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Nestle's inclusion in Nifty to raise FMCG weight; pvt banks to stay at top

Nestle (India), according to reports, is likely to replace media firm Zee Enterprises in the Nifty50 index from October futures & options (F&O) series. The likely inclusion is expected to increase the weight of fast moving consumer goods (FMCG) sector in the index by 94 basis points (bps) to 9.2 per cent. While the weightage of the FMCG sector will rise that of the media sector will be eliminated, according to a report by ICICI Securities dated August 27.

Reports say the churn is expected to be formally announced by August 30, while the changes are likely to be effective from September 27, 2019.

The Nifty50 index, which comprises well-diversified 50 stocks accounting for various sectors of the economy, is reviewed every six months while a four-week notice is given to the market before making changes to the index set.

“Despite the churn, the private banks will still top the chart with a weightage of 26 per cent in the index, followed by information technology sector at 14.9 per cent, energy (12.3 per cent), other financials (11.2 per cent) and FMCG (9.2 per cent),” said Siddharth Gupta, an analyst at ICICI Securities.

The replacement of stocks in Nifty 50, if any, is generally implemented from the first working day of futures & options (F&O) series of April and October. In case of any replacement in the index, a notice of four weeks is given to the market participants. According to a new announcement by NSE, stocks which are permitted to trade in NSE platform but are not listed in NSE will also be considered for inclusion in the indices.

The market capitalisation (market-cap) of Nestle (India), as of Tuesday's close, stood at Rs 1.21-lakh crore while free float market-cap stood at Rs 44,829.32 crore.


“On FY20 price-to-earnings (P/E) basis, Nifty50 is likely to become a tad expensive – from 18.56x to 18.74x – as the likely new entrant has a much higher FY20 PE (56.4) as compared to Zee, which is likely to exit”, wrote Vinod Karki, research analyst at ICICI Securities in a co-authored note with Siddharth Gupta.

The price-to-earnings (P/E) is one of the most popular indicators to ascertain the fundamentals of stocks/index. It is calculated by dividing a company's current stock price by its earnings per share (EPS). Hence, Nifty P/E ratio measures the average P/E ratio of the Nifty50 companies covered by the Nifty Index.

That apart, the inclusion of Nestle will lead to a gain in the aggregate Nifty50 free-float market capitalisation (FF market-cap) of 0.5 per cent. Free float market capitalisation of any stock implies those shares of the company that are available for trading to public investors. It excludes locked-in shares, such as those held by company executives and governments.

The report also states that after the index change, Nifty50 FY20E FF profit after tax (PAT) will fall by 0.47 per cent while the FF market-cap will grow by 0.50 per cent, thereby reducing Nifty50 EPS by 0.96 per cent.

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