 "RIL, ONGC, SBI, BHEL, L&T could be out of Sensex in 10 years: Ambit Capital")
Besides these five, Ambit also expects Bharti Airtel, NTPC, Mahindra & Mahindra (M&M), Bajaj Auto, Vedanta, Hero MotoCorp, Tata Steel, Hindlaco and Tata Power to get excluded over the next decade. It, however, withheld one name due to internal compliance reasons.
According to Ambit's analysis, Sensex movement over a 10-year window from 1986 to date shows the churn ratio tends to rise when the economy is undergoing irreversible structural changes. Going ahead, it expects the Modi Government to force the next big disruption - dismantling crony capitalism and the subsidy culture, and directing savings away from land and gold to the financial system.
“We expect Sensex churn to rise to 50 per cent in the next decade (2015 to 2025) from historical lows of 27 per cent during the most-recent decadal bucket (2004 to 2014). This means that 15 stocks will be replaced in the Sensex in the upcoming decade,” says Ambit.
New kids on the block
With as many as 15 companies exiting the 30-share index, Ambit applied its proprietary filters such as the ‘greatness’ score, Coffee Can Portfolio and P-75 Index to arrive at the list of new constituents.
To identify potential Sensex entrants from the current listed universe, Ambit used a five-step process that included analysis based on efficient capital allocation, consistent financial performance, elimination of Ambit’s P-75 companies (eliminate companies whose core competitive advantage is politically connectivity), market-cap buckets and, lastly, pick and choose from the short-list.
The entrants from the listed world include Page Industries, Eicher Motors, Asian Paints, Nestle and Pidilite (from consumer staples / discretionary), HCL Technologies (IT services), and Kotak Mahindra Bank and IndusInd Bank (banking, financial services and insurance), Torrent Pharma and PI Industries.
Five out of the 15 new entrants will enter through the initial public offering route, Ambit says, which includes themes such as e-commerce (Flipkart and Paytm); insurance (ICICI Prudential Life Insurance); consumer discretionary services (Café Coffee Day); and disinvestment (Hindustan Aeronautics Limited).
Some analysts, however, disagree with this theory and suggest that though new economy plays could be included going ahead, a disruption of this magnitude may not be possible.
Explains G Chokkalingam, founder and managing director, Equinomics Research & Advisory: “This is a classic example of new economy stocks replacing the old economy scrips. There could be a few replacements going ahead, but overall I don’t expect even half of the old economy plays to get replaced.” “We have seen the dot-com boom and nothing much changed in terms of index constituents. The funda of index construction is simple that the failed ones or the ones on the verge of failure are removed and the ones that have succeeded are included. A good example is Infosys that was a small counter to begin with and then became an index stock,” he adds.