The Ship of Theseus Paradox - Nifty 2008 and Nifty 2016

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The Ship of Theseus Paradox –
Nifty 2008 and Nifty 2016
Nooresh Merani

The Free Float Market Cap Methodology
• Free-float market capitalization takes into consideration
only those shares issued by the company that are readily
available for trading in the market.
• It generally excludes promoters' holding, government
holding, strategic holding and other locked-in shares that
will not come to the market for trading in the normal
course.

Example – State Bank of India
• Market Price = 205 on 31st
May 2016
• No of Shares = 7762777042
• Market Cap = 7762777042 * 205 = 159098 Cr
• Promoter Shareholding = 60% roughly
• Free Float Shareholding = 40%
• Free Float Market Cap = Free Float % * Market Cap
• = 40% of 159098 = 63639
• So the Free Float Market Cap of SBI is 63639 Cr and it has a
weightage 2.13% in the Nifty Free Float 50 Index.

Example – Kotak Mahindra Bank
• Market Price = 746.55 on 31st
May 2016
• No of Shares = 1834382158
• Market Cap = 1834382158* 746.55= 136945 Cr
• Promoter Shareholding = 40%
• Free Float Shareholding = 60%
• Free Float Market Cap = Free Float % * Market Cap
• = 60% of 136945= 79438
• So the Free Float Market Cap of SBI is 79438Cr and it has a
weightage 2.66% in the Nifty Free Float 50 Index.

Free Float Problem
• So even though State Bank of India has a much higher
market cap compared to Kotak Mahindra Bank the
weightage in Nifty is lesser than it.
• SBI is at 2.13% compared to 2.66% for Kotak Mahindra
Bank.

Free Float Methodology Adoption
• Sensex has been on a Free Float Methodology from
September 2003
• Nifty shifted to Free Float Methodology from June 2009
• Majority of the Indices in the World are based on Free Float
Methodology !!
• Higher the Free Float – Higher the Liquidity – Lower
the Impact Costs and lesser chances of
Manipulation makes it ideal for Exchanges to have
Free Float Index.

The Effects of Free Float Methodology
in Indian Indices
• Around the world the promoter holdings are low and the
float is anywhere between 40-90%
• In India till the time 75% the float was between 10-60%
• Financials get a higher weightage as the free float is higher
as promoter shareholding is lower.
• PSUs get a lower weightage in the Index as the promoter
shareholding is high and free float is low.
• The big concern in Bull Market is company diluting capital
receive higher weightage to a company doing buybacks.

The Churn in Nifty & Sensex
• Only 30-35% of the Index or roughly 1/3rd
of the original constituents
of Nifty ( 1996) and Sensex ( 1986 ) are still present in the Current
Nifty.
• Every 10 years the churn is almost 40-50%.
• A lot of so called Blue Chip Companies coz of presence in
Nifty/Sensex in a decade turn down to be obsolete and destroy
shareholder wealth.
• Apart from the churn the Weightage Shifts are also Huge.
• Luckily Nifty has a Rule of 5 changes only in a year and that too twice
a year only else the churn would be much more !! ( For example
today bottom 5-6 stocks free float market cap is lesser than 5-8
names from Nifty next 50 index. )

The Ship of Theseus Paradox
• The ship wherein Theseus and the youth of Athens
returned from Crete had thirty oars, and was
preserved by the Athenians down even to the time of
Demetrius Phalereus, for they took away the old planks
as they decayed, putting in new and stronger timber in
their places, in so much that this ship became a
standing example among the philosophers, for the
logical question of things that grow; one side holding
that the ship remained the same, and the other
contending that it was not the same.
• — Plutarch, Theseus[2]

Ship of Theseus Paradox - 1 – Nifty 50
Analyse India

Ship of Theseus Paradox - 2 – Nifty 50

Nifty – 2008 if you did not change the
Planks/Stocks
Analyse India
Nifty on 31st Jan
2008
5137.
45
After many
changes in Stocks
Nifty on 29th June
2016 8204 Returns
59.70
%
Nifty on 31st Jan
2008
5137.
45
Keeping same
Stocks
Nifty on 29th June
2016 7170 Returns
39.60
%
But if you randomly bought Nifty 50 at
various times in 2010/2011/2013 the
returns would not differ by much
But if you randomly bought Nifty 50 at
various times in 2010/2011/2013 the
returns would not differ by much

Nifty – New Planks in every Euphoria. Example
1999-2000 – IT & Media
• Inclusions in The Euphoria of 1999-2000
• Infosys / NIIT got included in Nifty in October 1998 at a
price of 20 and 120 and were at 400 and 500 by the peak
March 2000. ( Adjusted prices)
• Satyam inclusion in September 1999. HCL Infosystems and
Zee Tele in May 2000. Digital Equipment India in Sept 2000.
• Many other old economy stocks Bpcl, mrpl,thermax,
Andhra valley power supply , GE Shipping etc got excluded.
Analyse India
Inclusion of
IT stocks
Increased
closer to Y2K
peak. Easy to
say in
Hindsight
Inclusion of
IT stocks
Increased
closer to Y2K
peak. Easy to
say in
Hindsight

