Index changes have a story to tell

Financial advisory, Motilal Oswal, provided an interesting “time-lapse” of the Nifty 50 index across a period of 15+ calendar years, starting January 2002. Changes in constituents and changes in the weights of individual stocks and sectors also give us an insight into long-term returns. 

There was a key change in methodology in 2009. The Nifty started being weighted by free-float market capitalisation instead of absolute market cap. This reduced the importance of PSUs. The PSU weight in the Nifty is now just above 10 per cent, down from 31.5 per cent in 2008. The change also reduced the weight of PSU-dominated sectors like oil and gas and of course, PSU banks. 

Just 22 stocks remain out of the 50 that were part of the Nifty in 2002. These include four auto stocks, three IT stocks, two FMCG, three private banks, two oil and gas companies, metals, etc. The weight of that “core” 22 stocks has declined from 75 per cent (2002) to around 63 per cent. While only Reliance Industries has been among the top ten stocks (by weight) across the entire period, eight stocks have consistently been in the top 10 zone for the past five years.  

Massive weight changes have occurred in oil and gas (down), IT (down), consumer (down), auto (up) and financials (up). The biggest gainer has been the financial sector. Back in 2002, financials (NBFCs plus private banks plus PSU banks) contributed 11.7 per cent weight. That is now over 36 per cent. At that time, PSU banks held 4.7 per cent of total weight - PSU banks are now down to 3 per cent. 

Private banks have risen from 4.4 per cent to over 24 per cent, with several additions. NBFCs have risen from 2.6 per cent to 8.4 per cent. The highest weighted stock, HDFC Bank, is up from 1.8 per cent in 2002 to 9.8 per cent now. Motilal Oswal points out that insurers may soon be included. This would mean broader financial representation and even higher financial sector weight. Automobiles rose from 5.6 per cent (2002) to 10.8 per cent. New inclusions (Maruti went public in 2003) reflect higher middle-class vehicle penetration. 

The oil and gas sector has swung between 17.5 per cent (2002) to a high of 25.4 per cent (2007) to a low of 9.1 per cent (2015) and a current value of 11.3 per cent. It's hovered at 11-12 per cent for the past five years. Future volatility will be driven by international oil and gas prices along with energy policy changes.  

Big declines were recorded by technology, consumer and pharma sectors. Tech was the "heaviest" sector in 2002 at 24 per cent even though the Internet bubble had burst. It is down to 11 per cent, Wipro alone lost over 10 per cent of weight, partly due to free-float. Telecom (2.6 per cent in 2002) zoomed to a high of 11.6 per cent in 2008 and it's back down to 2.1 per cent now. 

Consumer was #2 in 2002 with a weight of 17.9 per cent - it's now #5 with a weight of 9.7 per cent. Healthcare weight has halved, from 8.3 per cent to 4.1 per cent. Metals, telecom, cement and media have all been pretty stable. Capital goods (only represented by Larsen & Toubro) is at 4 per cent, it was above 10 per cent in 2007. 

Over the years, narrowing is visible. The dominance of financials and auto is consistent and should continue into the new Samvat. The falls across IT, health care and FMCG have been equally consistent in the inverse direction. Volatility in oil and gas, telecom and capital goods is symptomatic of cyclical and policy risks. These could be contrarian picks when the weight drops below a certain critical level.