Nifty's journey to Mt 10k

Nifty's journey to Mt 10k

The journey from 1,000 to 10,000, has delivered 11% CAGR returns

First time in its 21-year history, the benchmark index Nifty crossed and closed above the psychological 10,000 mark on Wednesday (July 26). The Nifty had touched the four figure mark in 1995. With this, the Nifty became second Indian benchmark index to trade in five digits.

The Indian markets remain buoyed by continued liquidity inflow amid a strong macro backdrop. domestic mutual fund inflows in CY17 YTD (year-to-date) stand at $7 billion, matching inflows recorded in the entire last calendar year. Even more notable are FII flows of $8.6 billion, higher than those recorded in CY15 and CY16. “The macro backdrop remains best in recent times, with inflation under control, twin deficits in check, stable currency, and policy momentum intact, which is evident from the smooth and timely GST implementation,” Motilal Oswal Securities Ltd said in a research report.

The only missing link in an otherwise positive set-up is earnings recovery. Nifty earnings have remained flat for the last five years (4% CARGR over FY12-17) and hold the key for further re-rating. While traversing its journey from 1,000 to 10,000, the Nifty has delivered 11% CAGR returns. Meanwhile, the market capitalisation of the index has expanded 48x from Rs 1.5 lakh crore to Rs 70.6 lakh crore, implying a CAGR of 20%.

The journey of Nifty from 1k to 2k was most excruciating, which took a total 2,282 trading days (almost nine years). The move from 6K to 7K also took some time (1,589 trading days, 6.5 years), with the markets being stranded in a long phase of correction in the aftermath of the Global Financial Crisis (GFC) in 2008. From June 26, 2009, the index shifted its computation to free-float methodology.

Out of the 50 stocks in Nifty, 15 have been part of the index since its inception - RIL, HDFC Bank, HDFC, SBI, HUL, ITC, Tata Motors, Hero Motors, Tata Steel, Hindalco, ACC, Ambuja, L&T, Dr Reddy’s Labs and Tata Power. The combined market-cap of these 15 stocks increased at 18% CAGR since inception. These 15 stocks weigh 46% in Nifty today v/s 53% at inception. Best performers (market cap multiple since Nifty inception, % CAGR) are: HDFC Bank (693x-36%), Hero Motocorp (126x-26%), HDFC (68x-22%), ITC (65x-22%), Dr Reddy’s Labs (65x-22%) and Reliance Inds (55x-21%), the Motilal Oswal research revealed.

New evolving sectors

Over the years, the sectoral representation in the Nifty has undergone a sea change, in consonance with the changes in the underlying economy — new sectors have evolved, while some of the erstwhile dominant sectors of the economy have lost relative importance in the new India.

Consumer (with 17.6%) had the highest weight in the Nifty at inception. Today, it stands shoulder-to-shoulder with IT, Oil & Gas and Auto, with approximately 10-11% weight. PSU Banks had the second highest weight of 12.2% at inception, while Private Banks (0.4%) had the lowest weight, with sole representation of HDFC Bank.

Today, at 23.9%, Private Banks have the highest weight, while PSU Banks have just 3.3% weight.

Textile and Chemicals, which had 8.3% weight at inception, have no representation today. On the contrary, Information Technology and Telecom, which had no presence in the index in 1996, today form 14% of the index.

The drivers of market earnings growth have changed over the last decade. While the large part of the first decade of the 21st century was characterised by stronger earnings performance from Cyclicals and Infrastructure sectors, the story has changed post the global financial crisis. Financials and consumer/consumer discretionary have exhibited earnings outperformance over 2008-17. The same is reflected in the change in their market capitalisation ranks.

The disproportionate influence of financials and consumer/consumer discretionary in the current cycle has been reinforced - these sectors have delivered best earnings performance and are re-rated significantly. Naturally, they have gained in prominence in the market cap rankings. Biggest gainers in market cap ranks are: Maruti, IndusInd Bank, Ultratech, Asian Paints, Eicher Motors, HDFC Bank and HUL. Similarly, the underperformance of Cyclicals is reflected in the change in market-cap ranks at the bottom, with Tata Steel, Hindalco, ACC and Tata Power being the key losers.

The Nifty is trading at a trailing P/E of 22.3x, at a 25% premium to its own long-period average. comparing the Nifty's current valuations with those in January 2008 (earlier peak), the index now trades at a 19% premium, Motilal Oswal noted.
Delivers 11% CAGR in 22 years

Since inception, the Nifty has delivered a CAGR of 11%; however, its total market cap is up 48x, implying a 20% CAGR. About 15 stocks have consistently remained on the index since inception. On a cumulative basis, the market cap of these stocks has gone up 35x, a CAGR of 18%. The best Nifty performers (market cap multiple since Nifty inception): HDFC Bank (up 693x), Hero Motocorp (126x), HDFC (68x), ITC (65x), Dr Reddy's Lab (65x) and Reliance Inds (55x).

These 15 stocks represented 53% weight of the index in March 1996, and now account for 46.4%. Interesting observations from sectoral weight changes since inception Consumer (17.6%) and PSU Banks (12.2%) had the highest weights in March 1996. Private Banks had a meagre 0.4% weight in the index then, with HDFC Bank as the sole representative. Today, Private Banks account for the maximum weight at 23.9%, while PSU Banks form just 3.3% of the index.

Consumer sector’s weight has shrunk to 10%. Some of the consumer companies that were part of the Nifty in 1996 (Brooke Bond, Ponds) have got merged/acquired. Textiles and Chemicals, which had 8.3% weightage in 1996, have no representation in the Nifty today. On the other hand, Technology and Telecom sectors, which were still in their infancy in mid-90s and had no representation in Nifty then, now account for 14% of the index. Auto weights have remained static at 11%.

Notwithstanding the recent buoyancy in the markets, if one were to compare the Nifty performance with the earlier peak of January 2008, then the returns exhibit only modest CAGR of 5%, largely reflecting the anaemic earnings performance. From the recent bottom levels of February 2016, Nifty is up 44% in 17 months.

The Nifty trades at a trailing P/E of 22.3x, at a 25% premium to its own long period average. Comparing the Nifty’s current valuations with those of January 2008 (earlier peak), we note that the index now trades at a 19% premium.

Nifty trailing P/B, at 3.1x, is at a 10% premium to LAP, but at a 22% discount to January 2008 P/B of 3.9x. Nifty RoE stands at 13.7%, a tad below its long-term average of 16.1%. Market cap-to-GDP ratio of 78% (FY18E GDP) is at its long-term average.

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