What’s so special about these 29 companies?

March 12, 2015

 

 

They all survived the index (“Nifty”) for a decade or more. Not a small feat by any means! Out of the 29 companies that survived for 10 or more years, 15 of them survived since the formation of the index i.e., for 19 years! (the grey shaded companies in the table above)

 

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) does carry out periodic changes (quarterly or more) whereby stocks are excluded and included based on a variety of criteria including liquidity, performance, etc . Since 1996 when the Nifty was constituted, nearly 100 companies have participated in this ritual of getting in and getting out. Here is a visual description of this in and out process.

 

 

Source: NSE India,

 

Note: Green Cells indicate NIFTY Inclusion while Red cells indicate exclusion from NIFTY Index

 

While 49 companies have survived the Nifty (out of which 29 survived for 10 or more years), 57 companies got axed out at some stage or other due to various reasons including poor performance, mergers, delisting, liquidity, etc.

 

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 20.4% during these long years of stay in the Nifty compared to Nifty’s 12.6% annualized return. Infosys topped the list with a 40.7% annualized return followed by Sun Pharma (39.6%) and Wipro (33.3%) (see the risk-return chart). The lowest in the pack was Hindalco at 5.3%. 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 16.3% with good liquidity. As they season and age (like the survivors), they may pick up in performance, on par with “survivors”.

 

 Source: Reuters Eikon; Data pertains from 1996 to Jan, 2015

 

Rs.10,000 invested at the start of 1996 till 2014

 Source: Reuters Eikon; Data as of Dec 31, 2014

 

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. 17 lakhs while the same invested in Nifty index will be worth only Rs.86,000 and worse, Hindalco worth only about Rs.16,497. 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 57 companies) averaged an annualized return of 8.3% with liquidity just one third of survivors. Their average staying period in the Nifty index was 6 years ranging from 2 years on the bottom (Jet Airways, HCL Infosystems, Andhra Valley, etc) to 18 years (Ranbaxy).

 Source: Reuters Eikon; Data pertains from 1996 to Jan, 2015

 

In conclusion, we can say that investing in Nifty can be a good idea since it comprises of a diversified basket of companies drawn from various sectors and generally includes companies with market leadership and liquidity. However, cherry picking nifty "survivors" can be even a better idea!

 

 

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