the ship of theseus paradox - nifty 2008 and nifty 2016

www.nooreshtech.co.in

The Ship of Theseus Paradox – Nifty 2008 and Nifty 2016

Nooresh Merani


http://www.nooreshtech.co.in/


The Free Float Market Cap Methodology

• Free-float market capitalization takes into consideration only those shares issued by the company that are readily available for trading in the market.

• It generally excludes promoters' holding, government holding, strategic holding and other locked-in shares that will not come to the market for trading in the normal course.


Example – State Bank of India

• Market Price = 205 on 31st May 2016 • No of Shares = 7762777042• Market Cap = 7762777042 * 205 = 159098 Cr • Promoter Shareholding = 60% roughly • Free Float Shareholding = 40% • Free Float Market Cap = Free Float % * Market Cap • = 40% of 159098 = 63639• So the Free Float Market Cap of SBI is 63639 Cr and it has a

weightage 2.13% in the Nifty Free Float 50 Index.


Example – Kotak Mahindra Bank

• Market Price = 746.55 on 31st May 2016 • No of Shares = 1834382158• Market Cap = 1834382158* 746.55= 136945 Cr • Promoter Shareholding = 40%• Free Float Shareholding = 60% • Free Float Market Cap = Free Float % * Market Cap • = 60% of 136945= 79438• So the Free Float Market Cap of SBI is 79438Cr and it has a

weightage 2.66% in the Nifty Free Float 50 Index.


Free Float Problem

• So even though State Bank of India has a much higher market cap compared to Kotak Mahindra Bank the weightage in Nifty is lesser than it.

• SBI is at 2.13% compared to 2.66% for Kotak Mahindra Bank.


Free Float Methodology Adoption

• Sensex has been on a Free Float Methodology from September 2003

• Nifty shifted to Free Float Methodology from June 2009 • Majority of the Indices in the World are based on Free Float

Methodology !!

• Higher the Free Float – Higher the Liquidity – Lower the Impact Costs and lesser chances of Manipulation makes it ideal for Exchanges to have Free Float Index.


The Effects of Free Float Methodology in Indian Indices

• Around the world the promoter holdings are low and the float is anywhere between 40-90%

• In India till the time 75% the float was between 10-60% • Financials get a higher weightage as the free float is higher

as promoter shareholding is lower. • PSUs get a lower weightage in the Index as the promoter

shareholding is high and free float is low. • The big concern in Bull Market is company diluting capital

receive higher weightage to a company doing buybacks.


The Churn in Nifty & Sensex

• Only 30-35% of the Index or roughly 1/3rd of the original constituents of Nifty ( 1996) and Sensex ( 1986 ) are still present in the Current Nifty.

• Every 10 years the churn is almost 40-50%. • A lot of so called Blue Chip Companies coz of presence in

Nifty/Sensex in a decade turn down to be obsolete and destroy shareholder wealth.

• Apart from the churn the Weightage Shifts are also Huge. • Luckily Nifty has a Rule of 5 changes only in a year and that too twice

a year only else the churn would be much more !! ( For example today bottom 5-6 stocks free float market cap is lesser than 5-8 names from Nifty next 50 index. )


The Ship of Theseus Paradox

• The ship wherein Theseus and the youth of Athens returned from Crete had thirty oars, and was preserved by the Athenians down even to the time of Demetrius Phalereus, for they took away the old planks as they decayed, putting in new and stronger timber in their places, in so much that this ship became a standing example among the philosophers, for the logical question of things that grow; one side holding that the ship remained the same, and the other contending that it was not the same.

