Dabur inclusion to push Nifty 50 valuation further

By: |
February 7, 2020 2:51 AM

On the basis of average six-month free float market capitalisation, Dabur, Godrej Consumer (GCPL) and Shree Cement have marginal differences, though Dabur ranks the highest and Shree Cement the lowest.

Dabur, Nifty 50 valuation, FY20 earnings, Yes Bank, Nifty50, Indiabulls Housing Finance, HPCL, Nestle IndiaThe index methodology comprises multiple criteria like liquidity, trading frequency and float adjusted market-cap among others for a stock to be included in the index.

The already stretched valuation of Nifty50 could increase further as Dabur replaces Yes Bank in the forthcoming index constituents’ change on March 27, 2020. Dabur India trades at a price-earnings (PE) multiple of 46 times its estimated FY20 earnings, while Yes Bank commands a PE of 14x, which is less than a third of the proposed new member.

On the basis of average six-month free float market capitalisation, Dabur, Godrej Consumer (GCPL) and Shree Cement have marginal differences, though Dabur ranks the highest and Shree Cement the lowest. Hence, Dabur is most likely to replace Yes Bank in the next NIFTY50 reshuffle, ICICI Securities wrote in an investor note.

If Dabur India gets a place on the Nifty50, that would be the third consecutive consumer stock addition since 2019 to the broader index. Earlier, Nestle India and Britannia Industries were inducted to the index by replacing Indiabulls Housing Finance and HPCL, respectively.

“On an FY20 PE basis, NIFTY50 is likely to become expensive from 17x to 17.07x as the likely new entrant has a much higher FY20 PE multiple relative to the likely exiting stock,” the brokerage said. The brokerage expects Nifty50 ETF and index fund-related buying to the tune of Rs 520 crore in incoming stock, which is 1.8% of free-float market cap of Dabur India. The sell-off in Yes Bank shares is expected to be at Rs 160 crore. At the close on Thursday, the free-float market cap of Dabur India stood at Rs 28,819 core on NSE against Rs 8,554 crore for Yes Bank.

The index methodology comprises multiple criteria like liquidity, trading frequency and float adjusted market-cap among others for a stock to be included in the index. The eligible securities need to be a part of Nifty100 index, and should be available for derivative trading on NSE. As a result, higher free-float stocks such as HDFC Life and SBI Life are ineligible as they are not being traded in NSE’s F&O segment.

Edelweiss Securities, in an earlier note, said, “Assuming neither SBI Life and HDFC Life are included in the F&O segment nor the Nifty Inclusion eligibility criteria are revised, then the next best candidate that fits the bill for inclusion in the Nifty is either Shree Cement or Dabur (replacing Yes Bank).”

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