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.