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'Index management', a practice by influential market traders to influence benchmark gauges by excessively buying or selling stocks with maximum weightage, has become more tedious and expensive of late. The reason: the top two bellwethers of India's main indices, Reliance Industries and Infosys, are under performing because of uncertain business prospects. This has resulted in these traders looking at stocks with lesser weightage than the two to 'guide' the indices, though unsuccessfully at times. While the index weightage of these two stocks has eroded over months because of lagging performance, it has sparked a debate in the market about their potential successor.
"People tend to look for new 'stock leaders' when prevailing ones fail," said Ambareesh Baliga, COO, Way2Wealth Stock Brokers. "Investors lose faith when bellwether stocks stop performing. This came true in the case of Reliance and Infosys. Reliance could not deliver the targets it set while Infosys performed below market expectations." A few names appear to be contenders for the second spot occupied by Infosys in terms of weightage, but the top position held by RIL may take some time to be broken, brokers said. Reliance's weightage on the Nifty is 8.95%, down from 10.59% in December 2008 in line with the stock's underperformance to others on the index. The weightage of Infosys is 8.29%.
The top contender to Infosys' position on the Nifty would be ICICI Bank , whose weightage is 7.45%. Brokers and market participants say the possibility of ICICI Bank, India's second largest bank, to touch the weightage of Infosys is high, as investors' appetite for shares of banks, considered the proxy for an economy's growth, is expected to revive once inflation and interest rates begin to fall. At the same time, investors have turned less sanguine about Infosys' prospects to fetch returns higher than the indices in recent years.
"Infosys, at one point, commanded a 5% price premium over its peers. It fell out of favour among investors after several of its founding members, including chairman Narayana Murthy, retired. I do not think these companies will command the same clout," said Bharat Shah of Ventura Securities. Though Reliance shares may continue to lag most index stocks in the foreseeable future due to lack of clarity about the output from the company's only gas-producing block, D6 of the Krishna-Godavari (KG) basin and uncertainty over new business ventures, other stocks may take time to catch with Reliance up in weightage. The free-float market capitalisation of RIL is around Rs 1.57 lakh crore, while that of Infosys is Rs 1.33 lakh crore. ICICI Bank's free-float market cap is Rs 1.22 lakh crore. ITC, which has the fourth highest weightage on the Nifty at 6.39%, has a free-float market cap of Rs 1.09 lakh crore. The weightage of stocks on indices is determined on the basis of the extent of public shareholding, known as the free-float market capitalisation.
Yet, brokers say the biggest threat to Reliance's weightage position, in theory, would be the much-talked-about merger of Housing Finance Development Co (HDFC) and HDFC Bank. Based on current values, the merged entity would command a weightage of 10.74% on the Nifty. "The combined entity of HDFC and HDFC Bank could be the biggest challenge to Reliance's weightage, but this argument is still hypothetical," said an equity fund manager with a foreign bank-owned mutual fund. The managements of HDFC and HDFC Bank have repeatedly denied the possibility of a merger in the past though analysts feel this step will be key to their survival. But, the dominance in weightage may be short-lived for future heavyweights.
"Short investment horizon of investors will not let a stock to be on top for long," said Way2Wealth's Baliga. "Tata group stocks (Tata Motors, TCS and Tata Steel) have done well over the past one year, but they'll not be able to stay at top for long." Rajeev Thakkar, CEO, Parag Parikh Financial Advisory, said, "I don't see the possibility of new stocks displacing the existing lot soon. If the Centre goes aggressive on its divestment, then stocks like ONGC and Coal India have the potential to be there in the long run."
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