The Ship of Theseus Paradox Nifty 2008 and

The Ship of Theseus Paradox – Nifty 2008 and Nifty 2016 Nooresh Merani www. nooreshtech. co. in

The Free Float Market Cap Methodology • Free-float market capitalization takes into consideration only those shares issued by the company that are readily available for trading in the market. • It generally excludes promoters' holding, government holding, strategic holding and other locked-in shares that will not come to the market for trading in the normal course. www. nooreshtech. co. in

Example – State Bank of India • • Market Price = 205 on 31 st May 2016 No of Shares = 7762777042 Market Cap = 7762777042 * 205 = 159098 Cr Promoter Shareholding = 60% roughly Free Float Shareholding = 40% Free Float Market Cap = Free Float % * Market Cap = 40% of 159098 = 63639 So the Free Float Market Cap of SBI is 63639 Cr and it has a weightage 2. 13% in the Nifty Free Float 50 Index. www. nooreshtech. co. in

Example – Kotak Mahindra Bank • • Market Price = 746. 55 on 31 st May 2016 No of Shares = 1834382158 Market Cap = 1834382158* 746. 55= 136945 Cr Promoter Shareholding = 40% Free Float Shareholding = 60% Free Float Market Cap = Free Float % * Market Cap = 60% of 136945= 79438 So the Free Float Market Cap of SBI is 79438 Cr and it has a weightage 2. 66% in the Nifty Free Float 50 Index. www. nooreshtech. co. in

Free Float Problem • So even though State Bank of India has a much higher market cap compared to Kotak Mahindra Bank the weightage in Nifty is lesser than it. • SBI is at 2. 13% compared to 2. 66% for Kotak Mahindra Bank. www. nooreshtech. co. in

Free Float Methodology Adoption • Sensex has been on a Free Float Methodology from September 2003 • Nifty shifted to Free Float Methodology from June 2009 • Majority of the Indices in the World are based on Free Float Methodology !! • Higher the Free Float – Higher the Liquidity – Lower the Impact Costs and lesser chances of Manipulation makes it ideal for Exchanges to have Free Float Index. www. nooreshtech. co. in

The Effects of Free Float Methodology in Indian Indices • Around the world the promoter holdings are low and the float is anywhere between 40 -90% • In India till the time 75% the float was between 10 -60% • Financials get a higher weightage as the free float is higher as promoter shareholding is lower. • PSUs get a lower weightage in the Index as the promoter shareholding is high and free float is low. • The big concern in Bull Market is company diluting capital receive higher weightage to a company doing buybacks. www. nooreshtech. co. in

The Churn in Nifty & Sensex • Only 30 -35% of the Index or roughly 1/3 rd of the original constituents of Nifty ( 1996) and Sensex ( 1986 ) are still present in the Current Nifty. • Every 10 years the churn is almost 40 -50%. • A lot of so called Blue Chip Companies coz of presence in Nifty/Sensex in a decade turn down to be obsolete and destroy shareholder wealth. • Apart from the churn the Weightage Shifts are also Huge. • Luckily Nifty has a Rule of 5 changes only in a year and that too twice a year only else the churn would be much more !! ( For example today bottom 5 -6 stocks free float market cap is lesser than 5 -8 names from Nifty next 50 index. ) www. nooreshtech. co. in

The Ship of Theseus Paradox • The ship wherein Theseus and the youth of Athens returned from Crete had thirty oars, and was preserved by the Athenians down even to the time of Demetrius Phalereus, for they took away the old planks as they decayed, putting in new and stronger timber in their places, in so much that this ship became a standing example among the philosophers, for the logical question of things that grow; one side holding that the ship remained the same, and the other contending that it was not the same. • — Plutarch, Theseus[2] www. nooreshtech. co. in

Ship of Theseus Paradox - 1 – Nifty 50 Analyse India www. nooreshtech. co. in

Ship of Theseus Paradox - 2 – Nifty 50 www. nooreshtech. co. in

Nifty – 2008 if you did not change the Planks/Stocks Nifty on 31 st Jan 2008 5137. After many Nifty on 29 th June 45 changes in Stocks 2016 8204 59. 70 Returns % Nifty on 31 st Jan 2008 5137. Keeping same 45 Stocks 39. 60 Returns % Nifty on 29 th June 2016 7170 But if you randomly bought Nifty 50 at various times in 2010/2011/2013 the returns would not differ by much Analyse India www. nooreshtech. co. in

Nifty – New Planks in every Euphoria. Example 1999 -2000 – IT & Media • • Inclusion of IT stocks Inclusions in The Euphoria of 1999 -2000 Increased closer to Y 2 K Infosys / NIIT got included in Nifty in October 1998 at a peak. Easy to say in price of 20 and 120 and were at 400 and 500 by the peak Hindsight March 2000. ( Adjusted prices) • Satyam inclusion in September 1999. HCL Infosystems and Zee Tele in May 2000. Digital Equipment India in Sept 2000. • Many other old economy stocks Bpcl, mrpl, thermax, Andhra valley power supply , GE Shipping etc got excluded. Analyse India www. nooreshtech. co. in

