This would be a very different post for the reason we will not be talking as to where Nifty is headed or what are the supports, resistances, trends etc.
We see a slew of reports on Nifty technical view, P-E Ratio and so on but nobody has much of an idea of what is Nifty.
In simpler words Nifty 50 is an index of 50 stocks with different weights.
Some example weights are
|Stock Name||CMP||Weightage||Value in Nifty|
|RELIANCE INDUSTRIES LTD||816.1||8.08||433.60|
|ICICI BANK LTD.||962.15||6.61||354.71|
|HDFC BANK LTD||595.1||6.43||345.05|
These are the top 6 stocks of Nifty.
The combined weightage of these 6 stocks is 42.72% in the Nifty.
Now lets look at the last 6 stocks of Nifty
|RANBAXY LABS LTD||516.15||0.47||25.22|
|SESA GOA LTD||187.1||0.43||23.08|
|RELIANCE INFRASTRUCTU LTD||510.5||0.41||22.00|
|STEEL AUTHORITY OF INDIA||83.15||0.29||15.56|
The combined weightage of these 6 stocks is a meagre 2.38% in the Nifty or just 130 points. ( So if i were to make DLF target of 100 as per the Veritas report the impact on Nifty would only be 12 points )
The weightages are dynamic and every drop in price leads to weightages being reduced. At one point of time Reliance Industries the weight 12-15% has now come down to 8% because of the fall in price. At the same time weightage of ITC,HUL and Bajaj Auto continues to rise.
some facts and observations on the weightages
-> The top 20 stocks by weights comprise 75 % of the Nifty Weightage
-> In terms of market cap TCS is 2.5 lakh crore and Reliance Inds 2.64 lakh crores. But the index weights are 3.88% and 8.05% because of floating market cap calculations.
-> The last 10 stocks comprise less than 5% of the Nifty weightage.
Now how does all this make a difference technically. For all the analysis of Nifty technicals or fundamentals one needs to realize that its basically an index of 50 stocks !! So if one is very bullish on Reliance Inds expecting to it to do 900 from 730 implies a move of 20% + which in Nifty points would be 100-120 points upside without any other support. Meanwhile Goldman Sachs mentioned Reliance can be 100 billion dollars in 4 years or double if ….. after the stock moved from 700 to 820
I find it very amusing when hordes of analysts talk of Nifty being overvalued or overbought at 5000-5400 or giving big calculations but know nothing on weightages.The best part is when you ask them how does HUL, ITC, TCS , HDFC Limited, HDFC Bank, Auto and Pharma they continue to remain bullish by words like OVERWEIGHT,OUTPERFORM and dont expect a 10 % cut on them but on earnings based multiple expect a cut of 10% on Nifty.
So basically they remain bullish on 50-60 % of the index and bearish on Nifty 🙂
Above all this clearly tells us broader market is very very cheap on historical basis 🙂 as there its not about weightages but only prices which have not appreciated or rather fallen a lot.
The most unique part is people do talk of Nifty or even Dow Jones and give big views on the same without even knowing the constituents. We even speak on the economy but forget the fact Nifty is not always a clear picture of the economy !!
So quite a lot of analyst look at little stats and make conclusions. So below is a little statistics of a Fashion Model and you have to conclude how is the apperance and predict if a Super Model is possible with these stats.
Description of a Fashion Model
-> Height – 6 feet
-> Legs – 40 inches
-> Chest – 36 inches.
Replace the above stats with P-E, Price to Book and Dividend Yield.
From above stats can you conclude to call it Beautiful ( Overvalued ) or Handsome ( undervalued ) - for that you need to know the Gender ( Constituents ) to make some future prediction about the model.
Now look at this example for Dow Jones
-> Height – 14300 reached in 2007
-> Legs – Banks/Economy and Real Estate in Shambles.
-> Chest – Its flexing its muscles only because of the Fed Support
Now you would conclude Dow Jones should be most hurt and in an ugly place because of its constituents.
Well it is not from the lows of 6450 in 2009 it is up now to 13200 which is less than 10% away from 2007 peak of 14300. The reason being the orientation of Dow Jones.
The weightage of Banks and Financials in Nifty is 25-27% whereas in Dow Jones is 9.8 % of which two biggest are The Travellers and American Express which are doing great whereas JP Morgan and Bank of America are the only banks with less than 3%. Reason – Citigroup, AIG , General Motors were excluded from the index in 2008-2009. Now IBM is the biggest weight with 11.7% and next being Chevron at 6.57 %.
So next time you hear Nifty target from someone ask him about top 6 and last 6 weights and their targets. Its easier to talk 3000-4000 Nifty and 7000 Nifty but in the end it has to be some heavyweights which need to lead 🙂 else its just another loose talk coated with nice words. We have discussed some in possible heavyweights which can lead in our report
So lets do an exercise as to what you think can be leaders on downside and upside. So if you believe Reliance will do 1000 and Infosys will fall to 2000 or DLF to 100 look at their impact and get your Nifty value.
Now lets do this exercise again.
Attached below is the Nifty Calculator
NIFTY CALCULATOR NIFTY CALCULATOR
So how do we do it.
1) All one needs to do is change the expected price and it will reflect a change in Nifty value.
2) By default i have just put a 10% rise on all 50 stocks. This gives us a possible Nifty of 5900 but do we think all 50 stocks will fall exactly 10%. Every stock moves in its own way in panic or good times. ( For example i expect ONGC to surprise by a 15% upmove but not a TCS to do 15% so effect would be different )
3) So lets go play with your expected price on all possible stocks.
I remember doing this exercise in December 2011 – Here is the article giving a Nifty calculator. Had sent this excel sheet to the most pessimistic people they could not justify the targets of 3000-3800 Nifty which they would shout of as they could not think of Reliance Inds at 500 or ITC at 150-170. Meanwhile we bottomed out on December 3rd week 🙂
For me the technical view is as given in this post - https://nooreshtech.co.in/2012/08/analyse-india-forget-the-past.html
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Do post your comments.
August 19, 2012
Very Nice one sirji 🙂
February 6, 2016
August 20, 2012
Excellent and very innovative/unique /logical perspective and very practicle as well.
August 20, 2012
Yes just facts 🙂 no creativity or analysis
August 21, 2012
Very good insight to predict movement of nifty by movement of individual weightage stocks!!
August 22, 2012
Its very important to look into constituents. 🙂
August 22, 2012
This post is excellent- it provides ample food for thought.
It carries the strength to partially explain why people like me are dis-illusioned by the so called analysts and their brokerage houses. A big guy of a big brokerage house looking after my portfolio tells confidently to public to sell a share on rise when he himself is holding the same in my portfolio though the value of the same is 40% now.
To my view CNBC and such other channels who broadcast the views by the analysts and attaracts sums from millions of investors should develop a methodology to assess the capability of the analysts and do away with those who are not statically passing a minimum bar.
One more thought that it generates is the basis of initial assignment of weightage of a share and its succesive dynamics of path it follows. Surely, a model is in play. And most probably a hired from western markets. Do the hired model entirely envisage the Indian stocks? How do they affect AAM INVESTORS?
February 1, 2013
wonderful insight.THIS IS WORTH ITS VALUE IN GOLD.
February 3, 2013
Thanks for the kind words subhash