Nifty Attractiveness Quotient for August 2024

9 Sep 2024 , 12:37 PM

WHAT IS THE NIFTY ATTRACTIVENESS QUOTIENT?

Why do some stocks rally in a month and some stocks lag. Obviously, it is largely a mix of financials, news flows, risk factors etc. The big question is whether there is a numerical approach that we can adopt that is unbiased and takes a purely numerical picture of the likely gainers in the coming month. Whether or not it has predictive value is something we have to say. However, more than the numbers, it is the trends that matter. For instance, there are names like Bharti Airtel, Sun Pharma, and HDFC Bank that are in the top this month and that surely triggers off a thought process on these stocks.

Broadly, there can be four characteristics of an attractive stock. Firstly, the obvious requirement must be that the momentum returns in the near term must be positive and attractive. That is almost like a hygiene factor. Secondly, the lower the risk, the better it is. But dividing the returns by the volatility or standard deviation of returns we get a proxy for risk-adjusted returns. However, even if the returns are attractive on a risk adjusted basis, would it really attract the investors in a big way? That brings us to the third point.

The third aspect of the attractiveness quotient of Nifty stocks is the weightage in the index. An attractive returns-stock with a higher weightage is more meaningful for investors. Greater the weightage, the greater the impact on the Nifty and hence, the circular impact plays out perfectly. Institutions and HNIs, who are the swing factors, want significant stocks that have substantial free float and limited liquidity spread costs. The fourth and final aspect is the impact cost, or the impact of a reasonably large order on the price. Lower the impact cost, the better it is. It means, the stock is easily accessible and the cost of entry and exit is also low. When these 4 aspects are combined, we get the attractiveness quotient. But, before we get to the attractiveness quotient, let us first dwell on individual aspects.

DID THE NIFTY HEAVYWEIGHTS CHANGE IN AUGUST 2024

Between April 2024 and August 2024, the weightages have only undergone minor changes. Post the merger with HDFC Ltd, HDFC Bank has overtaken Reliance Industries as the most heavyweight stock in the index. Thanks to the recent really, SBI and Bharti Airtel are now a permanent part of the top-15 companies by weight in the index. LIC is not yet included in the Nifty, but once it is brought in, that should also feature in this list. Nifty weightages are not only based on market cap but also on the free float. That is why HDFC Bank has a higher weightage than Reliance, while Infosys has a higher weightage than TCS, despite ranking lower on the market capitalization scale. Here are the top 15 Nifty weightage stocks.

Stock Name	Weightage (%)
HDFC Bank Ltd.	11.0166
Reliance Industries Ltd.	9.1265
ICICI Bank Ltd.	7.7280
Infosys Ltd.	6.2735
ITC Ltd.	4.1433
Tata Consultancy Services Ltd.	4.1221
Larsen & Toubro Ltd.	3.8684
Bharti Airtel Ltd.	3.7978
Axis Bank Ltd.	2.9854
State Bank of India	2.7967
Mahindra & Mahindra Ltd.	2.4314
Kotak Mahindra Bank Ltd.	2.3408
Hindustan Unilever Ltd.	2.2163
Tata Motors Ltd.	2.0833
Bajaj Finance Ltd.	1.7921

Data Source: NSE

Out of the Nifty-50 stocks, only HDFC Bank has double digit weightage. The top 15 stocks account for 66.72% of the overall Nifty weight while the top-25 stocks on the Nifty accounted for 80.77% of the Nifty weightage. A total of 27 stocks had a weightage of 1 or above; while 23 stocks had a weightage of less than 1 as of August 2024.

If you look at the top 15 list, 6 out of these 15 stocks are financials (HDFC Bank, ICICI Bank, Axis Bank, SBI, Kotak Bank, and Bajaj Finance), while two stocks each belong to IT, FMCG, and Automobiles. The two stocks at the bottom in weightage viz. Divi’s Laboratories and LTI Mindtree will make way for BEL and Trent Ltd effective from September 30, 2024.

