Is the Sensex too reliant on Reliance Industries?

Reliance has yielded a whopping return of 160.81% in less than 6 months.Reliance alone accounted for 43% of the rise in the Nifty and the Sensex since Mar-20.

September 21, 2020 9:43 IST | India Infoline News Service
Over the last few days there have been a lot of reports that the Sensex may have become too reliant on just one stock; Reliance Industries. To understand the genesis of the argument, let us go back to the rally from the recent lows of March 23rd. The chart below compares Reliance Industries with 4 most valuable stocks; indexed to the base of 100. 

Data Source: BSE (Last price as on 18 Sep)

Heavyweights have shown sharply contrasting performance since the lows of March 2020. Reliance has yielded a whopping return of 160.81% in less than 6 months. The next best is Infosys, giving a little over 90% returns. TCS and HDFC Bank are up 46.73% and 37.04% respectively; roughly at par with the Nifty. HUVR gave a tepid performance giving just about 12.45% returns in the last 6 months. HUVR returns are not bad for a matured business, but pales when compared to Reliance.

If the US has FAANG stocks; India has Reliance Industries

In the US markets, you must have seen the NASDAQ diverging sharply from the Dow. The NASDAQ has not only recovered the losses of March 2020 but is up almost 20% above the pre-COVID highs. This has been largely driven by the FAANG stocks. An abbreviated version of Facebook, Amazon, Apple, Netflix and Google; FAANG Stocks have a combined market capitalization of over $8 trillion. How dominant has their contribution to S&P-500 been?

If you consider the broad-based S&P 500 index, the FAANG stocks accounted for 22% of the rally in the index from the lows of March 2020. If you just look at Apple, the most valuable company with a market cap of over $2 trillion, then Apple alone contributed 11% of the rally in the S&P 500 from the lows of March. How does India look in comparison?

If you thought that the FAANG stocks contributing 22% to the bounce in the S&P 500 was too much, just think again. In India, Reliance alone accounted for 43% of the rise in the Nifty and the Sensex since Mar-20. You heard it right; one stock accounted for 43% of the rally in the index! That is how dominant Reliance has been on the index in the last few months. As a result of this frenetic rally, Reliance’s weight in the Sensex has gone up from 10% in September 2019 to 17% in September 2020. At close to $200 billion, the market cap of Reliance is almost 9.5% of the overall Indian market. It used to average around 4.5-5% and the historical average has been around 4.85%.

Reliance has surely added heft on the Sensex
Company  CMP  Shares (cr)  Market Cap (Rs cr)  Free Float Adj  WEIGHTAGE (%)  PE Ratio
RELIANCE INDUSTRIES  2,306 633.93 14,61,518 0.50 17.1 36.7
HDFC BANK 1,057 548.33 5,79,803 0.70 10.1 22.1
INFOSYS 1,003 425.90 4,26,985 0.90 8.7 25.7
HDFC 1,723 173.21 2,98,398 1.00 7.0 16.8
TCS 2,451 375.24 9,19,616 0.30 6.0 28.3
ICICI BANK 370 647.28 2,39,428 1.00 5.6 30.2
ITC 179 1,229.22 2,20,277 1.00 5.2 14.6
HUL 2,098 216.48 4,54,249 0.40 4.1 67.4
KOTAK MAHINDRA BANK 1,278 191.30 2,44,544 0.70 4.0 28.3
L&T 900 140.39 1,26,378 1.00 3.0 12.5
BHARTI AIRTEL 497 545.56 2,70,978 0.40 2.6 N.A.
AXIS BANK 443 282.17 1,25,085 0.80 2.5 76.9
ASIAN PAINTS 2,029 95.92 1,94,602 0.50 2.2 71.4
MARUTI SUZUKI 6,963 30.21 2,10,347 0.40 2.2 37.2
BAJAJ FINANCE 3,476 60.17 2,09,114 0.40 2.1 39.7
Data Source: BSE (Data as on 18-Sep)

These are the fifteen of the top weighted stocks on the Sensex. The top 15 stocks on the Sensex with a weight of more than 2% in the index, account for 82.4% of the overall Sensex weightage. The top-5 stocks alone account for 49% of the Sensex weightage. In fact, the weight of Reliance Industries is almost equivalent to the bottom 15 stocks in the Sensex. Even in market cap terms, Reliance has a market cap of $200 billion while the bottom 15 stocks in the BSE Sensex have a combined market cap of just $198 billion.

Is the overdependence on Reliance a worry?

Let us face it; RIL has shown aggression, adaptability and alacrity in value creation, but there are two things that investors and analysts must keep in mind.
  • Reliance is quoting at a P/E ratio of 36.7X, which is well at a premium to the Sensex P/E of 29.8X. This is the highest P/E that Reliance Industries has quoted at in any of the periods in the last 20 years.
  • Reliance has traditionally had a delivery ratio in the range of 45-50%. Over the last few months of the rally, the delivery ratio has halved to around 23%. That is a sign of a lot of speculative build-up on the stock.
For now, Reliance Industries is having a larger than life impact on the Sensex. It is much more than the impact that the FAANG stocks are having on the S&P 500 in the US. That in a nutshell, explains the Reliance impact; and we can hope to live in interesting times.

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