Stocks may go bad, not Sensex and Nifty

Sensex conquered the 32000 peak last week. At a time when the industrial production growth is abysmally poor, bank loan growth at a six-decade low (as banks go breathless under bad loans), and IT companies ruthlessly retrenching employees, stock indices have continued with their party. As usual, clueless stock analysts were scrambling for the reason.

Indian stock markets are of course tracking the positive global markets as foreign funds continue to bet on Asia's third largest economy. But in this rally, they are only a side player. Implementation of India’s long-awaited tax reform, the goods and services tax, could have pushed up the market, though the initial confusion is still creating a substantial amount of transient pain. Last week, the analysts finally settled down on a vacuous reason: the retail inflation slipped further, creating room for another round of interest rate revision, and it would hopefully invigorate the slowing industrial growth engine.

The reason cited is as absurd as the growth in two stock indices -- Sensex and Nifty, primarily running on sentiments.

Like how we change the methodology for calculating GDP or wholesale inflation, in order to get clarity on India’s economic landscape, Sensex and Nifty undergo an overhaul too. Bad apples from their kitty are routinely taken out. Of course, it gives the indices a new look, with the motley crowd of stocks representing the changing face of India Inc. But this exercise intrinsically gives a push to the index as new performing stocks are brought into the basket.

The oldest index in the country, S&P BSE Sensex is a basket of 30 constituent stocks, with base year fixed at 1978-79 and base value, 100. The Index Committee meets every quarter and announces the revision in Sensex constituents, if any. The general guidelines for selection of constituent stocks include market capitalisation (stock should figure in Top-100 companies listed by full market cap), average daily trades (should be among Top-150 companies listed by average number of trades per day for last one year) and average daily turnover (should be among Top-150 companies, too), among others.

Rarely have we seen companies hacked from the Sensex kitty make a significant comeback. Most of them continue to languish outside the elite group.

At present, the Sensex is dominated by banks (SBI, HDFC Bank, Kotak Mahindra Bank, Axis Bank and ICICI Bank), pharma companies (Cipla, Dr Reddy’s, Sun Pharma and Lupin) and auto majors (Bajaj Auto, M&M, Hero Motocorp, Maruti Suzuki and Tata Motors).

Of course, the constituents of Sensex and Nifty are likely to witness more churn in the coming months as the government drives ahead with its disruptive policies. Some of today’s revered stocks will vanish into thin air just like the two companies--Hindustan Motors and Premier Padmini-- that dominated the Indian auto space till India opened up the market in the early Nineties and part of Sensex then, were consigned to the footnote of Indian history. Several blue-chips of yester year, owned by Birlas, Ruias, Singhanias and Wadias, have slithered down from their peaks, while some others owned by Tatas, Ambani, Bajaj and Mahindra have continued to have a grip over the indices, at least for now, along with some debutants such as Adani, Mittal and Gupta (Lupin).

Meanwhile, Sensex/Nifty will continue to conquer new peaks riding new darlings of the market.

The writer is editor, DNA Money.  He tweets at @AntoJoseph