NIFTY STOCKS WITH BEST RETURNS IN AUGUST 2024

For the month of August 2024, out of the 50 stocks on the Nifty, 34 stocks generated positive returns while 16 stocks gave negative returns. Tata Steel, SBI, and Adani Ports & SEZ were at the bottom in terms of monthly returns due to near-term headwinds. Here is a list of 15 stocks that delivered the best returns in August 2024.

Stock Name	MOM Returns (%)
Bajaj Auto Ltd.	12.70
Shriram Finance Ltd.	9.30
LTIMindtree Ltd.	8.80
Bajaj Finserv Ltd.	7.96
Cipla Ltd.	7.16
HCL Technologies Ltd.	6.74
Bharti Airtel Ltd.	6.54
Sun Pharmaceutical Industries Ltd.	5.95
Bajaj Finance Ltd.	5.78
SBI Life Insurance Company Ltd.	5.51
Tech Mahindra Ltd.	5.28
Hindalco Industries Ltd.	4.74
Apollo Hospitals Enterprise Ltd.	4.72
Dr. Reddy’s Laboratories Ltd.	4.16
Infosys Ltd.	4.04

Data Source: NSE

The top-15 is a fairly eclectic mix this time around. There were 4 IT stocks (LTI Mindtree, HCL Technologies, Tech Mahindra, and Infosys), 4 healthcare stocks (Cipla, Sun Pharma, Apollo Hospitals, and Reddy Labs), 4 BFSI stocks (Shriram Finance, Bajaj Finserv, Bajaj Finance, and SBI Life). The 3 Bajaj group companies in the list were largely on the back of the Bajaj Housing IPO, which is likely to be value accretive for these group companies. Last week, PSUs had dominated with 4 candidates, but in August there is not a single PSU. In terms of laggards, Maruti, Tata Motors, and M&M were the lagging auto stocks while commodity and infrastructure plays were also under pressure.

HOW NIFTY STOCKS RANKED ON BETA IN AUGUST 2024

Beta measure systematic risk of the stock, which cannot be diversified away. While Nifty has a beta of 1, there could be wide variations in the beta of Nifty components. How do you interpret Beta. A beta of 1.5 means every 1% move in Nifty will result in a 1.5% move in the stock; either ways. Stocks with Beta of more than 1 are classified as aggressive stocks while stocks with Beta below 1 are classified as defensive stocks. High beta stock outperform in bullish conditions but underperform in bearish market conditions. Here is top-15 by Beta.

Stock Name	Beta (X)
Adani Ports and Special Economic Zone Ltd.	2.11
Adani Enterprises Ltd.	2.07
Oil & Natural Gas Corporation Ltd.	1.79
NTPC Ltd.	1.59
Tata Steel Ltd.	1.57
Shriram Finance Ltd.	1.56
Coal India Ltd.	1.56
State Bank of India	1.48
Bharat Petroleum Corporation Ltd.	1.42
JSW Steel Ltd.	1.40
Larsen & Toubro Ltd.	1.39
Power Grid Corporation of India Ltd.	1.28
IndusInd Bank Ltd.	1.24
Hindalco Industries Ltd.	1.17
Reliance Industries Ltd.	1.16

Data Source: NSE

Out of the 50 companies in the Nifty index, 24 were aggressive stocks with Beta of 1 or above while the balance 26 stocks were defensive stocks with Beta of less than 1. In terms of low-beta stocks, 9 out of the bottom 10 belong to defensive sectors like FMCG and pharma, with Bajaj Auto being the sole exception. If you look at the high Beta stocks, there are about 7 stocks with a beta of over 1.50X, which includes Adani Enterprises, Adani Ports SEZ, ONGC, NTPC, Tata Steel, Shriram Finance, and Coal India. These stocks have displayed aggressive price behaviour. What about returns on high beta and low beta stocks. If you take the average returns on the 15 stocks with the highest Beta, the average returns for August 2024 was -0.88%. However, if you look at the bottom stocks in terms of Beta, the average returns are to the tune of 3.76%. The message is quite clear.

