Higher weightage and P/E ratio of incoming stocks are likely to change earnings profile, feel analysts
13.4 per cent. On the other hand, those coming in gained 3.1 per cent from the date of announcement to the effective date. Although a change in Sensex scrips does not have any bearing on the investment arguments from a fundamentals' perspective, pricing action is seen due to selling pressure on excluded counters and buying in companies which are included. Historically, the stocks which do not perform well have been removed and those which do well are included in the index. According to our calculations, Coal India will have a weightage of around 2.1 per cent and Sun Pharma 1.4 per cent, which is bound to have some impact on the affected scrips Both R-Infra and RCom are down by about 50 per cent over the last year as against the Sensex, which is trading at the same level as a year before. In 201011 on a consolidated basis, RCom reported a 71.6 per cent decline in consolidated net profits, whereas R-Infra posted a marginal 2.1 per cent gain. Since their combined weightage is one per cent, if the new entrants get about 3.5 per cent in the index, the rest will also lose some weightage, which is also why existing Sensex stocks could witness pressure on their prices.
The reshuffle in Sensex stocks is likely to impact 2011-12 estimated earnings for the index and also keep the outgoing index scrips, Reliance Infra (R-Infra) and Reliance Communications (RCom), under pressure. The two stocks, to exit August 8, tumbled six to eight per cent on Monday. On the other hand, Coal India and Sun Pharma, which replace the outgoing ADA Group stocks, gained nearly one per cent, despite poor market conditions.
RCom and R-Infra's combined free-float market capitalisation is around `15,300 crore. Coal India and Sun Pharma's free-float market cap is around `44,000 crore. This will lead to a change in Sensex 30 stocks' weightage and, consequently, Sensex-based ETF (exchange traded funds) and index funds' composition. This will ultimately put pressure on existing Sensex stocks, along with RCom and R-Infra and reward Coal India and Sun Pharma.
Most research heads say it is difficult to assess the impact before the actual weightage is known. On earnings, RCom, according to Bloomberg consensus estimates, is expected to report a 23 per cent drop in net profits and R-Infra to report 14.2 per cent growth. Their cumulative weightage in the Sensex is about one per cent. Both Coal India and Sun Pharma's earnings are expected to grow at 28 per cent in 2011-12. Also, the two are likely to have a higher weightage, of over three per cent, which means a change in the earnings profile of the Sensex.
Already, after the concerns relating to input price pressure and interest costs, the Sensex earnings estimates have been revised downwards from about `1,320 a share to about `1,200-1,220 per share. Any negative or positive change will have impact on valuations of the market. We are estimating Sensex earnings per share (EPS) of `1,200 for FY12. With inclusion of the new scrips, having higher weightage in the Sensex compared to those which will exit, overall Sensex EPS will be around one per cent lower or `12 per share for our estimated EPS of FY12.
Since companies with a lower price to earnings ratio are being replaced with those having a higher one, this is going to have a negative impact on the Sensex EPS.
Beside the change in earnings, there will be pressure on the prices. On the past three occasions when companies were excluded from the Sensex, they lost on an average about