NIFTY rejig: Apollo Hospitals to replace Indian Oil; Zomato, Nykaa to enter Nifty Next 50

Nifty Rebalancing: NSE makes changes to different NIFTY indexes twice every year, and it has recently made changes to the NIFTY, NEXT50, banking index, etc. We will talk about how stocks are selected in indexes and the recent changes.

Nifty rebalancing news: How are stocks added to the NIFTY50 index?

• The inclusion and exclusion of stocks in the index is taken care of by India Index Services and Products (IISL), an arm of the National Stock Exchange (NSE).
• There are multiple criteria for inclusion like liquidity and IPO period. The basic requirement for inclusion is that the security should have traded at an average impact cost of 0.50% or less during the last six months for 90% of the observations for a basket size of Rs 2 crore.
• Impact cost represents the cost of executing a transaction in a given stock, for a specific predefined order size (2 crore in the above case), at any given point of time. Impact cost is a practical and realistic measure of market liquidity.
• In a recent meeting, the committee has made changes to the eligibility criteria - the company should have a minimum listing history of 1 calendar month as on the cut-off date against the earlier requirement of 3 months.
• It should be available for trading in the derivatives segment.
• Market capitalization and trading frequency are other criteria considered to include a stock in an index.

Nifty rebalancing date: What are the changes to NIFTY50 post changes?

Apollo Hospitals Ltd will be included in the Nifty 50 Index and Indian Oil Corp will be excluded from it on March 31st, 2022.  

Powergrid Corp currently has a free-float market cap of ~Rs 72,000 crore and has a 0.97% weight in the Nifty 50 Index. Apollo Hospitals has a free-float market share of ~Rs 70,000 crore which is similar to Powergrid Corp. Therefore, it is expected that Powergrid Corp will have approximately 0.97% weightage in the Index. 

What does this mean for investors

• There are passive funds in India and abroad that only track and invest in Nifty 50 stocks. These funds replicate a portfolio similar to nifty 50 and rebalance their holding as per changes in holdings of the Index.
• As per the expected weights and the average AUM of these passive funds, approximately $143 million (Rs 1073 crore) of buying will happen in Apollo Hospitals and  $91 million (Rs 683 crore) of selling in Indian Oil Corp due to rebalancing of these portfolios.
• The stock prices are likely to move upwards and downwards due to the buying and selling pressure. However, stock prices are influenced by many other factors as well.

Apollo Hospitals shares closed 3.62% higher on Monday afternoon post the announcement. 

Nifty, Nifty Next 50 rebalancing

Source: Edelweiss Alternate Research

What are changes to NIFTY NEXT 50?

• Internet stocks are going to make their debut on the NIFTY NEXT 50 index. The Internet stocks that are going to get added are Zomato, Paytm,, and Nykaa. 
• The recent change to criteria (discussed above) has paved the way for stocks like Nykaa, Paytm, Policy Bazaar and Latent View which got listed after October 2021.
• The other stocks that will make an entry to NIFTY NEXT50 are Mindtree, SRF, and Indian Oil.
• Zomato is expected to see the largest fund inflows, among internet stocks, worth $33 million (Rs 248 crore), according to estimates by Edelweiss Alternate Research. 
• The stocks that are getting excluded are Apollo Hospitals Enterprise,  Aurobindo Pharma  HPCL,  IGL, Jindal Steel & Power, and Yes Bank from the Nifty Next 50 index.

What are changes to Bank Nifty?

• RBL Bank stock will exit from the banking index, and its exclusion from the index is likely to result in outflows worth $23 million (Rs 173 crore)
• Bank of Baroda will replace RBL Bank in the index, resulting in $53 million (Rs 398 crore) in inflows.

Consensus recommendation