Brokerage expects aggregate weight of Nifty to drop, along with a drop in PE as well, but bets on PAT to rise, going forward.
The weightage of the pharmaceutical sector on the Nifty index is likely to drop to levels last seen after the Lehman crisis, analysts at ICICI Securities have written in a report.
Performance of pharma stocks has led to a decline in the free-float (FF) market cap (Mcap). It expects Lupin to exit from the index and make way for JSW Steel. In fact, Britannia Industries is likely to have ‘missed by a whisker’.
“Lupin’s exit comes after the exit of Aurobindo Pharma in the previous reconstitution in April 2018 and will result in pharma sector weight dipping to 2.7 percent in Nifty. The drop of 430 bps weight of pharma in the index since its March 2015 high of 7 percent is the highest across sectors in that period,” analysts wrote in the note.
Further, it expects the aggregated weight of 49 stocks on the index to drop as well. The FF Mcap during July end for JSW Steel is 1.7x that of Lupin. This could lead to a gain in the aggregate Nifty FF MCap of 0.3 percent.
“The gain is at the expense of the remaining 49 stocks although the change for each of the individual stocks will be negligible relative to the reshuffled stocks.”
The brokerage house also anticipates the overall price to earnings (P/E) ratio to be marginally lower from 20.69 to 20.53. The P/E of JSW Steel is much lower at 10.5 times relative to Lupin at 23.9.
If the change goes through as expected, the Nifty profit after tax (PAT) could rise by over a percent, but earnings per share (EPS) could increase dip to 0.8 percent.
After the change, Nifty’s FY19 RoE (return on equity) is likely to be improve 12 basis points from the current 15.58 percent.