Private lenders, IndusInd Bank and Yes Bank, are set to become a part of the BSE Sensex 30 on December 18, increasing the weight of financial stocks in the benchmark index to over 42%. Analysts believe this can significantly influence the performance of the popular market index. This may even help the BSE Sensex to outperform the more diversified Nifty 50, which most equity mutual fund schemes use as their benchmark, as the two lenders will contribute nearly 5% to the total index weightage.
Currently, the HDFC twins along with ICICI Bank, Kotak Mahindra Bank, State Bank of India and Axis Bank account for close to 39% of the Sensex weightage. Market participants observe that the addition of these two lenders to the index will further boost its free-float market capitalisation which stood at Rs 31.96 lakh crore at the end of Tuesday. The index had converted to free-float methodology with effect from September 2003. IndusInd Bank has a promoter holding of 16.8% as of September 2017 while Yes Bank has a promoter holding of 20.1%. The Sensex has outdone the Nifty 50 on returns only in two years over the last decade. While in 2009 Sensex yielded a return of 81% against Nifty’s return of 75.8%, in 2013 it outperformed the Nifty 50 by 2.2%.
A K Prabhakar, Head of Research at IDBI Capital observed, with the inclusion of two banks that have higher free-float shares, the ability to outperform the Nifty 50 is high. “Even a one percent increase in these two stocks will have great impact on the overall index movement,” he argued. Drug makers Cipla and Lupin will be dropped from the index. After the exclusion of these two pharma firms, the Sensex is left with only Sun Pharmaceutical Industries and Dr Reddy’s Laboratories from the pharma sector.
This has led to the weightage of the sector shrinking to 3.3% from 5% earlier. Pharma stocks have been under pressure due to an increase in negative FDA actions, domestic regulatory pressures and growing competition. The Nifty Pharma index lost over 32% in value since the peak it had hit in April 2015. In contrast, Bank Nifty gained 38% in the same period. And this could well be a pointer for the future, if past performance is any indication. The index changes announced by Asia Index (a joint venture between S&P Dow Jones Indices and BSE), will be effective from December 18. The move is a part of Asia Index’s semi-annual reconstitution results.