Dabur, Nestle and Britannia: FMCG on course for Nifty inclusion hat-trick

Dabur India is the front runner to replace YES Bank in the Nifty, say analysts tracking index inclusion criteria. If the move materialises, the Ayurveda-focused firm will become the third straight fast-moving consumer goods (FMCG) stock to be added to the index. 

Dabur, Godrej Consumer Products (GSPL), and Shree Cement are the front runners for inclusion in the Nifty based on their free-float market capitalisation.

“On the basis of the average six-month free float market capitalisation, Dabur, GCPL, and Shree Cement have marginal difference. However, Dabur is most likely to replace YES Bank in the Nifty50 in the forthcoming index constituents change on March 27,” wrote Vinod Karki, head (strategy) at ICICI Securities, in a note.

During the previous reshuffle in August, multinational FMCG firm Nestlé India had replaced non-banking financial company (NBFC) Indiabulls Housing Finance. A year ago, Britannia Industries had replaced oil marketing company Hindustan Petroleum Corporation (HPCL) in the index.

The inclusion of consumer stocks comes at a time when valuations in the space have reached record levels. Over the past two years, investors have piled on to FMCG stocks, given their relative safety and high return ratios.

Analysts say inclusion of FMCG stocks will reduce volatility but increase valuations. Most FMCG stocks trade at a high price-to-earnings (P/E) ratio.

“On a FY20 P/E basis, Nifty is likely to become expensive from 17 times to 17.1 times, as the likely new entrant has a much higher FY20 P/E (46 times) relative to the likely exiting stock (14 times),” said Karki.

Over the year, the weight of consumer stocks in the Nifty has been on the rise. At present, the sector has the third-highest weight in the index, after banks (including financials) and information technology (IT). Following the likely inclusion of Dabur, the sector could pip the IT sector’s weight.

The Nifty reshuffle could have a bearing on investor flows too.

“Index fund-related buying is Rs 520 crore for Dabur, and that of selling is Rs 160 crore for YES Bank. Active funds seeking to align their holdings with benchmark indices could further add to the buy/sell momentum,” the report states.

Interestingly, life insurance stocks such as HDFC Life and SBI Life have a much higher free-float than the three potential entrants. However, these recently listed stocks don’t qualify for index inclusion. 

One of the key criteria for index inclusion is that the stocks should trade in the derivatives segment. Currently, both HDFC Life and SBI Life are not part of the list of stocks on which futures and options are available.

“HDFC Life and SBI Life have higher free float market caps, but are ineligible as they not available for derivatives trading. In case this changes, both of these enter the index, replacing YES Bank and Zee,” states the ICICI Securities report.