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Nifty rejig may see ETF selloff in Lupin, gain for JSW Steel


Pharmaceutical major Lupin could see selling to the tune of ₹210 crore by exchange traded funds if it is excluded from the benchmark Nifty in the upcoming index review, said institutional brokerage ICICI Securities.

JSW Steel, which is the most likely candidate to replace Lupin in the index could witness buying worth ₹360 crore by ETFs upon inclusion in the Nifty, said the brokerage.

An index fund is a mutual fund which tries to mirror a market index as closely as possible by investing in all the stocks that comprise that index in proportions which is equal to the weightage of those stocks in the index. Any inclusion or exclusion, therefore, is likely to have a corresponding impact on the stock.

“Active funds wanting to align their holdings with benchmark indices could further add to the buy/sell momentum,” said ICICI Securities.

Lupin’s exit could also have an impact on the sector’s weightage in the index. The pharmaceutical sector, which has been losing weight in the Nifty due to decline in free float market capitalisation as a result of underperformance, could see its weightage dip to levels last seen post the Lehman crisis after Lupin’s exclusion, said ICICI Securities.

“Lupin’s exit comes after the exit of Aurobindo Pharma in the previous reconstitution in April 2018 and will result in pharma sector weight dipping to 2.7% in the NIFTY50. The drop of 430 bps (basis points) weight of pharma in the index since its March 2015 high of 7% is the highest across sectors in that period,” said ICICI Securities.

The analysis by the brokerage on float market capitalisations and weight calculations are based on free float market capitalisations at the end of July while the actual weightages in the reconstituted Nifty index would be based on August-end free float market capitalisations.

The index reshuffle will come into effect from September 28 and the announcement could come between now and September 1.

The index could also become marginally cheaper, to 20.53 times on a forward price-to-earnings basis from 20.69 times, as the likely new entrant in the index has a much lower price-toearnings ratio compared to the stock which is likely to exit, said ICICI Securities.

The situation would have been different if Britannia Industries were to be included in the index as the stock has a higher P/E and higher return on equity which would have increased the multiple of the index rather than decrease it.

However, the brokerage said that Britannia’s average free float market capitalisation in the six months to July is lower than JSW Steel’s, which is why the biscuit maker is likely to miss out on entry into the Nifty, said the brokerage.

Source: Economic Times