks should be impacted big time – a large ETF presence would mean that the outgoing stocks would be sold and the incoming would be bought. But there’s not that much money riding on the Nifty 50 (51?) yet. The MSCI Index has much more money following it – around $3 to $5bn – which would see a larger impact in general, but we aren’t tracking those changes just yet.
  • Index based strategies that used a 50 base number for calculations (or 100 or 500 for the broader indexes) will have to change their algorithms to use percentages instead. This is an impact to Capital Mind as we have such strategies like the MA20. (Link for premium members)

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