The Nifty has traditionally undergone a shift to reflect the market in a more comprehensive way. The latest shift in the Nifty index will introduce insurance companies for the first time into the indices making them more reflective and also improve the quality of Nifty earnings.
Insurance makes an entry
The latest round of changes in the Nifty is likely to be all about insurance. It may be recollected that insurance companies were listed on the Indian bourses just about 3 years back. Today there are over six insurance companies that are listed and actively traded on the stock exchanges. Let us look at the major shifts first. The first shift is likely to be HDFC Life coming into the Nifty index in place of Vedanta. The exit of Vedanta was, anyways, a foregone conclusion. With Vedanta Resources PLC planning to delist its Indian subsidiary, the only thing left was the approval of majority of the shareholders. With nearly 70% of the shareholders approving the delisting the only option was for the exchanges to delist the stock. The other shift will be SBI Life replacing Zee Entertainment in the Nifty. Zee had been largely an underperformer in the market and had been in the news for the wrong reasons including the near default. SBI Life has emerged as one of the largest insurance players in India outside of LIC and these two players look best poised to play the bancassurance model effectively in the insurance space. What about flows?
Shift will improve ETF flows
One reason the index components are critical is that they determine direction and intensity of flows from index funds and index ETFs. Consider some numbers in this case. Vedanta has a weight of 44 bps in the index while HDFC Life is likely to come into the index with a weightage of 90 basis points. Similarly, Zee has a weight of just 36 bps in the index while the new entrant, SBI Life, will have a weight of 70 bps in the index. Currently, ETF and index funds manage close to Rs.91,000 crore in AUM. A 90 bps HDFC Life weight will result in inflows of Rs.820 crore. Similarly, SBI Life will see inflows to the tune of Rs.650 crore. There is one more change in the Nifty with Divi coming in place of Bharti Infratel. But, clearly there is going to be serious inflows into insurance stocks.
Insurance needs representation
The induction of HDFC Life and SBI Life into the index will pave the way for the eventual introduction of LIC into the index once the IPO is done. Hopefully, by then insurance will have a significant weight in the index, although floating stock will be quite low. Insurance is a big growth area and the index needs to represent that. Insurance penetration in India is abysmally low by global bench-marks and this inclusion should give the insurance companies better visibility. With financials losing weight, insurance can partially make up for the gap!