A Tale of Nifty Fifty Survivors

This article was originally published in the Global Analyst Magazine.

Whats so special about these companies?

ACC	HDFC	Reliance Infra	ICICI	Infosys
Ambuja Cements	ITC	SBI	L&T	BPCL
HDFC Bank	M&M	Telco	BHEL	Sun Pharma
Hindalco	Ranbaxy	Tata Power	Cipla	Wipro
Hindustan Lever	Reliance	Tisco	Hero Motors

 

They all survived the index (“Nifty”) for a decade or more. Not a small feat by any means!

How did we arrive at this list?

Nifty, as an index, is comprised of 50 leading stocks. But the index committee at National Stock Exchange (NSE) do carry out periodic changes (quarterly or more) whereby stocks are excluded and included based on a variety of criteria including financial performance, liquidity, etc. Since 1996 when the Nifty was constituted, nearly 100 companies have participated in this ritual of getting in and getting out. While 49 companies have survived the Nifty (out of which 24 survived for 10 or more years), 53 companies got axed out at some stage or other due to various reasons including poor performance, mergers, delisting, liquidity, etc. Out of the 24 companies that survived for 10 or more years, 17 of them survived since the formation of the index i.e., for 16 years! (the grey shaded companies in the box above)

From the current list of the index, we backtracked it based on the data provided in the NSE website about inclusions and exclusions. Here is a visual description of this in and out process.

Why is it important?

Getting included in the index is considered a feather in the cap for a company. Well governed companies work for such accreditation since inclusion attracts institutional investors (domestic and foreign) and improves the liquidity and profile for the stock. More important than the inclusion is the ability to stay put in the index without being axed. Surviving the nifty becomes important in that context since companies should continuously qualify under various parameters to be part of the index.

How is their performance?

The “survivors” averaged an annualized return of 18% during these long years of stay in the Nifty compared to Nifty’s 12% annualized return. Sun Pharma topped the list with a 35% annualized return followed by Infosys (34%) and HDFC Bank (33%) (see the risk-return chart). The lowest in the pack was Hindalco at 5%.  They all enjoyed good daily liquidity and have consistently produced excellent top line and bottom line growth. We also can notice other companies in the survivor list that survived for less than 10 years and is still going strong. They average a return of 12% again with good liquidity. As they season and age (like the survivors), they may pick up in performance and out beat the Nifty index.

 

 

The power of compounding is so astounding that an investment of Rs.10,000 back in 1996 in say HDFC Bank would now be worth Rs. 10 lakhs while the same invested in Nifty index will be worth only Rs.61,222 and worse, Hindalco worth only about Rs.21,808. However, this is not to suggest investing only in one or two companies as it takes away the benefit of diversification.

The “non-survivors” (totaling 53 companies) averaged an annualized return of -3% with liquidity just one third of survivors. Their average staying period in the Nifty index was less than 6 years ranging from 2 years on the bottom (Jet Airways, Andhra Valley, etc) to 14 years (ABB).

So what should be the portfolio strategy?

The key here is to monitor a company’s ability to survive Nifty for say a good period (10 years!) whereupon it becomes a candidate for inclusion in one’s portfolio till the time it is evicted out of Nifty for one reason or other.  All the 17 stocks that survived the Nifty till date will qualify for portfolio inclusion after a waiting period of 10 years. In other words, Since Nifty was formed in 1996, that testing period of ten years would end in 2005 when these stocks will be natural inclusions. A quick check of the performance of these hardcore survivors post portfolio inclusion (i.e, 2005) show that the performance is mostly superior to the naïve nifty investment. The only work here is to monitor the quarterly inclusion/exclusion exercise of the NSE which I feel is not that big a deal. 

Company	Year of inclusion in the portfolio	Purchase price	Sale price	CAGR (2005-2012)
HDFC Bank	2005	123.9	558.8	24%
M&M	2005	164.5	736.7	24%
I T C	2005	55.9	245.3	24%
L&T	2005	318.5	1337.1	23%
HDFC	2005	180.7	697.9	21%
ACC	2005	424	1298.7	17%
RIL	2005	253.7	769.4	17%
SBI	2005	717.6	2093.5	17%
HUL	2005	161.2	454.4	16%
Tata Motors	2005	94	256.7	15%
Ambuja	2005	65.5	174	15%
Tata Power	2005	40.5	103.1	14%
Nifty	2005	2297.1	5314.2	13%
ICICI Bank	2005	463	909.6	10%
Tata Steel	2005	331.8	431.2	4%
Hindalco	2005	111.4	124.3	2%
Ranbaxy	2005	473.2	493	1%
Rel infra	2005	562	525.4	-1%

 

The author thanks Ms. Sowmya Dorai for data analysis.