Strategy – Alternate view

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New-age stocks poised for entry into NIFTY50 but could miss entry in Sep’21 reshuffle; Cyclicals also improve free float market cap rank!

Research Analysts: Vinod Karki [email protected] +91 22 6637 7586

Siddharth Gupta, CFA [email protected] +91 22 2277 7607

Alternate view is a differentiated approach of analysing stocks and markets which combines the discipline of our proprietary fundamental quantitative frameworks with the judgement of bottom‐up research for generating investment ideas

Please refer to important disclosures at the end of this report

` Equity Research July 23, 2021

CNX Nifty: 15824 Strategy ICICI Securities Limited is the author and distributor of this report New-age stocks poised for entry into NIFTY50 but could miss entry in Sep’21 reshuffle; Cyclicals also improve Alternate View: Nifty50 reshuffle free float market cap rank!

Based on data till 19th Jul’21, the upcoming semi-annual NIFTY50 reshuffle could

result in Info-edge being the closest contender to replace IOCL on 29th Sep’21. However, Info-edge is marginally behind in terms of average free float market

capitalisation criteria (US$ 5bn and 3.7% lower than 1.5x that of IOCL – the smallest free float market cap stock within the current NIFTY50 index) while fulfilling other conditions such as inclusion in the F&O list and being part of the upcoming proforma

NSE100 universe amongst others (full list of criteria is given below).

 New-age economy stocks with >100x P/E ratio poised to enter the NIFTY50 index: will be the first pure play internet platform company to be included in the NIFTY50 index as and when it qualifies. To put things into perspective the US Dow Jones Industrial Average still doesn’t have any of the internet platform companies such as Amazon or Google as part of its constituents given the limitations of it being a price weighted index. In the upcoming proforma NSE100 universe list, which will be based on the average free float market cap since Feb’21 till now, two other non-NIFTY50 index stocks that rank ahead of Info-edge are: Avenue Supermarts, and . However, given that both the stocks are not part of the F&O list currently, they are excluded from our likely list although Avenue Supermarts has the edge in terms of qualifying as a F&O stock. All the three stocks are notably from the new-age economy sectors of internet businesses, organised discount grocery retail with e-commerce incubation, and a green energy company, respectively. Also, all these three companies have a 1-year forward P/E ratio of >100x, thereby inflating the NSE 100 P/E ratio as compared to the NIFTY50. New large cap internet platform companies like Zomato with high free float market cap due to zero promoter holdings could be serious contenders for entry into the benchmark indices going ahead. NIFTY50 index exclusion and inclusion trends reflect the emerging pockets of demand in the economy over the long term:

 2003-11 was driven by improving gross fixed capital formation (GFCF): Rising investment rate drove demand in the economy during 2003-11 and bulk of the stock additions to the index were from the investment and related credit cycle of the economy.

 Private final consumption expenditure (PFCE) along with selective exports growth drove demand during 2012-20 and bulk of the additions were from the consumption side of the economy.  Recent trends include: o Improving investment rate, commodity cycle and declining NPA cycle: Stocks from the investment and related credit side of the economy improved their free float market cap rankings over the past six months; these are stocks related to industrials, global markets, metals and banks. o New-age economy: As mentioned above, new-age economy stocks are poised to Research Analysts: enter the index. Our analysis of the digital economy (link) suggests strong demand Vinod Karki creation in the economy going ahead. [email protected] o Rising demand for insurance and non-lending financial intermediaries: Over +91 22 6637 7586 the past few years, private insurance companies, which have staged robust growth, Siddharth Gupta, CFA [email protected] have seen several inclusions in the index. +91 22 2277 7607

Please refer to important disclosures at the end of this report

Strategy, July 23, 2021 ICICI Securities

New-age stocks poised for entry into NIFTY50 but could miss entry in Sep’21 reshuffle

New-age economy stocks with >100x P/E ratio poised to enter the NIFTY50 index. Our analysis of the digital economy (Link to report) indicates strong growth going ahead.

