Adani Enterprises, scarcely tracked by brokerages, set to enter Nifty 50

Coverage may improve as more funds start chasing the stock, say market experts

Adani Enterprises (AEL) is pegged to replace Kolkata-based Shree Cement in the Nifty 50 index, a gauge for the performance of India’s capital market. If it enters Nifty, the diversified conglomerate will be the least-tracked company in the index.

According to Bloomberg, only two brokerages have coverage on the stock at present. Currently, the least-tracked companies in the index are Bajaj Finserv and Grasim, at 10 brokerages each. Group firm Adani Ports & SEZ, already part of the index, is tracked by 25 brokerages.

AEL, which has a market cap of Rs 2.8 trillion, is also under-owned by domestic mutual funds (MFs). As per Value Research, equity MFs held shares worth only Rs 5,000 crore of AEL at the end of June 2022 quarter. A large portion of this exposure is by arbitrage funds and passive funds, which track indices such as Nifty Next 50 or BSE 100, which AEL is currently part of.

Market players said the analyst coverage as well MFs exposure to AEL will increase once it enters the widely-tracked Nifty 50 index.

The review period to determine which stocks will enter and exit the Nifty indices ends next week. Typically, the National Stock Exchange (NSE) announces the changes in end of August or early September, which then get implemented at the close of trading on September 29.

*Not part of Nifty at present. Sources: Bloomberg, SmartKarma

With review period nearly complete, AEL is a high probability inclusion to the Nifty Index and will replace Shree Cement, said analyst Brian Freitas of Periscope Analytics who publishes on Smartkarma.

The number of shares passive funds will be required to buy of AEL, if it gets added to the Nifty index, will be equivalent to the stock’s five days of daily volume and 26 days of delivery-based volume, as per calculations done by Freitas.

As a result, the impact of Nifty inclusion on the AEL stock will be very high. More so because of the low ‘real public float’. While the public shareholding in AEL is about 28 per cent but Freitas says the ‘real public float’ is only 11.34 per cent. He has excluded the holdings of LIfe Insurance Corp (LIC), and funds like Elara, APMS, Vespera and Green Enterprises from the free-float calculation.

“LIC is a large holder as well and if they do not sell, the number of saleable shares reduces even further. Green Enterprises Investment, an arm of Abu Dhabi-based International Holding Company, invested around $1 billion in AEL in May and will not be a seller. That reduces the real float of AEL to 11.34 per cent, and the Nifty index passive trackers will need to buy nearly 7 per cent of the real float,” Freitas said in a note.

**ineligible for inclusion as they are not part of F&O segment; Sources: Bloomberg, SmartKarma

AEL’s inclusion in the Nifty index will result into inflows of Rs 2,172 crore by passive funds. Meanwhile, Shree Cement will see selling of Rs 882 crore.

Shares of AEL are already up 43 per cent calendar year-to-date (YTD) and have risen 18 per cent in the past one month. Shree Cement, on the other hand, is down 25 per cent YTD even though it has gained 10 per cent in the past one month.

Like most indices, Nifty 50 index considers free-float market capitalisation of its components. Interestingly, AEL’s free float mcap is not the highest among the stocks that are currently not a part of the Nifty. Adani Green, Adani Transmission and Avenue Supermarts have higher free float mcap than AEL. However, they are ineligible as they are not part of the derivatives segment, one of the prerequisites for index inclusion.

Currently, Shree Cement is the lowest ranked Nifty constituent, followed by Bharat Petroleum Corp and Hero Motocorp.

A sharp movement in share prices during the remaining seven days of the review period could change the pecking order of the stocks.