SUMMARY
NSE Indices, in a discussion paper, has proposed to only keep the stocks traded in the F&O segment in the Nifty Next 50 Index
Removal from the Nifty Next 50 Index can lead to outflow of capital from Zomato and Nykaa, which have been hit hard by the rout in tech companies over the last year or so
Shriram Finance, AU Small Finance Bank, Trent, and Indian Hotels, which would see an entry into the index following the exit of the non-F&O stocks, could see an inflow of over $40 Mn: Nuvama
In what could be another bad news for the shareholders of Zomato and Nykaa, eleven non-futures and options (non-F&O) stocks, including these two, are likely to be removed from the Nifty Next 50 Index.
NSE Indices, which owns and manages a portfolio of indices under the NIFTY brand, in a discussion paper has proposed to only keep the stocks traded in the F&O segment in the Nifty Next 50 Index, Business Standard reported.
If NSE Indices decides to go ahead with the proposal, then stocks like LIC, P&G, DMart, Varun Beverages, and Adani Green Energy will also cease to be a part of the index. The stocks will be removed from the index in two phases.
It must be noted that this is just a proposal for now and the final implementation could be announced by the third week of June, Nuvama Institutional Equities said.
Nuvama added that Shriram Finance, AU Small Finance Bank, Trent, and Indian Hotels, which would see an entry into the index following the exit of the non-F&O stocks, could see an inflow of over $40 Mn.
“The exposure of the index to non-F&O stocks frequently hitting the price bands, lowers the ability to replicate the index portfolio efficiently and thus increases the tracking error,” said Abhilash Pagaria, head of Nuvama Alternative & Quantitative Research.
Removal from the Nifty Next 50 Index can lead to outflow of capital from Zomato and Nykaa, which have been hit hard by global economic slowdown and the rout in tech companies over the last year or so.
Speaking on the matter, Ambareesh Baliga, an independent research analyst, said, “Those funds who benchmark their portfolio against Nifty Next 50 may lighten their positions in these stocks; so, we could see some selling pressure.”
While these 11 stocks are likely to witness some negative impact, Sarvjeet Virk, cofounder and MD, of Shoonya, a trading platform, believes that the exclusion of non-F&O stocks will have an overall positive impact on the index as it would strengthen and improve various index hedging strategies and pairs trading.
It must be noted that Zomato and Nykaa had a forgettable 2022. The share price of Nykaa fell 56% during the year (adjusted to lowered denomination post bonus share issue), while Zomato saw a 57% decline in its share price.
While the stocks have regained some strength of late, they are still seeing extreme volatility. In April, shares of Nykaa touched their lowest at INR 114.25 on the NSE. Currently, its shares are trading over 18% higher than that level at INR 135.
On the other hand, Zomato shares have rallied almost 39% in the last two months, reversing the downward trend of the first three months of the year, when it fell over 14% on the NSE.
Shares of Zomato ended today’s trading session 1.5% higher at INR 72.36 on the BSE, while those of Nykaa ended 2.9% lower at INR 133.8.
