The recent announcement by index managers of the Nifty50 regarding the rejig has sparked discussion among experts. The inclusion of Zomato and Jio Financial Services in the benchmark from March 28 is expected to increase the index’s valuation by 2.5 per cent.
Zomato, which will soon be known as Eternal, and Jio Financial Services, the demerged non-banking financial arm of Reliance Industries, will replace Bharat Petroleum Corporation Ltd and Britannia Industries in the Nifty 50 index. This change is expected to impact the trailing price-to-earnings (P/E) ratio of the index. The replacements will lead to an increase in the Nifty 50 P/E ratio from 22.1x to 22.6x by the end of March 2025.
Criticism has arisen over the fact that companies without a solid business model, like Jio Financial Services, are being added to the Nifty 50, while established companies like BPCL and Britannia are being removed. Some experts have raised concerns about the inclusion of high P/E stocks over low P/E stocks.
However, the process of revamping index constituents is based on set criteria, primarily market capitalization. The Nifty50 is calculated using a free float-adjusted, market capitalization weighted methodology. To qualify for inclusion in the Nifty50, a stock must have high liquidity, trade in the F&O segment, and have at least three months of trading history.
The entry of Zomato and Jio Financial Services into the Nifty50 may not have a significant impact on the benchmark as their weightage will be less than 1.5 per cent. The top 5 stocks in the Nifty command a significant portion of the index’s weightage, reducing the influence of the new entrants.
Over the last 20 years, the Nifty50 has delivered a healthy CAGR of nearly 13 per cent, despite the entry and exit of various stocks. While immediate volatility may be observed around the inclusion and exclusion dates of stocks, long-term index investors need not worry.
Nevertheless, there is a call for the inclusion and exclusion criteria of indices to evolve according to market dynamics. Suggestions have been made to consider setting minimum profit criteria for inclusion in benchmark indices like the Sensex and Nifty50.
Published on February 28, 2025.
