Sharp surge could hurt Adani Group stocks' MSCI prospects: Analysts

Global index provider will soon decide on 'extreme price increase' criteria

The sharp surge in shares of Adani Group firms this year could prove detrimental to their chances of getting included in the MSCI global indices.

Shares of Adani Enterprises, Adani Total Gas, and Adani Transmission have more than doubled this year. All three stocks meet the current index inclusion parameters and, therefore, are the frontrunners to get included in the MSCI standard global indices, say analysts. The move could result in cumulative buying by exchange-traded funds (ETFs) to the tune of $580 million (Rs 4,200 crore).

However, MSCI has sought market feedback on whether “extreme price increase” should be a criterion for disqualification. The index provider floated a consultation paper in this regard in February. It gathered money managers’ inputs on the issue until Wednesday and will announce its discussion on the proposal before April 16.

“The Adani Group of stocks have run up a lot in the last three months. In case MSCI sets a rule on price movement, that can act as a deterrent to the inclusion,” says Abhilash Pagaria, an analyst with Edelweiss Alternative Research.

Market experts said MSCI’s decision will be keenly watched. “Stocks of the three firms could see a rally ahead of the scheduled MSCI semi-annual rebalancing in May. ETFs will be forced to buy the stock in large quantities if they are included in the index,” said an analyst seeking anonymity.

Funds with assets of over $50 billion track the MSCI standard global indices.

“Our initial analysis for the upcoming review suggests that Adani Group stocks will be the big winner as we expect them to collectively garner $600-700 million worth of flows,” adds Pagaria.

In the consultation paper, MSCI has defined extreme price increase as excess returns over the MSCI All Country World Index (ACWI) of at least twice, thrice or four times for one, two or three months, respectively. In simple words, say for instance the MSCI ACWI rose 10 per cent in Q1 2021, a gain of 40 per cent or more for a stock will be considered “extreme price increase”.

Market watchers say MSCI’s move could set a precedent to other index providers such as FTSE or even domestic players such as NSE Indices and Asia Index.

“Very often it has been seen that the stock gets added to an index when the best has played out. Therefore, an ‘extreme price increase’ criteria sounds logical. However, a stock has to gain to push out an existing stock from the index. It remains to be seen how the index providers strike a balance to ensure that a stock gains but not to an extent that it becomes a risk to the investors,” said another analyst.