• — Plutarch, Theseus[2]

https://en.wikipedia.org/wiki/Theseus

https://en.wikipedia.org/wiki/Athens

https://en.wikipedia.org/wiki/Crete

https://en.wikipedia.org/wiki/Demetrius_Phalereus

https://en.wikipedia.org/wiki/Ship_of_Theseus


Ship of Theseus Paradox - 1 – Nifty 50

Analyse India


Ship of Theseus Paradox - 2 – Nifty 50


Nifty – 2008 if you did not change the Planks/Stocks

Analyse India

Nifty on 31st Jan 2008

5137.45

After many changes in Stocks

Nifty on 29th June 2016 8204 Returns

59.70%

Nifty on 31st Jan 2008

5137.45

Keeping same Stocks

Nifty on 29th June 2016 7170 Returns

39.60%

But if you randomly bought Nifty 50 at various times in 2010/2011/2013 the

returns would not differ by much

But if you randomly bought Nifty 50 at various times in 2010/2011/2013 the

returns would not differ by much


Nifty – New Planks in every Euphoria. Example 1999-2000 – IT & Media

• Inclusions in The Euphoria of 1999-2000 • Infosys / NIIT got included in Nifty in October 1998 at a

price of 20 and 120 and were at 400 and 500 by the peak March 2000. ( Adjusted prices)

• Satyam inclusion in September 1999. HCL Infosystems and Zee Tele in May 2000. Digital Equipment India in Sept 2000.

• Many other old economy stocks Bpcl, mrpl,thermax, Andhra valley power supply , GE Shipping etc got excluded.

Analyse India

Inclusion of IT stocks Increased

closer to Y2K peak. Easy to

say in Hindsight

Inclusion of IT stocks Increased

closer to Y2K peak. Easy to

say in Hindsight


Nifty – New Planks in Euphoria. Example 2005-2007

• Suzlon/Siemens included in June 2006 • Reliance Communications in Sept 2006 • Reliance Petroleum/Sterlite Inds in April 2007 • Unitech included in October 2007 by that time it was a 500-800

BAGGER from 2004 prices. • Idea Cellular/Cairn included in December 2007 • DLF/Power Grid included in March 2008

• Tata Tea, IPCL,hpcl, mtnl, Glaxo, bajaj auto, Shipping Corporation etc were the companies removed.

Inclusion of Real Estate Stock like

Unitech just before

peaking out. Easy to say in Hindsight

Inclusion of Real Estate Stock like

Unitech just before

peaking out. Easy to say in Hindsight


Nifty – New Planks in 2016

• Aurobindo Pharma, Bosch, Eicher Motors included because of huge outperformance and major weeding out of old wealth destroyers like Reliance Infra, Jaiprakash Associates, Vedanta, cairn etc.

• So no new sector becoming a major part of the Index because of outperformance.

• More of a decaying planks or wealth destroyers weeded out.

• No Euphoric sectoral moves leading the Market.

Analyse India

The churn today is more so because of

the underperfor

mance of many stocks then coz of new fresh Polished

Planks

The churn today is more so because of

the underperfor

mance of many stocks then coz of new fresh Polished

Planks


Nifty the Ship of Theseus from 2008 to 2016

Analyse India

31st January 2008 31st May 2016 RELIANCE 12.15% INFY 8.36ONGC 7.13% HDFCBANK 7.91BHARTIARTL 5.49% ITC 6.62NTPC 5.45% HDFC 6.55SBIN 4.61% RELIANCE 5.3ICICIBANK 4.29% ICICIBANK 4.77RCOM 4.17% TCS 4.58LT 3.59% LT 4.05

BHEL 3.40% TATAMOTORS 2.98SAIL 2.99% AXISBANK 2.88INFOSYSTCH 2.89% SUNPHARMA 2.77TCS 2.88% KOTAKBANK 2.66HDFC 2.71% SBIN 2.13ITC 2.48% M&M 2.06RPL 2.41% HINDUNILVR 2.03UNITECH 2.10% MARUTI 1.85WIPRO 2.08% INDUSINDBK 1.8HDFCBANK 1.87% BHARTIARTL 1.55TATASTEEL 1.82% ASIANPAINT 1.49STER 1.78% HCLTECH 1.4

Only 10 survive in Top 20

Only 10 survive in Top 20

4 are no more part of Nifty

4 are no more part of Nifty

Top 4 of 2016 = 29.4%

Was only 10% in 2008

Top 4 of 2016 = 29.4%

Was only 10% in 2008

RIL and RPL

=14.56% in 2008 is now only

5.3%

RIL and RPL

=14.56% in 2008 is now only

5.3%

RCOM at 7th no more

part of Nifty.

RCOM at 7th no more

part of Nifty.