RANKING NIFTY STOCKS ON VOLATILITY FOR AUGUST 2024

Like the Beta, the volatility (standard deviation) is also a measure of risk; but it measures total risk, rather than just systematic risk. Beta assumes that unsystematic risk is fully diversified; which is mostly not practical. One option is to use volatility, which looks at overall risk i.e. systematic and unsystematic risk combined. Volatility (standard deviation) is an alternate method to measure total risk of the stock. Here are the top-15 stocks by volatility (standard deviation) for August 2024.

Stock Name	Volatility (X)
ONGC Ltd	2.7383
Tata Motors Ltd.	2.4623
Coal India Ltd.	2.2436
Hindalco Industries Ltd.	2.1540
LTIMindtree Ltd.	2.0901
Shriram Finance Ltd.	1.9329
Tata Steel Ltd.	1.9018
JSW Steel Ltd.	1.8964
Divi’s Laboratories Ltd.	1.8531
Wipro Ltd.	1.8523
Eicher Motors Ltd.	1.8288
Adani Ports and SEZ Ltd	1.7588
Mahindra & Mahindra Ltd.	1.7583
Grasim Industries Ltd.	1.7555
Power Grid Corporation of India Ltd.	1.7495

Data Source: NSE

There are some interesting cues that we get from the volatility rankings of the Nifty stocks for August 2024. Out of the 50 stocks only 5 stock can be classified as highly volatile with volatility of 2X or more. These include ONGC, Tata Motors, Coal India, Hindalco, and LTI Mindtree. Interestingly, a number of PSU stocks appear in this list also and it includes names like ONGC, Coal India, and Power Grid. The big question is whether these high volatility stocks are compensating in terms of higher returns? If you take the average returns on the 15 stocks with the highest volatility for August 2024, it stands at around 0.25%. However, if you look at the bottom 15 stocks in terms of volatility, the average returns are to the tune of 2.28%. Like in the Beta list, even here, stocks with the least volatility have given much better returns, than the high volatility stocks.

HOW NIFTY STOCKS RANKED ON R-SQUARED IN AUGUST 2024

R-Squared is a measure of how much of the stock returns are explained by the returns on the index (Nifty in this case). There is a subtle difference between R-Squared and Beta. Beta measures how aggressive the stock is with respect to the Nifty. However, you are not sure if the Beta represents an actual relationship or just a casual relationship. This question is answered by R-Squared. Normally, the average R-Squared of the Nifty stocks is around 0.25, so any R-Squared figure of 0.40 to 0.50 shows a significant Nifty explanation to the stock. Beta is a lot more significant when R-Squared is also high.

Stock Name	Weightage (%)	Beta (X)	R-Squared (X)
Reliance Industries Ltd.	9.1265	1.16	0.5336
JSW Steel Ltd.	0.8020	1.40	0.5086
Tata Steel Ltd.	1.1246	1.57	0.5025
State Bank of India	2.7967	1.48	0.4935
Larsen & Toubro Ltd.	3.8684	1.39	0.4709
Adani Ports and SEZ	0.9725	2.11	0.4680
Adani Enterprises Ltd.	0.7074	2.07	0.4470
ICICI Bank Ltd.	7.7280	0.99	0.4440
NTPC Ltd.	1.7670	1.59	0.4404
ONGC Ltd	1.1526	1.79	0.4244
UltraTech Cement Ltd.	1.1662	1.13	0.4217
IndusInd Bank Ltd.	0.8430	1.24	0.4144
HDFC Bank Ltd.	11.0166	1.02	0.3945
Bajaj Finserv Ltd.	0.8649	1.00	0.3777
Shriram Finance Ltd.	0.7965	1.56	0.3659

