Reconstituting the Sensex

In my previous column, I had outlined, how I believed, Prime Minister Narendra Modi is likely to engineer three critical resets over the next four years, namely: (1) Shift India's savings landscape away from physical assets towards the formal financial system, (2) disrupt the model of crony capitalism and (3) redefine India's subsidy mechanism. Whilst in the long run these resets are likely to lower the cost of land, labour and capital, in the immediate term these changes are likely to limit GDP growth. I had gone on to point out that Indian history shows that the initiation of powerful resets renders redundant the traditional constructs used by investors. This in turn spawns a new generation of winners and losers in the Indian stock market. For instance, 1992-2002 saw the era of the 'licence raj' coming to an end and also saw the Sensex's churn ratio rise to 60 per cent (i.e., 18 of the 30 companies in the Sensex in 1992 were out of the Sensex by 2002). In this column I will delve what the most likely companies are to be ejected from the Sensex over the next decade as the new PM's resets gain traction. The churn in the Sensex peaked in the four years following the momentous reforms launched by P V Narsimha Rao (as PM) and Manmohan Singh (as finance minister). A whole host of businesses which had flourished behind the protectionist barriers created by the licence raj in industries were ejected from the Sensex. These industries include: (1) textiles (Aditya Birla Nuvo, Bombay Dyeing, Century Textiles and Future Polyester), (2) automobiles (Hindustan Motors and Premier), (3) steel (Mukand Limited), (4) paper (Ballarpur Industries) and (5) heavy engineering (Bharat Forge, Cummins India, Siemens and Voltas). Post 1995 Sensex churn has fallen remarkably relative to the volatile era of the early 1990s - only eight replacements were made in the Sensex from 2004 to 2014 vs 20 from 1995 to 2005. Sensex incumbents grew rapidly in size and I attribute this to the following reasons: Large business groups ramped up domestic cap

This article was originally published on June 26, 2015.