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TAKING STOCK
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Is the Sensex revamp worth the trouble?
Sachchidanand Shukla
The Bombay Stock Exchange Sensex will sport a new look from
7th January, 2002. Hero Honda Motors (HHM) and HCL Technologies
will replace Mahindra & Mahindra and NIIT, according to
a decision taken by the index committee of BSE. This will be
the fourth revamp of the Sensex in as many years. The exercise
aims at making the Sensex more representative and sensitive.
However, a close look raises questions over the relevance of
such revamps. Are such changes really worth it or are they merely
‘cosmetic’?
Since the BSE follows the market capitalisation criterion, the
new scrips with higher market cap surely win over the old ones.
However, there is a larger question, that of issue of divergence
and sensitivity of the index. HLL has regained the top slot
with a market cap of Rs 48,174 crore or 28.7 per cent of the
total market cap, followed by Reliance Industries and Infosys
with 13.2 and 11.1 per cent, respectively. The top five scrips
can overly influence the Sensex owing to their higher weighting.
As of now, the top five scrips have a bigger influence on the
index than the remaining 25 scrips as they account for 57 per
cent (Table 1) making the Sensex a highly skewed one. Besides,
thanks to the meltdown in the new economy sector, the FMCG (fast
moving consumer goods) industry accounts for 28.77 per cent
now followed by the infotech sector with 13.94 per cent weighting
(Table 2). In that case does it make much of a difference to
exclude or include scrips at the lower half of the Sensex?
Second, will the inclusion or exclusion have a significant impact
on the index by way of its sensitivity? Or, in other words,
does the volatility of Sensex indicate true representation of
the broader market? NIIT and M&M had 0.37 per cent and 0.38
per cent weighting in the Sensex with ‘Betas’ of 0.89 and 0.92,
respectively. However, the Sensex’s sectoral composition will
not be affected since the incoming scrips belong to the same
sectors as the outgoing ones. Also, it is unlikely that the
index will be more volatile.
As for the incoming scrips, they gain in terms of perception.
The mere fact that they are being included in the Sensex enhances
their standing in the eyes of the investor. Conversely, it may
be argued that since the companies are more liquid and have
maintained a positive investor perception, thanks to their steady
performance, they have been included in Sensex in the first
place.
If one looks at share prices of Hero Honda and HCL they show
that they have enjoyed a steady appreciation in prices since
the announcement of their inclusion in the Sensex. Whereas,
NIIT and M&M have suffered. While the rise or fall in the
share prices cannot be attributed solely to the inclusion or
exclusion of the scrips into the Sensex, it certainly is a major
factor. Second, owing to the revamp in the Sensex, index funds
will have to adjust their portfolios by buying the incoming
scrips and jettisoning the outgoing ones. This again may boost
the scrips. Of course, the portfolio reshuffle has its own cost
that has to be borne by who else but the investors of the respective
funds.
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