Exit of Dr Reddy's pushes pharma weight to 8-year low in Sensex rejig

Domestic brokerage Motilal Oswal Institutional Equities has upgraded the earnings estimates of Sensex for FY19, in the wake of changes in the composition of the index effective Monday (June 18).

According to the brokerage, Sensex’s earnings per share (EPS) for 2019-20 will see an upgrade of 1.7 per cent due to the inclusion of the proposed changes to the index. 

Metal and mining firm Vedanta has been included in the index with a weight of 1.3 per cent. This takes the total weight of metal firms in the index to 2.6 per cent. 

On the other hand, Dr. Reddy’s Laboratories has been excluded from the index. The Hyderabad-based drug maker follows Cipla and Lupin, which were excluded six months ago. This exit of Dr. Reddy’s has pushed the weight of the pharma index to an eight-year low of 1.7 per cent. Capital goods and telecom sectors are among others that have also seen their weight go down in the index. 

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The weight of PSUs will hit eight per cent, the lowest in at least a decade, from 8.1 per cent currently and 8.5 per cent in FY18, according to the brokerage. While the weight of existing Sensex stocks will decline by 50 basis points, the top 10 will be impacted most, with their combined weight declining from 66.1 per cent to 65.7 per cent. The top stocks that will see their weights decline include HDFC Bank (-6 bps), Reliance Industries (-5 bps) and HDFC (-5 bps).  

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Market participants say the current changes do not come as a surprise since pharma stocks have been battered in the last one year. The addition of Vedanta over Dr. Reddy’s is expected to boost the net profit of the index. 

Financial services continue to be the largest sector in the benchmark index with a weight of 40.4 per cent, of which private banks account for 28.8 per cent. The share of state-owned lenders has reduced to three per cent. HDFC Bank with a weight of 11.8 per cent will be the largest firm in Sensex, in terms of weight. Reliance Industries will be the second on the list, with a weight of 9.1 per cent.