Decadal changes in the Sensex: Exits from and entries into the Sensex by 2022 June 28, 2012
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
June 28, 2012
Decadal changes in the Sensex:
Exits from and entries into the Sensex by 2022
Saurabh Mukherjea, CFA
Tel: +91 22 3043 3174
saurabhmukherjea@ambitcapital.com
Gaurav Mehta
Tel: +91 22 3043 3255
gauravmehta@ambitcapital.com
Pg 1 Decadal changesSummary
"Churn" is a constant
60% of the Sensex’s constituents in January 1992 were no longer in the index a decade later. This “churn” ratio was 53% for the 10-
year period beginning January 2002. Churn in the Indian market is not only twice as high as it is in the US market, churn appears to
be higher in India than that in the other large Emerging Markets.
Of the 30 firms in the Sensex in 1992, 18 were out by 2002. Of the 18 firms exiting the Sensex by 2002, four belong to
the Textiles sector and three to the Capital Goods sector. However, there are no Financial Services or FMCG firms amongst the
exits. Of the 18 firms entering the Sensex by 2002, three each belong to the Pharma and IT sectors.
Of the 30 firms in the Sensex in 2002, 16 were out by 2012. Of the 16 firms exiting the Sensex by 2012, barring Pharma (three
firms exiting), there is no obvious sector concentration. However, there are no Financial Services firms or Capital Goods
firms or Auto firms among the exits. (In fact, across the two decades, Financial Services exits from the Sensex appear to be rare.)
11 of the 16 exits in the 2002-2012 period are firms which had entered the Sensex in the previous decade, underscoring just how
hard it is to stay at the top of the Indian market for a sustained period.
The investment implications of "churn"
The next ten years are more likely to be akin to the 1990s – a decade defined by the end of the “Licence Raj” in 1991 -
than the noughties. Civil servants in New Delhi are already viewing the period 2010-2012 as being the end of the “Old Raj”.
Even if we are conservative and assume a 50% churn ratio going forward, 15 companies will be ejected from the Sensex
over the next 10 years and 15 new firms will enter the index. Slides 9 and 10 seek to identify these entries and exits based on
five frameworks:
1. Ambit's index of politically connected companies whose core competitive advantage is connectivity with the powers that
be (see our note published on Jun 14, 2011 for more details)
2. Ambit's forensic accounting model for the BSE500 (see our note published on Jan 20, 2012 for more details)
3. Ambit's "greatness" model (see our note published on Jan 19, 2012 for more details)
4. The size effect i.e. firms that are big at the beginning of the period tend to be big by the end of the period as well.
5. The potential for Indian companies to use the 29% depreciation of the INR versus the Chinese currency over the past year to
build export franchises.
Pg 2 Decadal changes“Churn” is a constant
60% of the Sensex’s constituents in Jan 1992 were no longer in the index a decade later.
This “churn” was 53% for the 10 year period beginning Jan 2002.
Churn in the Indian market is twice as high as it is in the US market.
Churn in the Indian market appears to be higher than that in other large EMs.
Churn seems to have fallen in the most recent decade compared to the 1990s.