Nifty – New Planks in Euphoria. Example 2005 -2007 Suzlon/Siemens included in June 2006 Reliance Communications in Sept 2006 Reliance Petroleum/Sterlite Inds in April 2007 Unitech included in October 2007 by that time it was a 500 -800 BAGGER from 2004 prices. Inclusion of • Idea Cellular/Cairn included in December 2007 Real Estate Stock like • DLF/Power Grid included in March 2008 • • • Unitech just before peaking out. Tata Tea, IPCL, hpcl, mtnl, Glaxo, bajaj auto, Shipping Corporation etc Easy to say in were the companies removed. Hindsight www. nooreshtech. co. in

Nifty – New Planks in 2016 • Aurobindo Pharma, Bosch, Eicher Motors included because of huge outperformance and major weeding out of old wealth destroyers like Reliance Infra, Jaiprakash Associates, The churn Vedanta, cairn etc. today is more so • So no new sector becoming a major part of the Index because of outperformance. the underperfor • More of a decaying planks or wealth destroyers weeded mance of many stocks out. then coz of • No Euphoric sectoral moves leading the Market. new fresh Polished Planks Analyse India www. nooreshtech. co. in

Nifty the Ship of Theseus from 2008 to Only 10 2016 survive in 4 are no more part of Nifty RIL and RPL =14. 56% in 2008 is now only 5. 3% RCOM at 7 th no more part of Nifty. 31 st January 2008 RELIANCE ONGC BHARTIARTL NTPC SBIN ICICIBANK RCOM LT BHEL SAIL INFOSYSTCH TCS HDFC ITC RPL UNITECH WIPRO HDFCBANK TATASTEEL STER Top 20 12. 15% 7. 13% 5. 49% 5. 45% 4. 61% 4. 29% 4. 17% 3. 59% 31 st May 2016 INFY HDFCBANK ITC HDFC RELIANCE ICICIBANK TCS LT 8. 36 7. 91 6. 62 6. 55 5. 3 4. 77 4. 58 4. 05 Top 4 of 2016 = 29. 4% Was only 10% in 2008 3. 40% 2. 99% 2. 88% 2. 71% 2. 48% 2. 41% 2. 10% 2. 08% 1. 87% 1. 82% 1. 78% TATAMOTORS AXISBANK SUNPHARMA KOTAKBANK SBIN M&M HINDUNILVR MARUTI INDUSINDBK BHARTIARTL ASIANPAINT HCLTECH 2. 98 2. 88 2. 77 2. 66 2. 13 2. 06 2. 03 1. 85 1. 8 1. 55 1. 49 1. 4 Big Shift from 2425% being Oil and Gas to Financials at 30% Analyse India www. nooreshtech. co. in

The Big Shift from Investment Linked Nifty to Financials Led Nifty 2016 Analyse India Investment Linked 23. 97 Exports 23. 44 Financials 30. 29 Consumers & Disc 20. 82 www. nooreshtech. co. in

How do Analysts/Market-Men Value Nifty • Generally most of the Strategy Reports talk of how Nifty is quoting at 20 x Trailing earnings/ 16 x forward earnings and how it is higher than the Average P-E Multiple of last 10 years etc !! • A recent report mentioned a target based on a possible multiple of 14 x as that was the Index multiple in post 2008. • Most analysts compare current/forward P-E of Nifty to the Average/Mean/Peak/Bottom P-E of historical Nifty. Analyse India www. nooreshtech. co. in

The Valuation Problem with Nifty of 2016 • Today’s Nifty 50 is not even comparable to that 10 years back. Only 3 out of Top 10 in Nifty in 2007 are still there in the Top 10. Refer our note - Nifty 2016 is a very different animal from Nifty 2008 !! • So how can we really try to compare current valuations to previous averages when it was a totally different Nifty? It’s like comparing what P-E HDFC Bank deserves in comparison to SBI. (SBI had a weight of 4. 61% in 2007 and now 2% compared to HDFC Bank from 1. 87% weight to 7. 5% today!! ) Analyse India www. nooreshtech. co. in

Shift towards Financials makes the P-E Multiple shift higher • 30% of Nifty is now Banks and Financials where parameter for Valuation is generally Price to Book and not P-E. • Lack of PSUs like ONGC/SBI/NTPC and capital intensive biz like Reliance which are generally at Low P-E. • Embedded Values in Financials in terms Insurance/Asset Management and Foreign Subsidiaries in Tata Motors etc keep P-E high in some stocks and then others like Asian Paints/ITC/HUL/Pharma tend to trade at higher P-E. Analyse India www. nooreshtech. co. in

Conclusions • Conclusion – Possibly The Base P-E or Average P-E is much higher for current Nifty !! • Low Debt Companies and Less Capital Intensive and less Investment Linked Companies in Nifty 50 make it an Index which does not Swing Wildly in Magnitude. • We would not see wild swings of 30% absolute downsides in corrections ( like in 2004/2006) or 60% downsides in Nifty in Bear Markets ( 1992/2000/2008) until we see New Planks i. e New stocks becoming part of the Index because of a huge outperformance. Analyse India www. nooreshtech. co. in

Nooresh Merani Cell: +91 -9819225396 nooreshtech@analyseindia. com twitter. com/nooreshtech www. facebook. com/nooreshtech www. nooreshtech. co. in

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