Big Shift from 24-

25% being Oil and Gas to

Financials at 30%

Big Shift from 24-

25% being Oil and Gas to

Financials at 30%


The Big Shift from Investment Linked Nifty to Financials Led Nifty

Analyse India

Investment Linked 23.97

Exports 23.44

Financials 30.29

Consumers & Disc 20.82

Nifty 2016 Nifty 2016


How do Analysts/Market-Men Value Nifty

• Generally most of the Strategy Reports talk of how Nifty is quoting at 20x Trailing earnings/ 16x forward earnings and how it is higher than the Average P-E Multiple of last 10 years etc !!

• A recent report mentioned a target based on a possible multiple of 14x as that was the Index multiple in post 2008.

• Most analysts compare current/forward P-E of Nifty to the Average/Mean/Peak/Bottom P-E of historical Nifty.

Analyse India


The Valuation Problem with Nifty of 2016

• Today’s Nifty 50 is not even comparable to that 10 years back. Only 3 out of Top 10 in Nifty in 2007 are still there in the Top 10. Refer our note - Nifty 2016 is a very different animal from Nifty 2008 !!

• So how can we really try to compare current valuations to previous averages when it was a totally different Nifty? It’s like comparing what P-E HDFC Bank deserves in comparison to SBI. (SBI had a weight of 4.61% in 2007 and now 2% compared to HDFC Bank from 1.87% weight to 7.5% today!! )

Analyse India


Shift towards Financials makes the P-E Multiple shift higher

• 30% of Nifty is now Banks and Financials where parameter for Valuation is generally Price to Book and not P-E.

• Lack of PSUs like ONGC/SBI/NTPC and capital intensive biz like Reliance which are generally at Low P-E.

• Embedded Values in Financials in terms Insurance/Asset Management and Foreign Subsidiaries in Tata Motors etc keep P-E high in some stocks and then others like Asian Paints/ITC/HUL/Pharma tend to trade at higher P-E.

Analyse India


Conclusions

• Conclusion – Possibly The Base P-E or Average P-E is much higher for current Nifty !!

• Low Debt Companies and Less Capital Intensive and less Investment Linked Companies in Nifty 50 make it an Index which does not Swing Wildly in Magnitude.

• We would not see wild swings of 30% absolute downsides in corrections ( like in 2004/2006) or 60% downsides in Nifty in Bear Markets ( 1992/2000/2008) until we see New Planks i.e New stocks becoming part of the Index because of a huge outperformance.

Analyse India


Nooresh Merani

Cell: +91-9819225396

[email protected]

twitter.com/nooreshtech

www.facebook.com/nooreshtech

mailto:[email protected]

http://www.facebook.com/nooreshtech


Disclaimer

As investment & trading consultants, Promoters, owners, families, relatives, friends and clients of www.nooreshtech.co.in maybe having positions in stocks / securities mentioned on the web site All recommendations in this website are based on subject of Technical Analysis and do not reflect the fundamental validity of the stocks / securities. Authors / owners of Technical View by Nooresh will not be held responsible for any losses, financial or otherwise, incurred. To clarify, a ‘user’ is defined as anybody that visitshttp://www.nooreshtech.co.in, regardless of whether or not the have registered as a member of the website. ‘Site’ and the ‘community’ and‘www.nooreshtech.co.in’ are used interchangeably and refer to the URL http://www.nooreshtech.co.in and all sub-domains. The administrators and owners ofhttp://www.nooreshtech.co.in do not guarantee the reliability or completeness of any information provided on our site or in any hyperlink appearing on our site. Any advice or information presented on the site has not been verified by http://www.nooreshtech.co.in and does not represent the opinions of the same. Users of the site should not rely on the accuracy of any content on the site or assume any information they read on the site to be factual.http://www.nooreshtech.co.in, its administrators or owners will not be liable for any loss or damage caused by a user’s reliance on any information obtained from our site, or from a hyperlink found on our site. Members remain responsible for their own investments and should always conduct their own independent research before making independent investment decisions. If you choose to trade on the information, including but not limited to opinions or stock picks found on http://www.nooreshtech.co.in or any hyperlinks found on the site, then you have made a conscious, willing, free and personal decision to do so, and http://www.nooreshtech.co.in does not take any responsibility for this action.By using http://www.nooreshtech.co.in you agree to be bound by the Terms and Conditions outlined below. If you don’t wish to be bound by the Terms and Conditions then do not complete this registration, and do not usehttp://www.nooreshtech.co.in or any of its associated services.We (the administrators and owners of http://www.nooreshtech.co.in) reserve the right to change these terms at any time, but will post a notice in advance on this website of any material changes. Following an update being posted, your continued use of http://www.nooreshtech.co.inimplies acceptance of the modified terms and conditions.All of the Content onhttp://www.nooreshtech.co.in remains the property ofhttp://www.nooreshtech.co.in. By “Content” we mean any information or materials found onhttp://www.nooreshtech.co.in. The harvesting of data from our site via automated means of any type, without the prior permission of http://www.nooreshtech.co.in is forbidden, as is attempting to access our site by any means other than through the interfaces we provide for accessing the site.

