RIL flexes muscles with increased weighting
Index has rallied 9,000 pts since March lows; stock contributed nearly 1/3rd
Reliance Industries (RIL) is not just India’s most valuable company but also the most important from the stock market’s point of view. With its price more than doubling since its March lows, the stock has cemented its position in the benchmarks Sensex and Nifty, holding the largest weighting. It accounts for nearly 15 per cent of the Sensex’s weighting and 13 per cent of the Nifty. In early March, its weighting in the Sensex and Nifty was just 9.2 per cent and 8.1 per cent, respectively.
Reliance Industries (RIL) is not just India’s most valuable company, but also the most important from the stock market’s point of view. With its price more than doubling since its March lows, the stock has cemented its position on the benchmark Sensex and Nifty, holding the biggest weight. It accounts for nearly 15 per cent of the Sensex’s weight and 13 per cent of the Nifty. In early March, it’s weight in the Sensex and the Nifty was just 9.2 per cent and 8.1 per cent, respectively.
Though RIL has been India’s most valuable for some time now, it didn’t have the biggest weighting. This is because both the Sensex and Nifty calculate a stock’s weight based on free-float market capitalisation (m-cap) — it excludes shares owned by promoters or those under lock-in. Therefore, while RIL’S total m-cap was the highest, only half of it was free-float, given the promoter shareholding of over 50 per cent.
On the other hand, HDFC Bank — which, until recently, was India’s biggest weight — has large portion of its m-cap as free-float, due to the relatively low promoter holding. In May, RIL dislodged HDFC Bank as India’s top index weight.
Since then, it has stolen a march over other stocks, thanks to sharp gains in its stock price.
The Sensex has rallied nearly 9,000 points (34 per cent) since its March lows. RIL alone has accounted for nearly a third of the gains. The second biggest contributor has been HDFC Bank, accounting for nearly 12 per cent of the index gain. “A large proportion of the market rebound has to do with RIL, whereas private sector banks — the traditional overweights — have not participated that much,” said Abhimanyu Sofat, vice-president (research) of IIFL.
On Monday, the stock hit a fresh all-time high of ~1,804 in intra-day trade, before settling at ~1,747 — down 0.7 per cent over its previous close.
While positive news flow since March has helped both RIL and the overall market after strong gains, over-dependence on one stock nevertheless poses a risk to the market. If the outlook for the stock or sector takes a negative turn, it will weigh on the entire market.
However, analysts believe RIL’S growing weight isn’t a headache. “The index has always been dominated by a few sectors or stocks. The weight of banking and financials had risen to almost 40 per cent. The long-term outlook for RIL is positive — it has become net debt-free ahead of schedule, which is a big positive,” said Siddhartha Khemka, vice-president and head of research (retail), Motilal Oswal Financial Services.
Analysts say the other comforting factor is that RIL is no longer a pure oil and gas company. It’s diversification means less reliance on just one sector. “However, we should not be bothered about RIL’S growing weight. Earlier, it was an oil and gas firm, but is now a digital services company. If we segregate it, they are two different firms — there is an internet firm and then there are other businesses. At some point, the Jio business will get spun off separately. Then the issue will get sorted,” said Sofat. The firm’s weighting will grow further, when its partly paid shares get converted into fully paid. If the stock continues to outperform, its weighting will increase. In the past, a stock or sector’s growing weight has been a cause for concern to the regulator. Last year, the exchanges had floated a paper proposing to cap a sector’s weight at 25 per cent. Due to negative market feedback, the exchanges dropped the idea.