15 June 2017
India Strategy
BSE Sensex: 31,076
Latest Strategy Report:
Taking stock of
MODIfied regime
S&P CNX: 9,578
Sensex reconstitution; EPS downgrade of 1.5%
Weight of Financials to rise 250bp; Tech weight to hit near-decade low
The S&P BSE Sensex composition is all set for a reshuffle on Monday, 19 June 2017.
Kotak Mahindra Bank (KMB) will replace GAIL India, and Tata Motors Differential
Voting Rights (DVR) will be included as an additional stock in the benchmark.
In this report, we will analyze how these changes will (i) impact the earnings for the
benchmark and (ii) alter the weights of various sectors.
Sensex reconstitution: BFSI will have 36% weight (+250bp)
KMB will be included in the benchmark with 3.5% weight, and thus, will be
among the top-10 stocks by weight. Tata Motors DVR will enter with 0.5%
weight, helping maintain the weight of Auto sector in the benchmark.
With the exit of GAIL (weight: 0.8%), Oil & Gas stands to lose the most in terms
of weight (-110bp to 9%). Other losers include Consumer (-40bp), Technology
(-40bp), NBFCs (-30bp), Healthcare (-20bp) and Capital Goods (-20bp).
Least impacted sectors would be Utilities, PSU Banks, Telecom and Metals.
BFSI will have a weight of 36.1% (+250bp) post the reshuffle, which will be
almost equivalent to the combined weights of Consumer, IT and Auto.
Aggregate weight of the existing 29 Sensex stocks will decline by 320bp.
Top-10 stocks to be most impacted (in terms of weight) by the reshuffle: HDFC
Bank (-40bp), HDFC (-30bp), ITC (-30bp), Reliance Inds (-30bp), Infosys (-20bp),
ICICI Bank (-20bp), L&T (-20bp), TCS (-20bp), Maruti (-10bp) and SBI (-10bp).
Sensex EPS for FY18/FY19 will see a downgrade of 1.5%/1.4%, primarily due to
a higher increase in free float market cap of 2.7% compared to a rise of
1.1%/1.3% in free float PAT for FY18/FY19.
Notably, Kotak Mahindra Bank’s free float market cap is 4.4x of GAIL India.
We now estimate Sensex EPS at INR1,557 for FY18 (+15.4%) and ~INR1,895 for
FY19 (+21.7%).
We have recently downgraded GAIL India to
Sell
(refer our detailed report –
A case for lower PE; US contracts pose threat of losses).
Sensex trades at a P/E of 19.7x on FY18E earnings based on current
composition; this will expand to P/E of 20x post the reshuffle.
Domestic MFs currently hold 0.8% of their total AUM in GAIL, which is in line
with the weight of the current benchmark. However, domestic MFs are under-
owned in Kotak Mahindra Bank at 1.7% of total AUM.
DIIs hold 7.8% (-0.6% QoQ in Mar 2017) and FIIs hold 38.6% (+1.7% Q oQ in
March 2017) in Kotak Mahindra Bank.
Out of top-20 domestic MFs, 15 have exposure of less than 2% of their AUM to
Kotak Mahindra Bank.
Of the top-10 stocks to be most impacted, four are from Financials
Sensex EPS to see downgrade of
1.5%/1.4% for FY18/FY19
Current EPS (INR)
Revised EPS (INR)
Sensex EPS for FY18/FY19 to see downgrade of 1.5%/1.4%
1,922
1,895
1,581
1,557
FY18E
FY19E
Expect higher activity in the reshuffled stocks
Gautam Duggad
(Gautam.Duggad@MotilalOswal.com); +91 22 3982 5404
Deven Mistry
(Deven@MotilalOswal.com); +91 22 3982 5440
Investors
June 2017
are advised to refer through important disclosures made at the last page of the Research Report.
1
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