http://www.analyseindia.com/

















Disclaimer

You may make one copy of Content for your personal, non-commercial use as long as it is clearly labeled with “Intellectual Property of http://www.nooreshtech.co.in. All rights reserved”. Any other copying, distribution, storing, or transmission of any kind, or any commercial use of our Content, is prohibited without http://www.nooreshtech.co.in prior written permission. You may not republish, post, transmit or distribute Content to online bulletins or message boards, blogs, chat rooms, intranets or anywhere else without our consent.Notwithstanding the above, when you post Content, you do not surrender your copyright. You agree that http://www.nooreshtech.co.in a has an unlimited and perpetual license to republish the Content. However, you retain the right to use your words, images and other copyrightable content however you wish.We will always endeavor to ensure any content you publish is presented in context, and we’ll credit you (under your user name) as the author. We won’t republish your content in advertising without notifying you in advance and will not publish content in advertising if you instruct us not to.As a member of http://www.nooreshtech.co.in , you agree to behave honestly at all times and act for the benefit of the users of the site.You, as a user of http://www.nooreshtech.co.in must not:

Post content that is not your own, or that is harmful, irrelevant, nonsensical, obscene, abusive, solicitous, fraudulent, or defamatory.Misrepresent your true identity, motives and opinionsTake any action that places an unreasonable strain or disrupts the functioning of the site and its servicesCopy the site’s content without prior permission from http://www.nooreshtech.co.inViolate another member’s privacyViolate any laws or regulations while using our siteIf you don’t abide by the Code of Conduct, we will cancel your membership of the site.


• We collect information about who our members are and how they use our site in order to provide our members with the best experience possible. Sometimes we may use the information to notify you of products, services, specific content, or areas of our site that we think may interest you. You can choose whether or not to receive these notifications by altering your privacy settings at any time by contacting us at [email protected] whilst using the siteWhen you post content onto our site, that information, along with your screen name, is visible to the public. Please remember that any information you disclose can be collected and used by others. Other members can respond to your posts at any time but will not know your external email address or other contact details (unless you have disclosed it).http://www.nooreshtech.co.in cannot guarantee the security of any information you transmit to us, and you do so at your own risk. You are responsible for maintaining the secrecy of any password and/or account information. We will never ask you for your password in an unsolicited phone call or email. If you are using a computer to which others have access, such as one in a computer lab, Internet cafe, or public library, always remember to log out and close your browser window when leaving our site. If you follow links from our site to others, you should be aware that you are doing business with those other sites, which have their own privacy and data collection practices. http://www.nooreshtech.co.in has no responsibility or liability for these sites.

• Use of this site is subject to express Terms & Conditions, Code of Conduct, Privacy Policy, and Disclaimer. By continuing past this page, you agree to abide by these terms. Any information provided onhttp://www.nooreshtech.co.in should not be construed as research, trading picks or recommendations, or investment advice and is provided with no warrants as to its accuracy. Company names, products, services and branding cited herein may be trademarks or registered trademarks of their respective owners. The use of trademarks or service marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by http://www.nooreshtech.co.in

Disclaimer

the ship of theseus paradox - nifty 2008 and nifty 2016

Economy & Finance