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Saurabh Mukherjea – How Will the Nifty Evolve in the Coming Years

Investment Outlook , Published Feb 19, 2020

5 min read

Saurabh Mukherjea


The Indian Economy is likely to witness three noteworthy changes this decade, which will have impactions for investors – formalisation of economy, financialisation of savings and formalisation of retail sector.

“Though not a single household was wired for electricity in 1880, nearly 100 percent of US urban homes were wired by 1940, and in the same time interval the percentage of urban homes with clean running piped water and sewer pipes for waste disposal had reached 94 percent. More than 80 percent of urban homes in 1940 had interior flush toilets, 73 percent had gas for heating and cooking… In short, the 1870 houses were isolated from the rest of the world, but 1940 houses were ‘networked’, most having the five connections of electricity, gas, telephone, water and sewer… Networking inherently implies equality. Everyone, rich and poor, is plugged into the same electric, water, sewer, gas, and telephone network. The poor may only be able to hook up years after the rich, but eventually they receive the same access.”

– Robert Gordon in
“The Rise & Fall of American Growth” (2016)

The Nifty typically churns by 40 percent over a 10 year period implying that 20 of the current Nifty constituents will find themselves ejected from India’s most actively traded benchmark index whilst an equal number will find themselves entering the index. If an investor can second guess some of these exits/entrants, we will improve our chances of generating returns significantly higher than the long term returns of investing in the Nifty (the total returns from the Nifty were 10 percent per annum in the decade running upto 1st December 2019). For example, if I had taken the Nifty as it stood a decade ago and invested only in those 30 companies which have stayed in the Nifty through the intervening 10 year period, my returns would have been 19 percent per annum.

Going by the historical trend since the Nifty was created, almost all the entrants into the Nifty over the next decade will come from 100 stocks currently just under the Nifty. In order to assess which of these 100 companies will find themselves in the benchmark a decade later, it is worth first trying to assess how the Indian economy will change over the coming decade. I see three noteworthy changes taking place in India over the next decade.

  • Formalisation of the economy & concentration of profit share: India is already an economy with extraordinary levels of profit share concentration in many key sectors. For example in paints (Asian Paints, Berger Paints), premium cooking oil (Marico, Adani), biscuits (Britannia, Parle), hair oil (Marico, Bajaj Corp), infant milk powder (Nestle), cigarettes (ITC), adhesives (Pidilite), waterproofing (Pidilite again), trucks (Tata Motors, Ashok Leyland), small cars (Maruti, Hyundai). We already a couple of companies that account for 80 percent of the profits generated in the sector. Now this trend looks likely to spread to more fragmented sectors where the unorganised players had greater profit share.

    Leaving aside financial services and retail – which we will discuss further in this piece – there are several other large sectors where the impact of: (a) networking of the economy (widely available cheap broadband, low cost domestic flights, a reliable & extensive road network, widespread availability of banking services); (b) the impact of GST and the attendant crackdown on black money, look likely to compress profit share into one or two hands. The reward for the winners is huge – they get profits of the entire sector and market cap in excess of US $10 billion.

  • Financialisation of savings: As I travel around India, I see that most High Net-Worth (HNW) individuals now realise that physical assets struggle to give returns above the rate of inflation. Hence, business owners are first turning their black money savings into white money by paying Income Tax. Then they search for providers of financial savings products who can give them steady compounding. With potentially US $500 billion per annum of financial savings arising from annual income and with potentially another US $100 billion per annum arising from the balance sheet shift (from physical to financial), my back-of-the-envelope estimates suggest that the annual flow into financial savings could triple over the next decade (from US $200 billion today to US $600 billion).
  • Nifty Image

  • Formalisation of retail & distribution channels: 30 years ago, as a newspaper delivery boy in London, I saw the English high street change. Of the 60-odd shops to whom I would deliver newspapers, the first to shut down were the travel agents (disrupted by the rise of online). Then by the early 90s the local convenience stores started shutting down disrupted not so much by online but by: (a) the large supermarket which had opened a couple of kilometres down the road; and (b) the convenience-store format rolled out by the large supermarkets for local neighbourhoods such as the one I grew up in.

30 years ago, as a newspaper delivery boy in London, I saw the English high street change. Of the 60-odd shops to whom I would deliver newspapers, the first to shut down were the travel agents (disrupted by the rise of online). Then by the early 90s the local convenience stores started shutting down.

A similar challenge is now befalling the Kirana stores in the suburb of Mumbai where I reside. As the local Kirana stores wind up, the beneficiary in my neighbourhood is the local DMart and a few enterprising shopkeepers who are spending money in growing their stores and refurbishing them to create a 7/11 styled format. With the decline of the Kirana store, the traditional FMCG distributor is also dying.

Implications for the Nifty

If I look at the Nifty as it stands today, I can see a number of metals & mining companies, power & infrastructure companies, old-style conglomerates who struggle with rational capital allocation, and public-sector banks. I find 23 such companies within the Nifty and I can say with a degree of conviction that most of these companies will be out of the Nifty in a decade. Hence, as highlighted at the beginning of this note, ejecting these companies from your portfolio is likely to bump up your decadal returns from investing in large cap Indian companies.

Looking at the more positive side of Nifty churn, which companies will make it to the Nifty? Going by the three structural trends identified above and using Marcellus’ proprietary forensic accounting and capital allocation models, the following companies appear to be potential Nifty entrants over the next decade:

1. Pidilite
2. Berger Paints
3. Divi’s Lab
4. Marico
5. Infoedge
6. Abbott India
7. Page Industries
8. ICICI Lombard
9. Dabur
10. HDFC Life

Whilst I cannot possibly tell you the returns the above companies will give you, I know that had I been clever enough ten years ago to predict the names of the 20 companies which have entered the Nifty in the interim period, my portfolio would have compounded at 40 percent per annum.

(Disclosure: the first eight of the ten stocks mentioned above feature in most of Marcellus Investment Managers’ clients’ portfolios. I am the Chief Investment Officer of Marcellus and also a client of the firm.)

About Saurabh Mukherjea

Saurabh Mukherjea is the Founder and Chief Investment Officer of Marcellus Investment Managers, a portfolio management service. Asiamoney polls recognised Saurabh as the leading equity strategist for three consecutive years: 2015, 2016 and 2017.

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