Data Source: NSE

There are hardly any surprises in the above list. Reliance has the highest R-Squared followed by JSW Steel, Tata Steel, SBI, and Larsen & Toubro. In this case, 9 out of top 10 stocks by R-Squared are also aggressive stocks with beta above 1. If you look at the top 15 stocks on R-Squared, 6 of them are from BFSI, 3 are commodity companies, and 4 are infrastructure companies. Which are the low R-Squared stocks? The bottom list is dominated entirely by stocks from the healthcare, FMCG  and auto space. These sectors offer good diversification benefits on a large cap portfolio. Let us now turn to the Explanation Factor; which is the product of Beta and R-Squared. It shows how much of the stock risk is explained by Beta.

Stock Name	Weightage (%)	Beta	R-Squared	Explanation
Adani Ports and SEZ	0.9725	2.11	0.4680	0.9853
Adani Enterprises Ltd.	0.7074	2.07	0.4470	0.9262
Tata Steel Ltd.	1.1246	1.57	0.5025	0.7885
ONGC Ltd	1.1526	1.79	0.4244	0.7614
State Bank of India	2.7967	1.48	0.4935	0.7320
JSW Steel Ltd.	0.8020	1.40	0.5086	0.7113
NTPC Ltd.	1.7670	1.59	0.4404	0.7007
Larsen & Toubro Ltd.	3.8684	1.39	0.4709	0.6539
Reliance Industries Ltd.	9.1265	1.16	0.5336	0.6185
Shriram Finance Ltd.	0.7965	1.56	0.3659	0.5715
Coal India Ltd.	1.0696	1.56	0.3321	0.5173
IndusInd Bank Ltd.	0.8430	1.24	0.4144	0.5137
UltraTech Cement Ltd.	1.1662	1.13	0.4217	0.4783
ICICI Bank Ltd.	7.7280	0.99	0.4440	0.4383
Bharat Petroleum Corporation Ltd.	0.6239	1.42	0.2909	0.4141

Data Source: NSE

The ranking of top stocks by the explanation factor, broadly corresponds with the R-Squared list, although you find the Adani group stocks emerging right at the top due to high beta. At the bottom of the explanation factor rankings, there are the FMCG, auto and healthcare names, with little explanation coming from market returns. Others like Bajaj Auto and HDFC Life are also emerging as insular picks. These low explanation factor stocks are adept at diversifying the overall portfolio risk.

FINALLY, WE RANK STOCKS ON ATTRACTIVENESS QUOTIENT

Finaly, let us turn to the attractiveness score. This is an amalgam of 4 factors and explains how and why institutions preferred a stock in a particular month.

Stock Name	Attractiveness Score (X)
Bharti Airtel Ltd.	1,157.82
Infosys Ltd.	831.80
Sun Pharmaceutical Industries Ltd.	707.56
HDFC Bank Ltd.	593.82
Tata Consultancy Services Ltd.	579.22
Bajaj Finance Ltd.	431.86
Hindustan Unilever Ltd.	389.97
HCL Technologies Ltd.	358.11
ICICI Bank Ltd.	324.29
ITC Ltd.	320.23
Bajaj Auto Ltd.	319.78
Cipla Ltd.	279.94
Apollo Hospitals Enterprise Ltd.	250.60
Titan Company Ltd.	163.67
Bajaj Finserv Ltd.	143.87

Data Source: NSE

The attractiveness score is a product of risk adjusted returns and stock access factor. For risk-adjusted, returns, the returns are dividend by standard deviation. For access factor, the stock weight in the Nifty is divided by the impact cost. This attractiveness ranking, essentially, captures 2 interesting themes in the month. The first theme is the shift to defensives as a theme from cyclicals and industrials. Secondly, the bottom list shows the theme that is losing ground; in this case it is rate sensitives.

What does this attractiveness quotient indicate. Other factors remaining constant, the top names in this list should outperform other Nifty stocks. We have to wait and watch!