Though the Nifty index comprises 50 stocks,
the top 10 enjoys a lion’s share. In 2005, the top 10 constituted nearly 60% of
the index (in terms of market capitalization) while in 2015 it comprised 48%.
Obviously the performance of Nifty itself will be impacted by who is on this
coveted top 10 list and funds flow from institutions (both domestic and
foreign) that track this index will also be skewed towards these top 10
companies. Hence, the curiosity to study this in greater detail and try and
figure out how this top 10 list will look like say in 2025! Also, a look from
1996 to 2015 for Nifty 50 shows that more than 115 companies have been part of
Nifty 50 with average age of 8 years. In other words, if a company has been in
the Nifty 50 index for more than 8 years , its probability to continue in the
Nifty 50 reduces. In this context, the race to top 10 gets even more
interesting.
How the sands have been shifting?
Back in 2005, ONGC was the top company in
Nifty followed by Reliance and TCS. Fast forward to 2015, the coveted top slot
has been taken up by TCS with ONGC pushed to 7th spot though
Reliance managed to keep the same 2nd spot. However, the attrition
rate of top 10 between 2005 and 2015 has been 50% in that only 5 of the top 10
in 2005 made it to 2015. Wipro, Bharti Airtel, ICICI Bank, Satyam computers and
State Bank of India dropped out in the 2015 Top 10 list. HDFC Bank, Coal India,
HDFC, Sun Pharma and Hindustan Unilever replaced them in 2015.
The rise of TCS from the 3rd
position in 2005 to 1st position in 2015 is impressive as its market
cap compounded at an astonishing rate of nearly 20% between 2005 and 2015.
While it had a market cap of just $18 billion in 2005, it jumped to $72 billion
by 2015 making it as the most valuable company in Nifty 50. The saga of HDFC
Bank was even more impressive. Back in 2005, it was at 18th position
with a market cap of just $5 billion. It then moved 15 places up to become the
3rd most valuable company in 2015 where its market cap compounded at
an astonishing rate of 22.5%. The rise of Sun pharma is also credible whose
market cap grew nearly 10 fold between 2005 and 2015 moving it from 31st
position in 2005 to 9th position in 2015.
Getting to 2025
While it is useful to know changes that happened
in the top 10 coveted list during the last 10 years, it can be challenging to
figure out how this list will look like say 10 years from now. On a perusal of
growth rate performance of Nifty 50 companies during the last 5 years, I see a
normal distribution ranging from a positive +30.7% (Lupin) to a negative -22.7%
(Vedanta). However, positive performers (companies with positive rates of
growth in market cap) outnumbered negative performers 35:15. In other words, 35
companies enjoyed positive growth during the last 5 years while 15 suffered
negative growth rate. The top 25 stocks organized in terms of CAGR shows that
companies have grown at a hectic pace during the last five years. The CAGR
among top 25 ranged from 30%(Lupin, HCL Tech, Indusind) to 10% (Mahindra and Mahindra). Going
forward, I believe maintaining such high growth rates may be difficult given
the headwinds blowing across the world. There is a recent Mckinsey study that
says that long-term equity returns for the next 20 years will be nearly half of
the last 30 years average for US and European equities. While US and European
equities clocked 8% annualized growth in the last 30 years, they are expected
to clock a growth of 4-6.5% in the next 20 years. Also, in the next 20 years, Mckinsey
expects inflation to rise, interest rates to remain the same, and weaker GDP
growth. More importantly, it observes that emerging market companies and new
tech competition could cut margins. The story is the same on the bonds side
where the last 30 years produced a bond return of 5% in US, the next 20 years
will produce a return ranging from 0-2%. Welcome to a world of diminishing
returns!
Hence, it may be prudent to assume that
going forward the CAGR for Nifty 50 companies could be just half of what it
enjoyed during the last five years (excluding negative growth companies). While
this may sound conservative, in my view it is more realistic since compounding
at a very high rate for a period of 10 years can produce extraordinary numbers.
Given this approach, here is the list of Top 10 Nifty 50 companies by 2025.
Who makes it?
6 out of the 2015 Top 10 makes it to 2025
with TCS continuing to remain the most valuable Nifty 50 stock. TCS would have
improved its market cap from $72 billion
to $158 billion implying a CAGR of 8%. Sun Pharma would have moved from 9th
position to 2nd position while HDFC Bank will retain its 3rd
slot even in 2025. Notable new entrants to the Top 10 list would be HCL Tech
that was positioned at 22 in 2005, 19 in 2015 and would be 6th by
2025. Impressive indeed! Maruti Suzuki also has a similar ascent (21: 2005; 13:
2015; 7th:2025). Kotak Mahindra Bank moves from 16th
position in 2015 to 8th position in 2025 while Lupin moves from 23rd
(2015) to 10th (2025) with its market cap improving to $52 billion.
Who loses it?
Notable exclusions in 2025 from the Top 10
include Reliance, Infosys, Coal India, and ONGC. Reliance will move to 11th
position from 2nd, while Infosys will move to 12th from 5th.
Coal India will move to 15th from 6th while ONGC will
move to 16th from 7th.
Sector Shifts
While Oil and Gas dominated the scene in
2005, it is nowhere to be seen by 2025. Telecom has already lost it by 2015
while tobacco holds on thanks to ITC. Financials will see continuous growth in
the Top 10 while automobiles will be a surprise entrant by 2025 (thanks to
Maruti). However, the most important ascent is noticed in pharma whose market
cap will explode from $30 billion to $160 billion courtesy Sun Pharma and
Lupin. IT will still be a big part with TCS and HCL Tech leading the way.
Investment Implications
The jostling for space in the Top 10 can be
important to make investment decisions. Firstly, it will have huge impact on
the index per se. If you are investing in ETF’s, you will mostly track the
index which is heavily skewed in favour of top 10. Index investors will also
navigate this process of churning given the shifts in weights. Index
realignment happens over time and hence investors in ETF’s will underperform
active managers especially in emerging markets like India where ability to add
alpha is very high.
If you are in stock picking, this study
shows sectors to avoid (oil and gas, Telecom) and sectors to embrace (pharma,
IT). You may even want to deep dive attractive sectors (by dwelling into mid-caps)
to bet on future winners. Automobiles and auto ancillary are good examples.
The market cap of Nifty 50 will increase to
say $1.6 trillion in 2025 from $824 billion at the end of 2015. That is a
modest 7% annualized growth between 2016 to 2025. However, if you focus on the
top 10 list likely to be in 2025, your investment performance should definitely
be better than 7% at the least. However, what is crucial is to keep an eye on
this transformation as even stable companies can spring surprise on the
negative side.
PS: The author thanks Rajesh Dheenadayalan for data assistance
PS: The author thanks Rajesh Dheenadayalan for data assistance
