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India Strategy Report Back

India Strategy: Sensex reconstitution; EPS downgrade of 1.5

15-Jun-2017

The S&P BSE Sensex composition is all set for a reshuffle on Monday, 19 June 2017. Kotak Mahindra Bank (KMB) will replace GAIL India, and Tata Motors Differential Voting Rights (DVR) will be included as an additional stock in the benchmark.
In this report, we will analyze how these changes will (i) impact the earnings for the benchmark and (ii) alter the weights of various sectors.

Sensex reconstitution: BFSI will have 36% weight (+ 250bp)

KMB will be included in the benchmark with 3.5% weight, and thus, will be among the top-10 stocks by weight. Tata Motors DVR will enter with 0.5%weight, helping maintain the weight of Auto sector in the benchmark.With the exit of GAIL (weight: 0.8%), Oil & Gas stands to lose the most in terms of weight (-110bp to 9%). Other losers include Consumer (-40bp), Technology(- 40bp), NBFCs (-30bp), Healthcare (-20bp) and Capital Goods (-20bp).
Least impacted sectors would be Utilities, PSU Banks, Telecom and Metals.
BFSI will have a weight of 36.1% (+250bp) post the reshuffle, which will be almost equivalent to the combined weights of Consumer, IT and Auto.

Of the top-10 stocks to be most impacted, four are from Financials

Aggregate weight of the existing 29 Sensex stocks will decline by 320bp.
Top-10 stocks to be most impacted (in terms of weight) by the reshuffle: HDFC Bank (-40bp), HDFC (-30bp), ITC (-30bp), Reliance Inds (-30bp), Infosys (-20bp),ICICI Bank (-20bp), L&T (-20bp), TCS (-20bp), Maruti (-10bp) and SBI (-10bp).

Sensex EPS for FY18/FY19 to see downgrade of 1.5%/1.4%

Sensex EPS for FY18/FY19 will see a downgrade of 1.5%/1.4%, primarily due to a higher increase in free float market cap of 2.7% compared to a rise of1.1%/1.3% in free float PAT for FY18/FY19.
Notably, Kotak Mahindra Bank's free float market cap is 4.4x of GAIL India.
We now estimate Sensex EPS at INR1,557 for FY18 (+15.4%) and ~INR1,895 forFY19 (+21.7%).
We have recently downgraded GAIL India to Sell (refer our detailed report –A case for lower PE; US contracts pose threat of losses).
Sensex trades at a P/ E of 19.7x on FY18E earnings based on current composition; this will expand to P/E of 20x post the reshuffle.

Expect higher activity in the reshuffled stocks

Domestic MFs currently hold 0.8% of their total AUM in GAIL, which is in line with the weight of the current benchmark. However, domestic MFs are under-owned in Kotak Mahindra Bank at 1.7% of total AUM.
DIIs hold 7.8% (-0.6% QoQ in Mar 2017) and FIIs hold 38.6% (+1.7% QoQ in March 2017) in Kotak Mahindra Bank.
Out of top-20 domestic MFs, 15 have exposure of less than 2% of their AUM to Kotak Mahindra Bank.

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