ICICI Securities recently noted that the Nifty index has seen the inclusion of highly ‘expensive’ stocks since FY18, leading to inflated index valuations. This trend of adding pricey growth stocks is expected to continue, according to the firm.
In a report dated April 24, ICICI Securities pointed out that the Nifty50 index’s price-to-earnings (P/E) ratio on a trailing basis has increased to 23 times from 22 times in FY18. However, if the same set of companies from FY18 had remained in the index, the P/E ratio would have actually decreased to 20.9 times, representing a 9 per cent discount compared to the current index P/E.
The brokerage highlighted that the inclusion of low-volatility growth stocks like Britannia, Nestle, Titan, Tata Consumer, Divi’s Lab, Apollo Hospitals, HDFC Life, and Bajaj Finserv has contributed to this trend. These stocks are inherently expensive, leading to the index appearing more costly.
ICICI Securities also mentioned that the median P/E of stocks added to the index during a change was 60 times, significantly higher than the median P/E of excluded stocks at 10 times. Excluded stocks included IndianOil, GAIL Ltd, Indus Towers Ltd, Zee Entertainment, Vedanta, HPCL, and Aurobindo Pharma.
The firm identified potential future inclusions in the index based on their high free float market cap, such as Jio Financial Services Ltd, Zomato Ltd, Trent Ltd, and Bharat Electronics Ltd. These stocks are considered expensive growth stocks compared to index valuations.
However, Jio Financial and Zomato are not currently part of the F&O list, while Trent and Bharat Electronics will need to meet the free float market cap criteria for the relevant period (Feb – Jul’24) to be considered for inclusion.
It’s important to note that the information provided by Business Today on stock market news is for informational purposes only and should not be taken as investment advice. It’s recommended that readers seek guidance from a qualified financial advisor before making any investment decisions.