Sensex Reconstitution | 3 Entries & 3 Exits

What Changes Made in Sensex Reconstitution / Re-balancing?

Introduction

As part of Sensex reconstitution exercise, Asia Index recently announced some changes in BSE Sensex. There are 3 new entries and 3 exits in BSE Sensex effective from December 23, 2019. Lets see which are those companies entering and leaving BSE Sensex?

Sensex Reconstitution| 3 Entries & 3 Exits

Announcement of Reconstitution Results of BSE Sensex

• Asia Index has announced the reconstitution results of major benchmark indices on 22nd November. The changes are effective at the open of Monday, December 23, 2019. According to the results, there are 3 companies entering and 3 companies are exiting in BSE Sensex.
• Asia Index Pvt. Ltd is a 50-50 partnership between :
  • S&P Dow Jones Indices LLC, the world’s largest provider of financial market indices and
  • BSE Ltd, Asia’s oldest stock exchange and home to the iconic SENSEX index – a leading indicator of Indian equity market performance.
• According to the results announced by Asia Index,
  • 3 Entries : Nestle India, Titan Company, Ultra Tech Cement
  • 3 Exits : Tata Motors (with Tata Motors DVR), Vedanta Ltd, Yes Bank

3 Entries

Nestle India

• Th stock has given the returns of around 41% over the 6 months period from 1st May to 31st October. Along with the consistent top-line as well as bottom-line growth, the PE ratio of Nestle was consistently rising. The stock has shown a continuous growth in its market cap in spite of having a premium valuation.
• Average disposable income of Indians is in an upward spiral. It offers an advantage to the companies like Nestle as more disposable income means more consumer spending which in turn means more revenue for sectors like FMCG and Consumer Durables.
• Thus, Nestle India is enjoying a premium valuation on account of its strong fundamentals and decent future prospects. Nestle has qualified for the inclusion in BSE Sensex on account of the required criteria like float adjusted and total market cap and being a part of BSE 100.

Titan Company

• It has grown around 17% with respect to the market cap from 1st May to 31st October. Being a consumer durable product company, the stock has shown a good sales numbers in Q4 FY19 as well as Q1 FY20
• Due to the cascading effect of the revenue on the operating profit and its margins %, net profits have also given steady growth in the same period.
• Thus the market cap of the Titan grew on a good top-line and bottom-line effect. On account of the premium valuation, the market cap has shown a steady rising trend. Thus, entered in BSE Sensex.

UltraTech Cement

• It may be surprising that how can UltraTech Cement has made an entry in the BSE Sensex in spite of giving negative performance since last 6-8 months. The stock has given -10% returns from 1st May to 31st October.
• However, free float market cap of the company is increased on account of a slight decrease in promoter’s holding by 0.5%. So, according to the float-adjusted market cap calculation, UltraTech Cement has entered into the BSE Sensex.

3 Exits

Tata Motors (with Tata Motors DVR)

• On account of a continuous slump going on in the Automobile Industry, Tata Motors stock is beaten down greatly over last 12 months.
• Because of the same reason the average market capitalization of Tata Motors has deteriorated adversely. The stock returns was -17.5% from last 6 months (1st May – 31st October). Recently the stock made a rebound slightly and on a recovery phase after Q2 FY20 results. However, the average market cap over the 6 months period was the key factor for exit call from BSE Sensex.
• The 6 month period (1st May – 31st October) is taken as a basis for evaluating the stocks for BSE Sensex re-balancing effective from 4th Monday of December.

Vedanta Ltd

• Over the period from 1st May to 31st October, Vedanta Ltd has given a negative performance of almost 21%.
• The stock has gone through a series of fall every time almost 4-5%.Thus, as a consolidated effect its market cap get impacted and the stock was not able to qualify the evaluating criteria required for BSE Sensex inclusion.
• In the last re-balancing of exercise held in June 2019, Vedanta Ltd was added to the BSE Sensex. But, in December-2019, it got the exit from the index.

Yes Bank

• Stock is almost 70% down over the 6 months period. Yes bank has underperformed on account of a number of reasons like huge NPA numbers in Q4 FY19 and Q1 FY20 results, thereby incurring big losses.
• Promoters stake sale by Mr.Rana Kapoor also imposed a negative impact on the bank.Thus, market cap has dropped continuously over the 6 months time.
• In the last re-balancing of exercise held in June 2019, along with Vedanta Ltd, Yes Bank was also added to the BSE Sensex. But, now, it got the exit from the index.