HDFC Life to replace Vedanta in Nifty 50; index funds, ETFs may buy Rs 1,000 cr HDFC Life shares

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Published: July 7, 2020 1:07 PM

With Anil Agarwal-led Vedanta getting a go-ahead from shareholders to take the company private, an ‘out of turn’ change in the benchmark Nifty 50 has been made.

The change in Nifty 50 should not act as the primary argument for buying the stock, analysts warned.

With Anil Agarwal-led Vedanta getting a go-ahead from shareholders to take the company private, an ‘out of turn’ change in the benchmark Nifty 50 has been made. The index will see Vedanta’s exit, and the mining major will be replaced by HDFC Life at the end of this month. While the exit of Vedanta will rejig the Nifty 50 index, the index funds and ETFs that mirror the benchmark will also have to make the necessary changes. This, according to experts, could initiate inflow of funds worth somewhere between Rs 820 crore to Rs 1,000 crore into HDFC Life.

HDFC Life might not just see inflows from index funds and ETFs but from other mutual funds as well. “Due to HDFC life inclusion in NIFTY 50, ETF which invests in a similar weight to the NIFTY index will be allocated funds to HDFC Life. And there is a high possibility other regular mutual fund schemes could also buy owing to strong growth prospects and pandemic will help them to garner business faster space,” Jaikishan Parmar, Senior Equity Research Analyst, Angel Broking, told Financial Express Online. The decision to push Vedanta out and to replace it with HDFC Life comes ahead of the semi-annual change that is expected at the end of August this year. However, the decision to delist the company is a corporate action that triggers an ‘out of turn’ change.

“Currently, Nifty 50 ETF and index AUMs stand at Rs 914 billion (Rs 91,400 crore). Vedanta currently has an estimated weight of 44bps in the index, while HDFC Life is expected to enter the index with a weight of 90bps, entailing ETFs and index funds buying worth Rs 8.2 billion (Rs 820 crore),” said analysts at ICICI Securities in a recent report. The inflows into HDFC Life will not just be aided by the change in Nifty 50 but also by the growth prospects of the insurance space. “We expect around Rs 900 crore – Rs 1000 crore of flow into HDFC Life from ETF funds, however, considering the growth prospect of the insurance industry, other MF schemes and investors will also invest for the long term,” Jaikishan Parmar added.

However, the change in Nifty 50 should not act as the primary argument for buying the stock, analysts warned. “The inclusion and exclusion of stock in any index should not be the primary argument for buying stock. Buying decisions should be based on growth prospects of company industry size, and Penetration and finally return ratio. Etc,” he added. Currently, HDFC Life is trading at a higher valuation, compared to peers at 5.6x FY20EV, while ICICI Prudential Life is at 2.7x FY20EV and SBI Life Insurance is at 3x FY20EV. 

ICICI Securities further expects SBI Life Insurance to replace ZEE Entertainment in the semi-annual Nifty 50 rejig. The brokerage also expects the exit of Bharti Infratel, with Divi’s Lab replacing the stock.

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