Nifty Attractiveness Quotient for October 2024

22 Nov 2024 , 12:33 PM

UNDERSTANDING THE NIFTY ATTRACTIVENESS QUOTIENT

We often wonder why some stocks do well and others appear to lag; although fundamentally both may look attractive. For example, if you look at the last one year, Bharti Airtel has been a consistent outperformer, while pharma stocks have been the big positive surprise. From an investment perspective; the key question is whether stock attractiveness can be predicted scientifically. The Nifty attractiveness quotient considers 3 key aspects; momentum, risk adjusted returns, and ease of access. Whether or not The Nifty Attractiveness Quotient has predictive value is; something we need to back test. However, more than the numbers, it is the trends and trend shifts that matter and the results are intuitively appealing. For instance, the month of October has highlighted TBTF banks like HDFC Bank, ICICI Bank and SBI as the most attractive stocks, with Wipro being a significant inclusion from the IT space. Here is the methodology of measuring Nifty attractiveness.

Broadly, we consider 4 key characteristics of a stock to assess attractiveness. Firstly, momentum returns in the near term must be positive and attractive. In any market, momentum is king. Secondly, the lower the risk, the better it is. Hence, one solution is to look at risk-adjusted returns by dividing the returns by the volatility or standard deviation of returns. It may not be precise, but it is a good proxy. Now comes the catch; is risk adjusted returns the ultimate story? 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 pillar of the story.

The third aspect of the attractiveness quotient of Nifty stocks is the weightage in the index. A stock that offers attractive returns, is a lot more attractive, if it has a higher weightage in the index. A rally in Reliance is a lot more valuable than in a smaller stock. Swing investors want significant stocks that have substantial free float and limited liquidity basis risk. The fourth and final aspect is the impact cost (ease of entry / exit), or the impact of a reasonably large order on the price. Lower the impact cost, the better it is. When these 4 pillars are combined into a single metrics, we get the attractiveness quotient. But, before we get to the attractiveness quotient, let us first dwell on individual aspects of the stock ranking.

OCTOBER 2024 – NIFTY HEAVYWEIGHTS AND NIFTY BEST RETURN STOCKS

In the last 6 months, the weightages have only undergone minor changes. The one big change in the recent month is that Reliance Industries has dropped to third place in terms of weightage in the Nifty behind HDFC Bank and ICICI Bank. In recent times, stocks like Bharti Airtel, Larsen & Toubro, Axis Bank, SBI, Kotak Bank, and M&M have all become significant stocks in the Nifty. Here are top 20 Nifty weightage stocks and top return stocks.

Nifty Stocks – Rank on Weight	Weightage (%)	Nifty Stocks – Rank on Returns	MOM Returns (%)
HDFC Bank Ltd.	12.11	State Bank of India	4.10
ICICI Bank Ltd.	8.38	Tech Mahindra Ltd.	1.99
Reliance Industries Ltd.	8.31	Wipro Ltd.	1.91
Infosys Ltd.	5.82	ICICI Bank Ltd.	1.51
ITC Ltd.	4.18	HDFC Life Insurance	0.30
Bharti Airtel Ltd.	3.98	HDFC Bank Ltd.	0.21
Larsen & Toubro Ltd.	3.92	Bharat Electronics Ltd.	-0.07
Tata Consultancy Services	3.73	Larsen & Toubro Ltd.	-1.45
Axis Bank Ltd.	3.04	HCL Technologies Ltd.	-1.67
State Bank of India	2.90	Apollo Hospitals	-2.45
Kotak Mahindra Bank Ltd.	2.34	Eicher Motors Ltd.	-2.62
Mahindra & Mahindra Ltd.	2.24	Grasim Industries Ltd.	-3.57
Hindustan Unilever Ltd.	2.07	Sun Pharmaceuticals	-4.04
Sun Pharmaceuticals	1.84	Adani Ports and SEZ	-4.99
NTPC Ltd.	1.78	Dr. Reddy’s Laboratories	-5.64
Bajaj Finance Ltd.	1.77	ITC Ltd.	-5.66
HCL Technologies Ltd.	1.72	Bharti Airtel Ltd.	-5.67
Tata Motors Ltd.	1.63	Trent Ltd.	-5.89
Trent Ltd.	1.46	Axis Bank Ltd.	-5.90
Maruti Suzuki India Ltd.	1.34	Adani Enterprises Ltd.	-6.01

Data Source: NSE

Out of the Nifty-50 stocks, only HDFC Bank has double digit weightage at 12.11%; with ICICI Bank slightly above Reliance Industries. The top 20 stocks account for 74.56% of the overall Nifty weight. A total of 26 stocks had a weightage of 1 or above.

For October, the returns were dominated by the TBTF banks, with 44 out of the 50 Nifty stocks giving negative returns in the month of October 2024. There are a lot of FMCG clustered at the bottom of the rankings list.