Index churn
70 60
60 53 52 48
Churn (%)
50
39 36
33
Data not available
40 30
30 23
20
10
-
Sensex (India) DJIA (US) Hang Seng Bovespa (Brazil) Average
(Hongkong)
Market
1992-2002 2002-2012
Pg 3 Decadal changesChurn in the 1992-2002 period: 18 companies
Exits from the Sensex by 2002 Entry into the Sensex by 2002
CAGR-92-02 (rel CAGR-92-02 (rel to
Company name Sector CAGR-92-02 Ranking Company name Sector CAGR-92-02
to Sensex) Sensex)
Bombay Dyeing Textiles (21) (26) 11 BHEL Cap. Goods 1 (5)
Ballarpur Inds Paper (18) (23) 15 Castrol Chemicals 12 7
Ceat Tyres Tyres (15) (20) 23 Reliance Infra Power Gen. & Dist. 4 (1)
Century Spinning Diversified (20) (25) 4 Colgate Palm (India) Ltd. FMCG 1 (4)
G.E. Shipping Shipping (14) (19) 14 Infosys IT - Software 87 82
GSFC Fertilizers (28) (33) 8 Guj. Ambuja Cements Ltd. Cement 11 6
Hind. Motors Automobile (16) (21) 24 HPCL Refineries 3 (2)
Indian Hotels Hotels & Restaurants 7 2 27 Rel Petroleum Refineries 0 (5)
Indian Rayon Textiles (8) (13) 16 Dr. Reddy's Pharma 39 34
Kirloskar Cummins Cap. Goods 7 1 18 NIIT LTD. Computer Education 21 16
Indian Organic Textiles (21) (27) 28 ICICI Banks 20 15
Mukand Steel (29) (34) 22 MTNL Telecomm-Service (9) (14)
Philips Consumer Durables (3) (8) 19 Ranbaxy Lab Pharma 26 21
Premier Auto Cap. Goods (21) (26) 29 State Bank of India Banks (3) (8)
Siemens Cap. Goods (3) (8) 17 Cipla Ltd. Pharma 52 47
Tata Power Power Gen. & Dist. (6) (11) 21 Zee Telefilms Entertainment 33 28
Voltas Diversified (10) (15) 25 Satyam IT - Software 67 62
Zenith Steel (31) (36) 30 Bajaj Auto Automobile 14 9
Of the 18 firms exiting the Sensex by 2002, 3 each belong to the Textiles and Capital Goods sectors. However,
there are no Financial Services of FMCG firms amongst the exits. (Textiles accounts for 4 exits if you include
Century Spinning.)
Of the 18 firms entering the Sensex by 2002, 3 each belong to the Pharma and IT sectors. Barring that, there is
no obvious sector concentration.
Obviously, identifying these exits and entrants early helps investment performance.
Pg 4 Decadal changesChurn in the 2002-2012 period: 16 companies
Exits from the Sensex by 2012 Entry into the Sensex by 2012
CAGR-02-12 (rel CAGR-02-12 (rel to
Company name Sector CAGR-02-12 Ranking Company name Sector CAGR-02-12
to Sensex) Sensex)
ACC Cement 22 5 23 Bharti Airtel Telecomm-Service 45 28
Castrol Chemicals 16 (1) 26 Coal India Ltd. Mining & Mineral (4) (21)
Rel Infra Power Gen. & Dist. 6 (11) 22 HDFC Bank Banks 25 8
Colgate Palm (India) FMCG 20 3 27 Wipro IT - Software 10 (7)
Nestle FMCG 23 6 12 Sterlite Inds Non Ferrous Metals 39 22
Guj. Ambuja Cem Cement 20 3 21 ONGC Crude Oil & Nat. Gas 28 11
Glaxosmit Pharma Pharma 21 4 28 Jindal Steel & Power Steel 68 51
Grasim Textiles 25 8 25 NTPC Power Gen. & Dist. 9 (8)
HPCL Refineries 6 (11) 15 HDFC Ltd. Finance 26 9
Rel Petorleum Refineries Merged with RIL 5 DLF Ltd. Realty (36) (53)
Dr. Reddy's Pharma 13 (4) 10 Sun Pharma Pharma 33 16
NIIT LTD. Computer Education 2 (15) 30 Maruti Suzuki Automobile 12 (5)
MTNL Telecomm-Service (16) (33) 8 Hero Motocorp Automobile 22 6
Ranbaxy Lab Pharma 7 (10) 7 Tata Power Power Gen. & Dist. 22 5
Zee Telefilms Entertainment 8 (9) 16 TCS IT - Software 19 3
Satyam IT - Software (6) (23) 9 JP Associates Construction 11 (6)
Of the 16 firms exiting the Sensex by 2012, barring Pharma (3 firms exiting), there is no obvious sector
concentration.
However, there are no Financial Services firms or Capital Goods firms or Auto firms amongst the exits.
