The CNX Nifty logo is displayed on a glass wall at the National Stock Exchange (NSE) in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg) 

The Stocks Most Likely To Exit And Enter Nifty 50

The next review of the Nifty 50 Index is due and given the parameters that the National Stock Exchange follows, state-run refiner Hindustan Petroleum Corporation Ltd. is most likely to be replaced. And one of the two consumer goods makers could find their way into India’s benchmark index: Britannia Industries Ltd. and Godrej Consumer Products Ltd.

The indices are reconstituted twice every year based on data for six months ending January and July. The last change happened in August 2018 when Lupin Ltd. made way for JSW Steel Ltd.

Among the criteria the NSE follows to select the Nifty 50 constituents is that the free-float market capitalisation of the company being considered to be included should be at least 1.5 times that of the smallest member of the index, according to the NSE methodology document.

The second is impact cost or the cost of executing a transaction in a given stock, for a specific predefined order size at any given point of time. A stock needs to have enough liquidity where large orders can be executed without incurring an impact cost greater than 0.5 percent.

Liquid companies having average impact cost of 0.50 percent or less in the last six months for 90 percent of the observations for a basket size of Rs 10 crore are considered while making index inclusions.

Based on these criteria, the stock in line to make an exit is HPCL. The refiner has a free float market cap of Rs 18,020 crore and has the smallest market cap among Nifty 50 constituents.

There are two eligible companies from Nifty Next with more than 1.5 times bigger market cap that could replace HPCL: Britannia and Godrej Consumer.

The monthly impact costs available on the NSE website show that it’s lower for Britannia and Godrej Consumer than HPCL.

Other criteria for inclusion are:

  • The stock should be available for trading in the Futures & Options segment.
  • Companies eligible for inclusion in the Nifty 50 should have at least 10 percent of its stock available to investors.
  • The company must be domiciled in India and available for trade on the NSE.

Based on all the criteria, there is a heightened probability that Britannia could be a part of the index in the next index rejig, said IDBI Capital in a note.

Impact On Britannia

While the stock price movement of any company is subject to market swings and the fundamentals of the company, Motilal Oswal sees an inflow of nearly $68 million (about Rs 480 crore) in Britannia after the inclusion due to rebalancing of index funds which is expected to come in with a weight of 80 basis points versus HPCL’s weight of 40 basis points.

Motilal Oswal said there is no fixed date for announcement, it usually comes in the third week of February for the Jan. 31 cut-off observation.