Ranking on Dow Jones indices could raise investment appeal, say analysts

Contingent liability a critical parameter too, according to analysts

A high ranking on Dow Jones indices or perhaps even an entry into one of its world indices could make companies’ more attractive to institutional investors going ahead, say analysts. 

However, the contingent liability of the firms would also play a key role.

Recently, a slew of domestic metal and infrastructure companies featured in the Dow Jones indices paving the way for stronger recognition in the global market.

Gautam Adani-led Adani Ports, Aditya Birla Group’s flagship company Hindalco Industries, along with Anil Agarwal-led Vedanta and Hindustan Zinc were among the entities that grabbed attractive ranking on the Dow Jones index.

“The (Dow Jones) index is closely tracked by the global institutional investor community and, hence, its accreditation counts. A ranking in the Dow Jones index is a high quality validation that the company is responsibly carrying out its environmental, social and governance practices,” said an industry expert on condition of anonymity.

The Dow Jones Sustainability Indices (DJSI) are float-adjusted market capitalisation weighted indices that measure the performance of companies selected with ESG (Environmental, Social, Governance) criteria, explained the methodology document of Dow Jones Sustainability Indices.

The Dow Jones Sustainability Emerging Markets Index ranked Adani Ports and Special Economic Zone (APSEZ) 14th in the global transportation and transportation infrastructure sector, the only Indian company included in this sector.

Hindustan Zinc, on the other hand, retained first position in the Asia Pacific region in the Metal & Mining sector in Dow Jones sustainability Index 2020. Globally, it has been ranked eighth overall and third in environment space by the index.

Meanwhile, Hindalco Industries was ranked as the aluminium industry leader for its sustainability performance in the 2020 edition of DJSI Corporate Sustainability Assessment (CSA) rankings.

“Featuring in the index will surely improve a company’s global image as its visibility will go up and help build stronger brand image in the global market,” said Hitesh Avachat, group head-corporate ratings at CARE Ratings.

Vedanta rose from 21 last year to 12th this year on DJSI in the metals and mining sector.

Though featuring in the index could have some business benefits in terms of acquiring global contracts, the index does not capture the holistic picture of the company’s working, said analysts.

“Contingent liability as against net worth (of a company) is also an important criteria that needs to be looked into to know how responsible the company is, especially if it is in commodities business, where risk is high,” said an analyst with a ratings agency on condition of anonymity.

According to data, Vedanta’s consolidated contingent liability as percentage of net worth stood at 64 per cent in FY20, while Hindalco’s contingent liability as percentage of net worth is 1.64 per cent. 

Contingent liability is a potential liability that may occur in the future, such as pending lawsuits or honoring product warranties. If the liability is likely to occur and the amount can be estimated, the liability should be recorded in the accounting records of a company.