Table 1: Key stocks for the upcoming reshuffle – while Adani Green and Avenue supermarts lose out not being part of F&O, average free float market cap for Infoedge is <1.5x the average free float market cap for IOCL Full float Free float Rs bn Current 6M Current 6M Bloom Sector market cap Average Rank market cap Average Rank F&O? NIFTY50 constituents ranked by Free float mcap rank – IOCL has the lowest rank (67) I O C L IOCL IN Non-renewable energy 997 958 46 269 259 67 COAL IN Non-renewable energy 890 878 51 303 298 58 EIM IN Two wheelers 705 716 61 360 365 51

Stocks outside NIFTY50 ranked by Free float mcap rank – while Adani Green and Avenue have higher ranks, they are not part of F&O currently Adani Green ADANIGR IN Renewable Energy 1,531 1,761 21 429 493 39 No Modern Trade & e- Avenue Super. DMART IN commerce incubation 2,158 1,995 19 496 459 40 No Info Edge INFOE IN Digital platforms 660 623 72 396 374 50 Yes Note: Average refers to the period Feb-Jul’21 (six months). Source: Niftyindices.com, Capitaline, I-Sec Research

Stocks related to investments and global markets have seen the sharpest improvement in market cap rankings while defensive stocks have seen sharp drop in ranking since the last semi-annual change to the NIFTY50 index in Mar’21

Table 2: Rank within top 250 companies – Cyclicals sector companies have seen the largest gain in ranks, defensives the largest drops Previous* FF New FF Name Bloom ticker Previous* rank New Rank Improvement Avg mcap Avg Mcap Adani Enterp. ADE IN 100 324 121 53 68 TTMT IN 272 569 52 32 20 Adani Ports ADSEZ IN 293 528 50 34 16 TATA IN 372 752 36 20 16 JSW Steel JSTL IN 312 574 42 29 13 Nestle India NEST IN 605 612 19 26 -7 Divi's Lab. DIVI IN 428 508 31 38 -7 I O C L IOCL IN 218 259 60 67 -7 Dr Reddy's Labs DRRD IN 594 607 20 27 -7 NTPC NTPC IN 456 521 28 36 -8 Eicher Motors EIM IN 329 365 39 51 -12 Hero Motocorp HMCL IN 398 396 34 47 -13 Britannia Inds. BRIT IN 433 415 30 44 -14 *Note: Previous refers to the free float market caps from the period Aug’20 to Jan’21, which were used in the previous Nifty50 reconstitution Source: Niftyindices.com, Capitaline, I-Sec Research

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Strategy, July 23, 2021 ICICI Securities

NIFTY50 index exclusion and inclusion trends reflect the emerging pockets of demand in the economy over the long term

2003-11 was driven by improving gross fixed capital formation (GFCF) resulting in more stocks being added from this space while since 2011 consumption has been resilient while GFCF kept declining

Chart 1: Trend in share of GDP %

PFCE Total consumption GFCF (RHS)

75% 36% 34% 70% 32% 30% 65% 28% 26% 60% 24% 22% 55% 20% Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21

Source: CEIC, I-Sec research

Table 3: YoY growth in Real GDP, % FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 PFCE 3.4 6.0 2.9 5.9 5.2 7.5 4.9 7.3 4.5 5.0 6.7 7.4 5.5 7.3 6.4 7.9 8.1 6.2 7.6 5.5 -9.1 GFCE 1.4 2.4 -0.2 2.8 4.0 8.8 4.1 9.4 11.4 14.2 5.2 6.5 0.6 0.6 7.6 7.5 6.1 11.9 6.3 7.9 2.9 GFCF -1.8 22.2 -0.7 5.1 11.5 16.4 13.9 16.3 3.2 7.7 11.0 12.1 4.9 1.6 2.6 6.5 8.5 7.8 9.9 5.4 -10.8 Real GDP 3.8 4.8 3.8 7.9 7.9 7.9 8.1 7.7 3.1 7.9 8.5 5.2 5.5 6.4 7.4 8.0 8.3 6.8 6.5 4.0 -7.3 Source: CEIC, I-Sec research Chart 2: Number of stocks added to the NIFTY50 index reflect aggregate demand trend in the economy…