India Strategy | Index Reconstitution
Exhibit 1: Pvt banks will see an increase in weight; Auto
weight to be unchanged due to addition of Tata Motor-DVR
Current Weight
New Weights w.e.f 19th June
Exhibit 2: Oil & Gas, Consumer, Technology – biggest losers
due to the reshuffle
Current Weight
13.7
13.2
12.6
10.1
New Weights w.e.f 19th June
24.1
21.3
11.9
12.2
9.2
8.9
5.1
9.0
12.0
4.9
4.9
4.7
Banks-Pvt
Auto
Oil & Gas Consumer Technology
NBFC
HealthcareCap. Goods
Source: BSE, MOSL
Interesting observations from sectoral weight changes in the past decade:
Financials, Autos at all-time high; Capital Goods, Telecom at new lows
Weight of Financials has kept rising.
It will touch a new high of 36.1% (+1.8x in
10 years) with the inclusion of Kotak Mahindra Bank .
Auto about to overtake IT:
Auto has bridged the gap versus Technology,
especially over the last two years. The gap between Auto and Technology has
come off from 610bp in FY16 to virtually zero now. Post the reshuffle, Auto
weight will be at a new high of 12%.
Healthcare weight is down significantly
due to the underperformance over the
last two years.
Weights of Capital Goods and Telecom are now at an all-time low
of 4.7% and
1.6%, respectively. Notably, Telecom weight is down from ~10% in FY07. Both
the sectors will now have representation of only one stock in the benchmark
(L&T and Bharti Airtel).
Consumer weight has remained stable
over the last four years, but has
increased significantly (+570bp) over the last 10 years given its sharp
outperformance v/s the index.
Real Estate and Cement have no representation in Sensex.
Metals weight has bounced off its lows
of sub-1% in FY16, but it is far off from
the peak of 7.2% in FY10.
New
w.e.f 19th June
12.0
36.1
4.7
13.2
4.9
1.1
1.2
9.0
12.2
1.6
4.0
100.0
91.4
8.6
Avg Weight
FY07-17
8.1
25.5
7.2
3.1
10.4
3.9
1.1
4.1
14.5
0.9
15.6
4.3
4.1
100.0
87.7
12.3
Chg. New vs.
Avg Weight (pp)
3.9
10.5
-2.5
-3.1
2.8
1.0
0.0
-3.0
-5.6
-0.9
-3.4
-2.7
-0.2
3.7
-3.7
2
Exhibit 3: Trend in Sensex sectoral weight (%) – Financials, Autos at all-time high
Sector
Auto
Banking/ Finance
Capital Goods
Cement
Consumer
Health Care
Infrastructure
Metals
Oil & Gas
Real Estate
Technology
Telecom
Utilities
SENSEX
Private
PSU
15 June 2017
FY07
4.0
21.1
7.3
4.2
7.5
3.6
3.6
16.0
19.9
9.7
3.3
100.0
88.1
11.9
FY10
6.4
23.0
9.7
2.2
7.2
1.1
1.3
7.2
16.8
1.0
14.6
4.1
5.4
100.0
86.4
13.7
FY13
9.4
26.2
5.6
13.8
4.7
3.9
13.7
16.2
2.4
4.0
100.0
87.4
12.6
FY16
10.8
28.9
4.8
12.5
8.3
1.0
0.9
10.0
17.9
2.1
2.8
100.0
91.6
8.4
FY17
11.4
32.0
4.7
13.0
6.3
1.1
1.2
10.8
13.5
1.7
4.5
100.0
89.4
10.6
Current
11.9
33.6
4.9
13.7
5.1
1.1
1.2
10.1
12.6
1.7
4.1
100.0
90.3
9.7

India Strategy | Index Reconstitution
Brief snapshot of key sector weights vis-à-vis sector earnings growth and valuation trends over the last
decade
Exhibit 4:
Auto weight has gone up consistently
Auto weight (%)
231.2
9.9 9.4
8.8
71.7
15.5
-5.9
11.4
10.6 10.9 10.8
Auto PAT growth YoY (%)
Exhibit 5: …and valuations have expanded too
Auto Sector P/E (x)
31
24
17
10
3
14.9
10 Yr Avg (x)
12.0
30.4
16.0 7.5
4.0 3.8
6.4
3.4
-59.0
22.3
4.7 15.1 -9.8
19.3
Exhibit 6: Consumer weight has been steady of late
Consumer weight (%)
21.9
16.5
14.7
10.8
7.2
20.9
Consumer PAT growth YoY (%)
Exhibit 7: …but valuations are at decadal high
19.6 19.4
13.7
11.5 13.8
8.3
13.2
16.5
10.2
12.5 13.0
10.1 9.1
12.4
7.3
43
36
29
22
15
Consumer P/E (x)
10 Yr Avg (x)
38.9
29.5
13.1
7.5 7.4
Exhibit 8: Financials weight in Sensex up 1.8x in a decade..
Financials weight (%)
Financials PAT growth YoY (%)
32.0
28.9
32.0
Exhibit 9: …valuations still off from peak but it’s a story of
two halves – Private v/s PSU
2.8
2.3
Financials P/B (x)
10 Yr Avg (x)
36.1
55.3
21.1
18.7
21.1
39.7
19.6
27.5
24.8 24.6 26.2
23.0
2.2
1.8
1.8
1.3
0.8
25.8 21.1 21.4
17.2 17.6
1.8 8.1
22.6
-35.5
Note: Weights for FY18E represent pro forma weight to be effective from 19th June.
15 June 2017
3