11 of the 16 exits are firms which had entered the Sensex in the previous decade underscoring just
how hard it is the stay at the top of the Indian market for a sustained period of time.
Of the 16 firms entering the Sensex by 2012, there is no obvious sector concentration.
Pg 5 Decadal changesThe constants: the 9 firms that were in the Sensex in ‘92 & ‘12
Firms which were in the Sensex in 1992 and 2012
CAGR-92-12 (rel Forward Ranking Ranking
Company Name Sector CAGR-92-12
to Sensex) (FY13) PE (1992) (2012)
Hindalco Non Ferrous Metals 9 (1) 7 10 28
Hindustan Unilever FMCG 17 7 32 5 13
ITC Tobacco Products 20 10 27 2 6
Mahindra & Mahindra Automobile 23 12 12 26 21
Larsen & Toubro Infra Developers & Operators 19 8 16 12 15
Reliance Industries Refineries 18 7 11 6 2
Tata Power Power Gen. & Dist. 7 (4) 12 21 29
Tata Motors Automobile 9 (2) 6 3 17
Tata Steel Steel 4 (7) 8 1 23
It is hard to find common denominators across these constants
It is hard to rationalise some of these firms’ durability even with the benefit of hindsight
Pg 6 Decadal changesWho will be the exits and entrants of 2022?
The next ten years are more likely to be akin to the 1990s – a decade defined by the end
of the “License Raj” in 1991 - than the noughties. Civil servants in New Delhi are already
viewing the period 2010-12 as being the end of the “Old Raj”.
Even if we are conservative and assume a 50% churn ratio going forward, 15
companies will be ejected from the Sensex over the next 10 years and 15 new
firms will enter the index.
As shown in the preceding slides, identifying these exits and entrants has a meaningful
bearing on investment performance.
What determines their identity?
Sector specific forces?
Company specific forces?
Current size?
Pg 7 Decadal changesOur framework for identifying Sensex entries and exits
Impact of political connections on share prices Impact of accounting quality on share prices
300 25% y = 1.0662x + 0.1322
260 R2 = 0.901 TCS
20%
Price performance (FY08-11)
220
15% HCL
180 Wipro Tech
Infosys
10%
140
CAGR
100 5%
Oracle
60 0%
Jan-09
Oct-09
Oct-10
Oct-11
Apr-09
Jul-09
Jan-10
Apr-10
Jul-10
Jan-11
Apr-11
Jul-11
Jan-12
Apr-12
-5%
-15% -10% -5% 0% 5% 10%
Ambit Connected Cos Index BSE 500
Avg change in accounting score (FY08-11)
Impact of “greatness” on share prices The “size” effect
120
115
In the 1992-02 period the correlation between
110
beginning of the period rank and end of period rank
105
is 20%.
100 The corresponding figure for the 2002-12 period is
95 66%.
90
Rolling regression analysis on this shows across 20
18-01-12
01-02-12
15-02-12
29-02-12
14-03-12
28-03-12
11-04-12
25-04-12
09-05-12
23-05-12
06-06-12
20-06-12
yeas that the co-efficient on the “beginning of
period” rank is significant BUT the average R-
G25 (25 best stocks on our greatness framework) squared is only around 20%.
