What’s special about Sensex?

What’s special about Sensex?

Mumbai: Individual stocks help fuel the Sensex. But does the Sensex itself help a company’s shares?

A Mint analysis of investor behaviour involving firms that were added and those that were dropped from the Bombay Stock Exchange’s (BSE’s) 30-stock benchmark index appears to suggest that, so far, being part of this elite group makes no significant difference to an Indian stock’s actual performance, at least in the short term.

To be sure, being in the Sensex, India’s leading stock market barometer often seen as a signal for the country’s economic health and mood, gives an individual firm a stamp of approval of sorts and bragging rights.

But unlike in, say, the US, it appears that a lack of indexing and a paucity of investment products based on the Sensex composition means that individual members’ shares sink or swim on their own merit, much more so than in the Western stock markets.

During a week when BSE decided to kick out Indian pharmaceutical giant Dr Reddy’s Laboratories Ltd and replace it with another giant from a sunrise sector, real estate’s DLF Ltd, Mint looked at the last 11 changes made to the Sensex to see if investors can make any meaningful bets based on companies entering and exiting the Sensex.



Since its exclusion from the Sensex on Monday, Dr Reddy’s has lost 3.07% through Thursday. DLF, which entered the big leagues, fell 12.15%. Meanwhile, the Sensex itself has lost 5.95% since Monday.

Mint also looked at the last 11 changes to the Sensex over a longer—three-month—period and found that just two stocks went up after inclusion in that period and only one fell after its exit from the index over the same period.

NTPC Ltd, which had lost 7.10% in the three months before it entered the Sensex in May 2005, gained 20.19% in the subsequent 90 days. Tata Consultancy Services Ltd, which had also fallen 8.61% in the three months before its inclusion in the Sensex in March 2005, gained 9.17% in the three months after?joining the group.

Interestingly, some shares performed rather well after they left the Sensex. Zee Entertainment Enterprises Ltd (then Zee Telefilms Ltd), for instance, was a weak performer in the 90 days leading up to its exit, up just 3.72%, but soared 24.27% in the three months after its exit from the Sensex.

Analysts attribute the seeming lack of a Sensex bounce, on the upside or downside, to the limited number of index funds that mirror the Sensex orNifty, the National Stock Exchange (NSE) 50-stock benchmark index which includes all Sensex companies except DLF.

Though the actual number of stocks in the Sensex, at 30, mirrors the number of firms on New York Stock Exchange’s benchmark Dow Jones Industrial Average (DJIA), usually DJIA firms see a spike on entry and exit into the index because of the strong index-linked buying tradition—and products—in the Western markets.

Such buying, where money is put in various proportions into the firms representing the index, is often led by pension funds, endowments and other mutual funds, all of which are not widely present in India.

“Relative to other markets, there is not much index-linked buying here," says Krishnamurthy Vijayan, chief executive of JPMorgan’s Asset Management. “So, it doesn’t make much of a difference whether a stock is in the index or not."

There are around a dozen index-linked funds in India, but most are linked to the Nifty and not the Sensex. Benchmark Asset Management Co. Pvt. Ltd, a domestic fund, has several such funds and NSE banking index-linked fund is its biggest.

“Such a replacement does make a difference to us because we will sell the old one, buy the new one and all 50 would change so that they mirror the new weightages on the index," Sanjay Gaitonde, executive director with Benchmark Asset Management said.

But, because there are so few funds such as what Gaitonde is describing, the impact on the stock price of say a DLF or a Dr Reddy’s is very limited.

Indeed, stocks on the index may have higher market capitalization, more liquidity and more research coverage by industry analysts, but retail and institutional investors say that these matter less than whether it is a good stock to invest or not rather than if it is in the Sensex or not.

Apart from index funds, however, funds that benchmark their performance with the Sensex or Nifty also have to take a view on a stock if it is in the index.

“If, say, DLF is not on the index, then a manager can say that they own 1% and that is overweight," said the head of a foreign institutional investment fund, who did not want to be named because of company policy. “But if it’s in the Sensex, they need to say if they own as much as its weightage on the Sensex if they have a neutral view on the stock and more, if they are overweight. So, being on the index definitely gives a stock visibility."

For retail investors, a stock’s inclusion in an index is part of the range of signals they read about which sectors and stocks to buy into.

“DLF’s inclusion is definitely an indication that the stock exchange is keen on the real estate sector. So, I will be looking at DLF, HDIL or Puravankara or another of the big real real estate stocks now," says Vishal Sarda, a Mumbai-based executive who has been in the market for more than a decade.

“People may take a blind risk on a stock if it is on the Sensex," says Ketan Dalal, a Mumbai-based investor.

But the biggest benefits could be the intangible gloss a company and its brand gets from being in an elite club. “Being in the index is not so powerful that it will override other weaknesses in the stock," says Anand Halve, co founder, Chlorophyll Brand and Communications Consultancy Pvt. Ltd. “But it does bring stature and respect for a company..."

A Dr Reddy’s spokesperson said the company would not comment on its exit from the index.

The 21-year-old Sensex, which recently crossed 20,000 before giving up some of the gains—closed Thursday at 18,526.32—mimics the DJIA in size, but uses the methodology of the broader Standard & Poor’s S&P 500 index, which comprises 500 companies that trade in the US markets.

The constituents of the list are decided by a Sensex committee, a BSE panel that makes the calls based on parameters such as frequency of trading, liquidity, market capitalization and free float, which is the volume of shares of the firms available for trading.

The committee also judges the weightage of the sector. “A company may qualify for the index, but still does not get an entry if it is from a sector that has overwhelming presence in the Sensex. The index always maintains the balance," said a person familiar with the functioning of the committee.


(Ashwin Ramarathinam contributed to this story.)