Capex Consumption Financials

30

25

20

15

10

5 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20

Source: Niftyindices.com, Capitaline, I-Sec Research

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Strategy, July 23, 2021 ICICI Securities

Chart 3: …and so did the weight of stocks from respective sectors in the NIFTY50 index

Capex Consumption Financials 80 70 60 50 40 30 20 10 0 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20

Source: Niftyindices.com, Capitaline, I-Sec Research Chart 4: On index earnings as well, Capex driven stocks have ceded large share of earnings pool to financials, exports and consumption

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Capex Consumption Financials IT + Pharma

Source: Capitaline, I-Sec Research

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Strategy, July 23, 2021 ICICI Securities

Chart 5: Digital platform index after tracking the NIFTY50 for several years is showing a clear divergence in performance since FY19 (Free float weighted index of stocks in the area of e-commerce platforms)

Digital index Nifty

900 800 700 600 500 400 300 200 100 0 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Sep-12 Dec-12 Sep-13 Dec-13 Sep-14 Dec-14 Sep-15 Dec-15 Sep-16 Dec-16 Sep-17 Dec-17 Sep-18 Dec-18 Sep-19 Dec-19 Sep-20 Dec-20

Note: Refer our note on Digital economy dated 23rd Feb 2021 Source: Capitaline, I-Sec Research

Annexure 1: Key points from index guidelines

Table 4: Key points from index methodology document Heading Key points Domicile Must be domiciled in India and traded on the NSE Eligible Securities Constituents of NIFTY 100 index, and available for trading in NSE’s Futures & Options segment Liquidity Should have traded at an average impact cost of 0.50 % or less during the last six months for 90% of the observations for a portfolio of Rs100mn. Impact cost is the mark-up suffered while transacting the desired quantity of a security compared to its ideal price – (best buy + best sell)/2 Float-Adjusted Average free-float market capitalisation is at least 1.5 times the average free-float market capitalization of Market Cap the smallest constituent in the index Listing history A newly listed security is eligible if it fulfils the normal eligibility criteria for the index – impact cost, float- adjusted market capitalization for a three-month period instead of a six-month period. At the time of index reconstitution, a company which has undergone a scheme of arrangement would be eligible for inclusion if as on the cut-off date for sourcing data of preceding six months for index reconstitution, a company has completed three calendar months of trading period after the stock has traded on ex-basis subject to fulfilment of all eligibility criteria for inclusion in the index Trading frequency The company’s trading frequency should be 100% in the last six months Index The index is reconstituted semi-annually considering 6 months data ending January and July respectively. Reconstitution In case of any replacement in the index, a four weeks’ prior notice is given to the market participants Additional index reconstitution may be undertaken in case any constituent undergoes a scheme of arrangement. Equity shareholders’ approval to a scheme of arrangement is considered as a trigger to initiate the exclusion of such stock. Limit A maximum of 10% of the index size (by number of stocks) may be changed in a calendar year. However, this limit shall not be applicable for exclusion on account of scheme of arrangement. Source: www.niftyindices.com, I-Sec research

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Strategy, July 23, 2021 ICICI Securities

Annexure 2: Free float calculation

As per the index methodology, the investible weight factor (IWF) is determined as the amount available for trading and which is not held by entities having strategic interest in a company. Following categories are excluded from the free float factor computation:  Shareholding of promoter and promoter group  Government holding in the capacity of strategic investor  Shares held by promoters through ADR/GDRs.  Strategic stakes by corporate bodies  Investments under FDI category  Equity held by associate/group companies (cross-holdings)  Employee Welfare Trusts  Shares under lock-in category

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Strategy, July 23, 2021 ICICI Securities

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New I-Sec investment ratings (all ratings based on absolute return; All ratings and target price refers to 12-month performance horizon, unless mentioned otherwise) BUY: >15% return; ADD: 5% to 15% return; HOLD: Negative 5% to Positive 5% return; REDUCE: Negative 5% to Negative 15% return; SELL: < negative 15% return

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