The Sensex and Nifty at close to all time high levels at 21,000 and 6250 as of 30th October 2013 are almost at similar levels seen in December 2007. In absolute terms the indices have hardly given any returns over the December 2007 to October 2013 period. However during the time period under review there have been many value creators and value destroyers. The value creators have outperformed the indices by a vast margin while the value destroyers have underperformed the indices by a vast margin. It is important to identify future value creators even if broad market outlook is not positive.
Value Creators in Sensex and Nifty December 2007 to October 2013
The IT companies TCS and Infosys have created value for their shareholders since December 2007. TCS has gained 295% in terms of market capitalization and Infosys has gained 81.5% in terms of market capitalization. The other IT company- HCL technologies has gained a spot in the index and has given a return of 255% from Rs.306 in December 2007 to Rs.1085 in October 2013. The IT sector has a weightage of 16.5% in the Nifty Index as on October 2013 and It is expected that IT sector would be one of the highest in terms of market capitalization in 2018 as the growth and momentum in revenue and profitability is expected to continue in the longer term scenario.
The number of Banks in the Nifty 50 have increased as the Banking and Financial Services sector has shown growth and expansion to create value for the shareholders. The weightage of Banks in the Nifty has increased from 12% in 2007-08 to 18.5% as on October 2013. HDFC Bank has shown considerable movement in terms of the position of the company in Nifty 50 from December 2007 to October 2013. HDFC Bank market capitalization has increased by 140% from December 2007 to October 2013. The Bank now stands among the top ten companies by market capitalization in the Nifty in September 2013 whereas it was ranked at 22nd position in December 2007. ICICI Bank has lost 40% value in terms of market capitalization from December 2007 to October 2013. New stocks in the index include Axis Bank, Bank of Baroda and Kotak Mahindra Bank.
Capital Goods and metal stocks have lost their value in terms of market cap and names like L&T and BHEL are observed to have lost their top ten position since December 2007. Metal stocks such as Sterlite and National Aluminium have been removed from the index while others such as Tata Steel, SAIL and Hindalco have been rerated to lower positions in the table in the current scenario. The capital goods and metals stocks have not created value for shareholders as the stocks have underperformed the Nifty since the financial crisis of 2008-09. Leveraged capital goods and metal stocks have been observed to have lost value for the shareholders since the financial crisis of 2008-09 as hardening interest rates and high inflation in the economy has made it difficult for these companies to improve their profitability coupled with a demand slowdown that has drastically decreased capacity utilization.
The upward shift in the positions of the Automobile stocks in the Nifty 50 index shows their economic performance from the year 2007 onwards. The economic performance for the Auto stocks has gained value for the shareholders with improvement in productivity and use of latest technology amidst intense competition among the players.
Pharma stocks such as Sun Pharma and Dr. Reddys have gained in value by increase in market capitalization and Lupin appears as a new stock in the index. Oil and Gas stocks have been rerated on the higher side with stocks such as BPCL and Cairn creating value while atocks such as GAIL losing value in market capitalization. FMCG stocks such as ITC and Hindustan Unilever have remarkably shifted positions in the value creation with ITC getting a 2nd rank and HUL at 10th position in the current scenario. The stocks have created value for the shareholders riding on the great Indian consumption story with faster growth and reach in the rural segment and continued growth in the urban areas.
The realty stocks were highly rated during December 2007 period and currently only DLF features in the Nifty series with the stock in the bottom 10 companies in the index. Unitech has been removed from the index. It seems that speculation had driven the price for most of the realty stocks and value creation was not seen. The realty stocks have lost value as prices continue to remain elevated despite a necessary correction.
Stocks like Reliance Communication and Reliance Energy are out of the Nifty index currently and they were within the top 25 stocks in December 2007. The shift clearly indicates that they were overvalued due to speculation at that time. The speculation was on the expectation that these stocks would create value for the shareholder in the future with significant revenues and profitability. The actual scenario in 2013 has trimmed the excess and brought the stocks to average valuations.
The next five years are likely to see shifts in valuations of index stocks and we will be focusing on potential value creators.