HOW NIFTY STOCKS RANKED ON R-SQUARED IN OCTOBER 2024

R-Squared measures how much of the stock returns are explained by the Nifty. While Beta measures how aggressive the stock is with respect to the Nifty; R-Squared measures whether adding a particular stock will have diversification value. Lower the R-Squared, the higher the diversification value. Despite the low returns, FMCG stocks continue to be the best diversification bets in the Nifty portfolio. Here is a ranking of top 20 stocks on R-Squared.

Stock Name	Weightage (%)	Beta (X)	R-Squared (X)
Reliance Industries Ltd.	8.31	1.17	0.54
Adani Ports and SEZ	0.93	2.10	0.49
State Bank of India	2.90	1.47	0.47
Larsen & Toubro Ltd.	3.92	1.42	0.47
Tata Steel Ltd.	1.13	1.49	0.46
NTPC Ltd.	1.78	1.57	0.45
Adani Enterprises Ltd.	0.64	2.04	0.44
UltraTech Cement Ltd.	1.16	1.12	0.44
JSW Steel Ltd.	0.85	1.27	0.43
ICICI Bank Ltd.	8.38	1.00	0.42
ONGC Ltd	0.95	1.74	0.40
Shriram Finance Ltd.	0.81	1.61	0.40
HDFC Bank Ltd.	12.11	1.00	0.38
Bharat Electronics Ltd.	0.94	1.74	0.38
Axis Bank Ltd.	3.04	1.13	0.38
Bajaj Finserv Ltd.	0.88	0.99	0.37
Coal India Ltd.	0.94	1.54	0.35
Power Grid Corporation	1.34	1.31	0.34
Grasim Industries Ltd.	0.92	0.96	0.32
IndusInd Bank Ltd.	0.64	1.30	0.32

Data Source: NSE

There are hardly any surprises in the above list. Reliance has the highest R-Squared followed by Adani Ports, SBI, Tata Steel, NTPC and Adani Enterprises. In this case, all the top 10 stocks by R-Squared are also aggressive stocks with beta above 1. A total of 19 out of 20 top R-Squared stocks are also aggressive stocks with a Beta greater than 1. Let us 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	0.93	2.10	0.49	1.0290
Adani Enterprises Ltd.	0.64	2.04	0.44	0.8976
NTPC Ltd.	1.78	1.57	0.45	0.7065
ONGC Ltd	0.95	1.74	0.40	0.6960
State Bank of India	2.90	1.47	0.47	0.6909
Tata Steel Ltd.	1.13	1.49	0.46	0.6854
Larsen & Toubro Ltd.	3.92	1.42	0.47	0.6674
Bharat Electronics Ltd.	0.94	1.74	0.38	0.6612
Shriram Finance Ltd.	0.81	1.61	0.40	0.6440
Reliance Industries Ltd.	8.31	1.17	0.54	0.6318
JSW Steel Ltd.	0.85	1.27	0.43	0.5461
Coal India Ltd.	0.94	1.54	0.35	0.5390
UltraTech Cement Ltd.	1.16	1.12	0.44	0.4928
Power Grid Corporation	1.34	1.31	0.34	0.4454
Bharat Petroleum (BPCL)	0.55	1.47	0.30	0.4410
Axis Bank Ltd.	3.04	1.13	0.38	0.4294
ICICI Bank Ltd.	8.38	1.00	0.42	0.4200
IndusInd Bank Ltd.	0.64	1.30	0.32	0.4160
HDFC Bank Ltd.	12.11	1.00	0.38	0.3800
Mahindra & Mahindra Ltd.	2.24	1.26	0.30	0.3780

Data Source: NSE

The explanation factor makes the Beta more meaningful. The ranking of top stocks by the explanation factor, broadly corresponds with the R-Squared list. At the bottom of the explanation factor rankings, there are the FMCG and healthcare names, with little explanation coming from market returns. That makes them good portfolio diversifiers.

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 investors preferred a stock in a particular month.

Stock Name	Attractiveness Score (X)
State Bank of India	349.71
ICICI Bank Ltd.	294.96
HDFC Bank Ltd.	88.30
Wipro Ltd.	39.07
Tech Mahindra Ltd.	35.43
HDFC Life Insurance	6.53
Bharat Electronics Ltd.	-1.57
Eicher Motors Ltd.	-47.50
Apollo Hospitals Enterprise Ltd.	-66.35
Adani Ports and SEZ	-79.74
Adani Enterprises Ltd.	-80.13
Grasim Industries Ltd.	-91.23
Cipla Ltd.	-94.30
HCL Technologies Ltd.	-113.09
SBI Life Insurance Company Ltd.	-127.53
Larsen & Toubro Ltd.	-140.00
Shriram Finance Ltd.	-142.56
JSW Steel Ltd.	-160.31
Trent Ltd.	-181.42
Dr. Reddy’s Laboratories Ltd.	-185.39

Data Source: NSE

The attractiveness score, as we mentioned earlier, 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 3 interesting themes in the month. Firstly, financials are making a big comeback on the attractiveness quotient; an extension of the previous month; which reinforces the trend. Secondly, you find the financials at the top, making a case for shifting to financial stocks, while heavyweights like TCS and RIL are struggling at the bottom of the list.