India Strategy | Index Reconstitution
Exhibit 10: Healthcare weight has come off drastically since
FY16…
Healthcare weight (%)
64.4
28.2 30.0
42.2
6.6
15.7 19.3
5.1
14.8
Healthcare PAT growth YoY (%)
8.3
6.3
9.9
Exhibit 11: ..and valuations at discount to LPA
36
30
24
18
12
22.3
Healthcare P/E (x)
10 Yr Avg (x)
3.6
16.1
-0.3
2.1
1.7
4.9
8.0
4.0
1.1 1.1 2.7 4.7
21.0
Exhibit 12: Technology weight at near-decade low
Technology weight (%)
48.2
19.9
12.2 14.6
11.8
15.9 18.3 16.9 15.1
18.6
16.5 16.1
16.2 16.6
31.6
16.1 17.9
27.3
13.5
12.2
11.5
6.1 7.9
Technology PAT growth YoY (%)
Exhibit 13: …valuations at LPA
23
19
15
11
7
Technology P/E (x)
10 Yr Avg (x)
16.0
15.7
2.4
Exhibit 14:
Private v/s PSU weights in Sensex (%)
Private
11.9
13.7
16.1
13.7
12.6
14.2
12.6
PSU
10.8
10.6
8.4
10.6
9.7
8.6
PSU weights in Sensex
to be in single-digits
88.1
86.3
83.9
86.4
87.4
85.9
87.4
89.2
89.4
91.6
89.4
90.3
91.4
Source: BSE, MOSL
Aggregate weight of existing 29 Sensex stocks to see a decline of 320bp
Of the top-10 stocks to be most impacted in terms of weight, four are from
Financials.
The top-10 stocks to get most impacted by the reshuffle are HDFC Bank (-40bp),
HDFC (-30bp), ITC (-30bp), Reliance Inds (-30bp), Infosys (-20bp), ICICI Bank (-
20bp), L&T (-20bp), TCS (-20bp), Maruti (-10bp) and SBI (-10bp).
15 June 2017
4

India Strategy | Index Reconstitution
Exhibit 15: Existing stocks weight change (pp)
-0.1 -0.1 -0.1 -0.1 -0.1 -0.1
-0.1 -0.1 -0.1
-0.1 -0.1 -0.1
-0.3 -0.3
-0.4
-0.2
-0.2 -0.2
-0.2 -0.1
Source: BSE, MOSL
Sensex EPS to see downgrade by ~1.5% for FY18/FY19
Notably, Sensex EPS will see a downgrade in estimates by 1.5%/1.4% for
FY18/FY19. This is because free float market cap will increase by 2.7% v/s rise
of 1.1%/1.3% in free float PAT for FY18/FY19.
Kotak Mahindra Bank’s free float market cap is 4.4x of GAIL India.
We now estimate Sensex EPS at INR1,557 for FY18 (+15.4%) and ~INR1,895 for
FY19 (+21.7%).
Sensex trades at a P/E 19.7x on FY18E earnings based on current composition;
will expand and trade at 20x post the reshuffle.
Exhibit 17: FY19E Sensex EPS to see 1.4% downgrade
FY19E EPS
21.6
15.4
Growth YoY (%)
21.7
Exhibit 16: FY18E Sensex EPS to see 1.5% downgrade
FY18E EPS
17.2
Growth YoY (%)
1,581
1,922
1,895
1,557
Current EPS (INR)
Revised EPS (INR)
Current EPS (INR)
Revised EPS (INR)
Source: Company, MOSL
Exhibit 18: Stock-wise contribution to growth in FY18E Sensex EPS (INR)
6 5 4 4 4 3 3 2 2 2 2 1 1 1 0 0 0
20 13 11 9 7 6 6
21
-1
-1 -6
58 23
Top 5 stocks to
contribute 65% of
earnings growth
in FY18
1,349
1,557
Source: MOSL
15 June 2017
5

THEMATIC/STRATEGY RESEARCH GALLERY

DIFFERENTIATED PRODUCT GALLERY

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Strategy | Index Reconstitution
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