Nifty – New Planks in Euphoria.
Example 2005-2007
• Suzlon/Siemens included in June 2006
• Reliance Communications in Sept 2006
• Reliance Petroleum/Sterlite Inds in April 2007
• Unitech included in October 2007 by that time it was a 500-800
BAGGER from 2004 prices.
• Idea Cellular/Cairn included in December 2007
• DLF/Power Grid included in March 2008
• Tata Tea, IPCL,hpcl, mtnl, Glaxo, bajaj auto, Shipping Corporation etc
were the companies removed.
Inclusion of
Real Estate
Stock like
Unitech just
before
peaking out.
Easy to say in
Hindsight 
Inclusion of
Real Estate
Stock like
Unitech just
before
peaking out.
Easy to say in
Hindsight 

Nifty – New Planks in 2016
• Aurobindo Pharma, Bosch, Eicher Motors included because
of huge outperformance and major weeding out of old
wealth destroyers like Reliance Infra, Jaiprakash Associates,
Vedanta, cairn etc.
• So no new sector becoming a major part of the Index
because of outperformance.
• More of a decaying planks or wealth destroyers weeded
out.
• No Euphoric sectoral moves leading the Market.
Analyse India
The churn
today is more
so because of
the
underperfor
mance of
many stocks
then coz of
new fresh
Polished
Planks 
The churn
today is more
so because of
the
underperfor
mance of
many stocks
then coz of
new fresh
Polished
Planks 

Nifty the Ship of Theseus from 2008 to
2016
Analyse India
31st January 2008 31st May 2016
RELIANCE 12.15% INFY 8.36
ONGC 7.13% HDFCBANK 7.91
BHARTIARTL 5.49% ITC 6.62
NTPC 5.45% HDFC 6.55
SBIN 4.61% RELIANCE 5.3
ICICIBANK 4.29% ICICIBANK 4.77
RCOM 4.17% TCS 4.58
LT 3.59% LT 4.05
BHEL 3.40% TATAMOTORS 2.98
SAIL 2.99% AXISBANK 2.88
INFOSYSTCH 2.89% SUNPHARMA 2.77
TCS 2.88% KOTAKBANK 2.66
HDFC 2.71% SBIN 2.13
ITC 2.48% M&M 2.06
RPL 2.41% HINDUNILVR 2.03
UNITECH 2.10% MARUTI 1.85
WIPRO 2.08% INDUSINDBK 1.8
HDFCBANK 1.87% BHARTIARTL 1.55
TATASTEEL 1.82% ASIANPAINT 1.49
STER 1.78% HCLTECH 1.4
Only 10
survive in
Top 20
Only 10
survive in
Top 20
4 are no
more part
of Nifty
4 are no
more part
of Nifty
Top 4 of
2016 =
29.4%
Was only
10% in
2008
Top 4 of
2016 =
29.4%
Was only
10% in
2008
RIL and
RPL
=14.56%
in 2008 is
now only
5.3%
RIL and
RPL
=14.56%
in 2008 is
now only
5.3%
RCOM at 7th
no more
part of Nifty.
RCOM at 7th
no more
part of Nifty.
Big Shift
from 24-
25% being
Oil and
Gas to
Financials
at 30%
Big Shift
from 24-
25% being
Oil and
Gas to
Financials
at 30%

The Big Shift from Investment Linked
Nifty to Financials Led Nifty
Analyse India
Investment
Linked 23.97
Exports 23.44
Financials 30.29
Consumers &
Disc 20.82
Nifty 2016Nifty 2016

How do Analysts/Market-Men Value
Nifty
• Generally most of the Strategy Reports talk of how Nifty is
quoting at 20x Trailing earnings/ 16x forward earnings and
how it is higher than the Average P-E Multiple of last 10
years etc !!
• A recent report mentioned a target based on a possible
multiple of 14x as that was the Index multiple in post 2008.
• Most analysts compare current/forward P-E of Nifty to the
Average/Mean/Peak/Bottom P-E of historical Nifty.
Analyse India

The Valuation Problem with Nifty of
2016
• Today’s Nifty 50 is not even comparable to that 10 years back. Only 3
out of Top 10 in Nifty in 2007 are still there in the Top 10. Refer our
note - Nifty 2016 is a very different animal from Nifty 2008 !!
• So how can we really try to compare current valuations to previous
averages when it was a totally different Nifty? It’s like comparing
what P-E HDFC Bank deserves in comparison to SBI. (SBI had a weight
of 4.61% in 2007 and now 2% compared to HDFC Bank from 1.87%
weight to 7.5% today!! )
Analyse India

Shift towards Financials makes the P-E
Multiple shift higher
• 30% of Nifty is now Banks and Financials where parameter for
Valuation is generally Price to Book and not P-E.
• Lack of PSUs like ONGC/SBI/NTPC and capital intensive biz like
Reliance which are generally at Low P-E.
• Embedded Values in Financials in terms Insurance/Asset
Management and Foreign Subsidiaries in Tata Motors etc keep P-E
high in some stocks and then others like Asian
Paints/ITC/HUL/Pharma tend to trade at higher P-E.
Analyse India

Conclusions
• Conclusion – Possibly The Base P-E or Average P-E is much higher for
current Nifty !!
• Low Debt Companies and Less Capital Intensive and less Investment
Linked Companies in Nifty 50 make it an Index which does not Swing
Wildly in Magnitude.
• We would not see wild swings of 30% absolute downsides in
corrections ( like in 2004/2006) or 60% downsides in Nifty in Bear
Markets ( 1992/2000/2008) until we see New Planks i.e New stocks
becoming part of the Index because of a huge outperformance.
Analyse India

Nooresh Merani
Cell: +91-9819225396
nooreshtech@analyseindia.com
twitter.com/nooreshtech
www.facebook.com/nooreshtech

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The Ship of Theseus Paradox - Nifty 2008 and Nifty 2016

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