RIL to L&T: Old firms' sway in Nifty50 index weakens rerating case

Companies that are part of the benchmark Nifty50 index for more than a decade continue to have a considerable sway on it. 

Sample this: 33 out of the 50 companies have been part of the index since 2012. 

These companies account for 90 per cent of the profit pool. 

Further, they have a combined weighting of 83 per cent in the Nifty. 

According to a report by BNP Paribas, the high influence of old companies in the index weakens the case for a rerating. 

“The 17 new stocks have only 14 per cent weight in Nifty50 and account for only 10 per cent of its profits. Against this, materials, utilities and oil & gas (except Reliance Industries) have only 7 per cent weight in the index, but contribute 25 per cent to its profits that brings down the weighted average. Thus, we believe the newly introduced stocks do not justify a significant rerating of the index,” says Kunal Vora, head of India equity research, BNP Paribas, in a note. 

Of the Nifty50 constituents that remain constant since the 2011-12 financial year, 18 have reported double-digit earnings compound annual growth rate (CAGR) over the past decade, of which seven have managed over 15 per cent CAGR. 

Of these seven companies, four are from sectors such as metals, utilities and energy. 

On the other hand, the 17 new entrants into Nifty50 have a fairly strong earnings growth momentum. 

Of these, 13 have a profit history over the last decade and reported double-digit earnings CAGR during that period (except Nestlé India), with nine delivering more than 15 per cent earnings CAGR, the note adds.