Sensex
Pg 8 Decadal changesLikely exits (table contains all the names in the Sensex currently)
1 yr sh price 1 yr sh price Last 3 yr EPS
Ticker Name Index Wt (%) Accounting P75 Govt interface Greatness chg (absolute) chg (relative to CAGR
ITC IN Equity ITC Ltd 9.5 35% 39% 21%
RIL IN Equity Reliance Industries Ltd 9.0 -16% -13% 10%
INFO IN Equity Infosys Ltd 8.4 -10% -7% 12%
HDFCB IN Equity HDFC Bank Ltd 7.1 - 17% 20% 28%
ICICIBC IN Equity ICICI Bank Ltd 6.8 - -16% -13% 29%
HDFC IN Equity Housing Development Finance Corp 6.6 - -1% 3% 23%
LT IN Equity Larsen & Toubro Ltd 5.2 -18% -14% 17%
TCS IN Equity Tata Consultancy Services Ltd 5.0 15% 18% 26%
ONGC IN Equity Oil & Natural Gas Corp Ltd 4.1 7% 10% 9%
SBIN IN Equity State Bank of India 4.1 - 1% 4% 10%
HUVR IN Equity Hindustan Unilever Ltd 3.4 - 48% 51% 4%
TTMT IN Equity Tata Motors Ltd 3.3 32% 35% 73%
BHARTI IN Equity Bharti Airtel Ltd 2.9 -19% -15% -16%
MM IN Equity Mahindra & Mahindra Ltd 2.2 8% 11% 27%
TATA IN Equity Tata Steel Ltd 2.0 -25% -22% -6%
SUNP IN Equity Sun Pharmaceutical Industries Ltd 1.8 23% 26% 12%
NTPC IN Equity NTPC Ltd 1.7 -13% -10% 6%
WPRO IN Equity Wipro Ltd 1.7 -1% 2% 16%
BJAUT IN Equity Bajaj Auto Ltd 1.5 - - 15% 18% 78%
COAL IN Equity Coal India Ltd 1.5 - -11% -8% DNA
HMCL IN Equity Hero Motocorp Ltd 1.4 19% 23% 23%
DRRD IN Equity Dr Reddy's Laboratories Ltd 1.4 5% 8% 39%
BHEL IN Equity Bharat Heavy Electricals Ltd 1.3 -43% -39% 32%
JSP IN Equity Jindal Steel & Power Ltd 1.3 -29% -26% 11%
GAIL IN Equity GAIL India Ltd 1.2 -22% -19% 12%
HNDL IN Equity Hindalco Industries Ltd 1.1 -30% -27% 33%
CIPLA IN Equity Cipla Ltd/India 1.1 -3% 1% 10%
MSIL IN Equity Maruti Suzuki India Ltd 1.1 -2% 1% 5%
TPWR IN Equity Tata Power Co Ltd 1.1 -23% -20% -1%
STLT IN Equity Sterlite Industries India Ltd 1.0 -36% -32% 10%
“ – “ indicates Data Not Available
Pg 9 Decadal changesLikely entrants (table shows biggest non-Sensex names from our “greatness” model)
Free Float MCap (Rs Limited interface with Export 1 yr sh price chg 1 yr sh price chg Last 3 yr
Ticker Name Accounting
mn) the Govt? opportunity? (absolute) (relative to Sensex) EPS CAGR
APNT IN Equity Asian Paints 274,979 33% 36% 35%
KMB IN Equity Kotak Mah. Bank 196,616 36% 39% 38%
NEST IN Equity Nestle India 148,803 15% 19% 22%
LPC IN Equity Lupin 139,763 24% 27% 27%
HCLT IN Equity HCL Technologies 100,521 2% 6% 23%
ACC IN Equity ACC 97,729 27% 30% -7%
TTAN IN Equity Titan Inds. 93,987 3% 6% 43%
DABUR IN Equity Dabur India 91,319 0% 3% 7%
BOB IN Equity Bank of Baroda 82,859 -18% -14% 37%
IDEA IN Equity Idea Cellular 81,999 2% 5% -8%
GLXO IN Equity Glaxosmit Pharma 79,332 -13% -10% 11%
SHTF IN Equity Shriram Trans. 61,133 -15% -11% 23%
FB IN Equity Federal Bank 58,586 2% 5% 17%
EXID IN Equity Exide Inds. 57,258 -10% -6% 12%
SKB IN Equity GlaxoSmith C H L 56,456 8% 11% 24%
SRCM IN Equity Shree Cement 48,549 73% 76% 40%
HPCL IN Equity HPCL 42,947 -10% -6% -39%
OFSS IN Equity Oracle Fin.Serv. 39,772 12% 16% 21%
KKC IN Equity Cummins India 37,300 -8% -5% 16%
PLNG IN Equity Petronet LNG 35,561 -2% 2% 37%
APTY IN Equity Apollo Tyres 33,716 10% 13% 43%
CDH IN Equity Cadila Health. 33,338 -12% -8% 27%
CSTRL IN Equity Castrol India 32,519 6% 9% 12%
HZ IN Equity Hind.Zinc 27,754 -9% -5% 27%
NMDC IN Equity NMDC 26,612 -32% -28% 18%
CRIN IN Equity Coromandel Inter 22,616 -22% -19% 15%
EIM IN Equity Eicher Motors 19,371 66% 69% 85%
Note: shading indicates potential entrants
Pg 10 Decadal changesThe “certain” constants from 2012-2022?
