Mukesh Ambani’s Reliance is taking oil and gas weightage higher in Nifty

Oil and gas, for instance, has the second-highest weightage in Nifty at 14.76% — thanks to the sharp rise in RIL.

By Urvashi Valecha

India’s stock markets have been led by financial stocks, especially banks, for the last one decade. The weightage of financial stocks in the Nifty has fallen to 34.38% in June against 41.98% in December 2019.

The Nifty has risen 39.38% from its March 23-lows but, Nifty bank has only risen 29.16%. While financials have come under pressure, shares of consumer companies and Reliance Industries (RIL) continue to shine. RIL has jumped 107.65% from its respective March lows, and is trading above its January-levels, taking the weight of oil & gas sector higher on the benchmarks.

Sectors such as oil and gas, information technology, telecom and pharmaceuticals have seen an increase in their weightage compared to last year. Oil and gas, for instance, has the second-highest weightage in Nifty at 14.76% — thanks to the sharp rise in RIL. The weightage of pharmaceuticals, telecom and information technology has risen to 3.03%, 3.53%, and 13.46%, respectively, against the 2.11%, 2.16% and 12.51%, respectively, in December 2019 as investors are betting on defensive stocks in the current environment.

Experts are of the view that there could be a change in leadership of the Nifty, where non-lending financial stocks, such as insurance companies, could come into the limelight. Last week the NSE announced that HDFC Life was set to enter the Nifty, replacing Vedanta. Amar Ambani, head of research (institutional equities) at Yes Securities, said SBI life Insurance could make its way into Nifty. “SBI Life is already slated to come into the Nifty, so insurance will come into the limelight. It is possible that if there are other laggards in the Nifty, they will make way for a new set of companies, a lot of them likely in insurance again, for instance ICICI Prudential,” he said.

While the financial sector continues to have a dominant position in the 50-share index, the weightage of the financial stocks, currently, is the same as that seen in December 2017, when it stood at 35.03%. From the nine financial sector stocks on the benchmark index, six belong to banks, which have been underperformers ever since the equity markets started recovering after hitting their rock bottom on March 23.

Banks such as IndusInd Bank, Axis Bank, State Bank of India, among others, are still trading below their respective January highs.

Banking stocks had been hammered the most in March, and their underperformance continues as investors have exited such stocks in the post Covid-19 scenario. This is because of concerns over the performance of leveraged business in year that will be characterised by a contraction in GDP. Sachin Shah, fund manager at Emkay Investment Managers, said, “Post Covid-19, the global economy is going to shrink to 5% and maybe Indian economy will also shrink in that range. Banking, as a business, is a leveraged business and when the economy will not perform well for a year or two, a lot of banks and NBFCs will be under stress. So, investors have exited from these stocks, resulting in the stock prices having crashed considerably and so, by default, their weight has come down.” He stated that certain banking stocks such as ICICI Bank, HDFC Bank in the last six years saw their prices rise because of the good performance they had delivered.

According to Amar Ambani, commodity plays like Tata Steel, Vedanta, GAIL can head out of the Nifty some time in future. Life insurance businesses along with asset management companies continue to do well in the current economy since they are non-lending businesses, according to Shah.

“Telecom, pharmaceutical businesses, financial services sectors such as insurance, broking, wealth management, and IT services may take up the leadership in the next two to three years from banking and financial services,” said Sachin Shah.