1 yr sh price chg
% Index Govt 1 yr sh price chg Last 3 yr
Ticker Name Accounting P75 Greatness (relative to
Weight interface (absolute) EPS CAGR
Sensex)
ITC IN Equity ITC Ltd 9.5 35% 39% 21%
HDFCB IN Equity HDFC Bank Ltd 7.1 DNA 17% 20% 28%
ICICIBC IN Equity ICICI Bank Ltd 6.8 DNA -16% -13% 29%
HUVR IN Equity Hindustan Unilever Ltd 3.4 DNA 48% 51% 4%
SUNP IN Equity Sun Pharmaceutical Industries Ltd 1.8 23% 26% 12%
BJAUT IN Equity Bajaj Auto Ltd 1.5 DNA DNA 15% 18% 78%
HMCL IN Equity Hero Motocorp Ltd 1.4 19% 23% 23%
“DNA“ indicates Data Not Available
Pg 11 Decadal changesDisclaimer
1. AMBIT Capital Private Limited (“AMBIT Capital”) and its affiliates are a full service, integrated investment banking, investment advisory and brokerage group. AMBIT Capital is a Stock Broker, Portfolio Manager and Depository Participant
registered with Securities and Exchange Board of India Limited (SEBI) and is regulated by SEBI
2. The recommendations, opinions and views contained in this Research Report reflect the views of the research analyst named on the Research Report and are based upon publicly available information and rates of taxation at the time of
publication, which are subject to change from time to time without any prior notice.
3. AMBIT Capital makes best endeavours to ensure that the research analyst(s) use current, reliable, comprehensive information and obtain such information from sources which the analyst(s) believes to be reliable. However, such information
has not been independently verified by AMBIT Capital and/or the analyst(s) and no representation or warranty, express or implied, is made as to the accuracy or completeness of any information obtained from third parties. The information
or opinions are provided as at the date of this Research Report and are subject to change without notice.
4. If you are dissatisfied with the contents of this complimentary Research Report or with the terms of this Disclaimer, your sole and exclusive remedy is to stop using this Research Report and AMBIT Capital shall not be responsible and/ or
liable in any manner.
5. If this Research Report is received by any client of AMBIT Capital or its affiliate, the relationship of AMBIT Capital/its affiliate with such client will continue to be governed by the terms and conditions in place between AMBIT Capital/ such
affiliate and the client.
6. This Research Report is issued for information only and should not be construed as an investment advice to any recipient to acquire, subscribe, purchase, sell, dispose of, retain any securities. Recipients should consider this Research Report
as only a single factor in making any investment decisions. This Research Report is not an offer to sell or the solicitation of an offer to purchase or subscribe for any investment or as an official endorsement of any investment.
7. If 'Buy', 'Sell', or 'Hold' recommendation is made in this Research Report such recommendation or view or opinion expressed on investments in this Research Report is not intended to constitute investment advice and should not be intended or
treated as a substitute for necessary review or validation or any professional advice. The views expressed in this Research Report are those of the research analyst which are subject to change and do not represent to be an authority on the
subject. AMBIT Capital may or may not subscribe to any and/ or all the views expressed herein.
8. AMBIT Capital makes no guarantee, representation or warranty, express or implied; and accepts no responsibility or liability as to the accuracy or completeness or currentess of the information in this Research Report. AMBIT Capital or its
affiliates do not accept any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of this Research Report.
9. Past performance is not necessarily a guide to evaluate future performance.
10. AMBIT Capital and/or its affiliates (as principal or on behalf of its/their clients) and their respective officers directors and employees may hold positions in any securities mentioned in this Research Report (or in any related investment) and
may from time to time add to or dispose of any such securities (or investment). Such positions in securities may be contrary to or inconsistent with this Research Report.
11. This Research Report should be read and relied upon at the sole discretion and risk of the recipient.
12. The value of any investment made at your discretion based on this Research Report or income therefrom may be affected by changes in economic, financial and/ or political factors and may go down as well as up and you may not get back
the full or the expected amount invested. Some securities and/ or investments involve substantial risk and are not suitable for all investors.
13. This Research Report is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied in whole or in part, for any purpose. Neither
this Research Report nor any copy of it may be taken or transmitted or distributed, directly or indirectly within India or into any other country including United States (to US Persons), Canada or Japan or to any resident thereof. The
distribution of this Research Report in other jurisdictions may be strictly restricted and/ or prohibited by law or contract, and persons into whose possession this Research Report comes should inform themselves about such restriction and/ or
prohibition, and observe any such restrictions and/ or prohibition.
14. Neither AMBIT Capital nor its affiliates or their respective directors, employees, agents or representatives, shall be responsible or liable in any manner, directly or indirectly, for views or opinions expressed in this Report or the contents or any
errors or discrepancies herein or for any decisions or actions taken in reliance on the Report or inability to use or access our service or this Research Report or for any loss or damages whether direct or indirect, incidental, special or
consequential including without limitation loss of revenue or profits that may arise from or in connection with the use of or reliance on this Research Report or inability to use or access our service or this Research Report.
Conflict of Interests
15. In the normal course of AMBIT Capital’s business circumstances may arise that could result in the interests of AMBIT Capital conflicting with the interests of clients or one client’s interests conflicting with the interest of another client. AMBIT
Capital makes best efforts to ensure that conflicts are identified and managed and that clients’ interests are protected. AMBIT Capital has policies and procedures in place to control the flow and use of non-public, price sensitive information
and employees’ personal account trading. Where appropriate and reasonably achievable, AMBIT Capital segregates the activities of staff working in areas where conflicts of interest may arise. However, clients/potential clients of AMBIT
Capital should be aware of these possible conflicts of interests and should make informed decisions in relation to AMBIT Capital’s services.
16. AMBIT Capital and/or its affiliates may from time to time have investment banking, investment advisory and other business relationships with companies covered in this Research Report and may receive compensation for the same. Research
analysts provide important inputs into AMBIT Capital’s investment banking and other business selection processes.
17. AMBIT Capital and/or its affiliates may seek investment banking or other businesses from the companies covered in this Research Report and research analysts involved in preparing this Research Report may participate in the solicitation of
such business.
18. In addition to the foregoing, the companies covered in this Research Report may be clients of AMBIT Capital where AMBIT Capital may be required, inter alia, to prepare and publish research reports covering such companies and AMBIT
Capital may receive compensation from such companies in relation to such services. However, the views reflected in this Research Report are objective views, independent of AMBIT Capital’s relationship with such company.
19. In addition, AMBIT Capital may also act as a market maker or risk arbitrator or liquidity provider or may have assumed an underwriting commitment in the securities of companies covered in this Research Report (or in related investments)
and may also be represented in the supervisory board or on any other committee of those companies.
Additional disclaimer for U.S.Persons
19. The research report is solely a product of AMBIT Capital
20. AMBIT Capital is the employer of the research analyst(s) who has prepared the research report;
21. Any subsequent transactions in securities discussed in the research reports should be effected through THINKEQUITY LLC. or another U.S. broker-dealer.
22. The research analyst(s) preparing the research report is resident outside the United States and is/are not associated persons of any U.S. regulated broker-dealer and that therefore the analyst(s) is/are not subject to supervision by a U.S.
broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public
appearances and trading securities held by a research analyst account.
Pg 12 Decadal changesYou can also read
