Nifty Attractiveness Quotient for September 2024

16 Oct 2024 , 01:52 PM

 WHAT IS NIFTY ATTRACTIVENESS QUOTIENT AND DID IT DELIVER?

We have often wondered as to why do some stocks do well and others appear to lag. There is always a fundamental story, but that is not the full story. We will not delve into those niceties, but the key question is whether such stock attractiveness can be predicted or estimated through a scientific methodology. The Nifty attractiveness quotient as it considers 3 important aspects. It captures momentum, risk adjusted returns, and ease of access. Whether or not The Nifty Attractiveness Quotient has predictive value is; something we need more time to back test. However, more than the numbers, it is the trends that matter and the results are, at least, intuitively appealing. For instance, there are names like Bharti Airtel, Sun Pharma, and HDFC Bank that are in the top this month and have been in the recent months also. That is a sign that there is some underlying story in this quotient.

Broadly, we have considered 4 key characteristics of an attractive stock. Firstly, the obvious requirement must be that the momentum returns in the near term must be positive and attractive. At the end of the day, momentum is king in the stock markets. That is almost like a hygiene factor. 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 a rally in LTI Mindtree. A higher weightage also means bigger impact on the Nifty. Swing investors want significant stocks that have substantial free float and limited liquidity spread costs. The fourth and final aspect is the impact cost (ease of buying 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 legible 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.

DID NIFTY HEAVYWEIGHTS CHANGE IN SEPTEMBER 2024

In the last 6 months, the weightages have only undergone minor changes. Post the merger with HDFC Ltd, HDFC Bank has overtaken Reliance Industries as the prime stock in the index. In recent times, stocks like Bharti Airtel, Larsen & Toubro, SBI, NTPC, Bajaj Finance have all become significant weight stocks in the Nifty. LIC is not yet included in the Nifty, but once it is brought in, that should also feature in this list. HDFC Bank has a higher weightage on Nifty than Reliance, while Infosys has a higher weightage than TCS, despite ranking lower on market cap. That is due to higher free float. Here are the top 15 Nifty weightage stocks.

Stock Name	Weightage (%)
HDFC Bank Ltd.	11.3361
Reliance Industries Ltd.	8.6403
ICICI Bank Ltd.	7.7382
Infosys Ltd.	5.8243
ITC Ltd.	4.1587
Bharti Airtel Ltd.	3.9536
Tata Consultancy Services Ltd.	3.7643
Larsen & Toubro Ltd.	3.7333
Axis Bank Ltd.	3.0302
State Bank of India	2.6155
Mahindra & Mahindra Ltd.	2.3793
Kotak Mahindra Bank Ltd.	2.3488
Hindustan Unilever Ltd.	2.2727
Bajaj Finance Ltd.	1.8593
NTPC Ltd.	1.8109

 

Out of the Nifty-50 stocks, only HDFC Bank has double digit weightage at 11.336%. The top 15 stocks account for 65.47% of the overall Nifty weight while the top-25 stocks on the Nifty accounted for 80.07% of the Nifty weightage. A total of 26 stocks had a weightage of 1 or above; while 24 stocks had a weightage of less than 1 as of September 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 and FMCG. The two stocks at the bottom in weightage viz. BPCL and Eicher Motors.

NIFTY STOCKS WITH BEST RETURNS IN SEPTEMBER 2024

For the month of September 2024, out of the 50 stocks on the Nifty, 34 stocks generated positive returns while 16 stocks gave negative returns. Tata Motors, ONGC, TCS, BEL and Reddy Labs 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 September 2024.

Stock Name	MOM Returns (%)
Bajaj Auto Ltd.	13.35
Shriram Finance Ltd.	11.62
Bajaj Finserv Ltd.	10.68
Tata Steel Ltd.	10.34
Mahindra & Mahindra Ltd.	10.32
JSW Steel Ltd.	9.45
Britannia Industries Ltd.	8.25
Hindalco Industries Ltd.	7.82
Bharti Airtel Ltd.	7.58
Nestle India Ltd.	7.57
Titan Company Ltd.	7.26
Bajaj Finance Ltd.	6.98
Maruti Suzuki India Ltd.	6.73
Hindustan Unilever Ltd.	6.49
NTPC Ltd.	6.49

Data Source: NSE

The top-15 is a fairly eclectic mix this time around, although Bajaj Auto is the leader for the third month in a row. There were 3 Auto stocks (Bajaj Auto, M&M, and Maruti Suzuki), 3 financial stocks (Shriram Finance, Bajaj Finserv, and Bajaj Finance), 3 Metals stocks (Tata Steel, Hindalco, and JSW Steel), and 4 FMCG stocks (Britannia, Nestle India, Titan, and Hindustan Unilever). The 3 Bajaj group companies in the list continued for the third month in succession. NTPC Ltd seems to be the only PSU in the above list, which is contrast to the previous month, which had a generous sprinkling of PSU stocks.

HOW NIFTY STOCKS RANKED ON BETA IN SEPTEMBER 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 above 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 SEZ	2.08
Adani Enterprises Ltd.	2.04
Oil & Natural Gas Corporation Ltd.	1.78
Bharat Electronics Ltd.	1.73
Shriram Finance Ltd.	1.56
NTPC Ltd.	1.55
Coal India Ltd.	1.55
Tata Steel Ltd.	1.51
State Bank of India	1.49
Larsen & Toubro Ltd.	1.42
Bharat Petroleum Corporation Ltd.	1.39
JSW Steel Ltd.	1.34
Power Grid Corporation of India Ltd.	1.28
Mahindra & Mahindra Ltd.	1.22
IndusInd Bank Ltd.	1.19

Data Source: NSE

 

Out of the 50 companies in the Nifty index, 23 were aggressive stocks with Beta of 1 or above while the balance 27 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 8 stocks with a beta of over 1.50X, which includes Adani Enterprises, Adani Ports SEZ, ONGC, Bharat Electronics, Shriram Finance, NTPC Ltd, 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 September 2024 was 2.51%. However, if you look at the bottom stocks in terms of Beta, the average returns are higher at 3.26%. The trend was the same last month also.

RANKING NIFTY STOCKS ON VOLATILITY FOR SEPTEMBER 2024

Volatility (standard deviation) measures total risk, rather than just systematic risk. Beta assumes that unsystematic risk is fully diversified; which is not a practical assumption. One option is to use volatility, which looks at overall risk i.e. systematic and unsystematic risk combined. Here are the top-15 stocks by volatility (standard deviation) for September 2024.

Stock Name	Volatility (X)
Bharat Petroleum Corporation Ltd.	1.95
Mahindra & Mahindra Ltd.	1.87
Bharat Electronics Ltd.	1.73
Hindalco Industries Ltd.	1.73
Oil & Natural Gas Corporation Ltd.	1.69
Wipro Ltd.	1.68
Shriram Finance Ltd.	1.66
Hero MotoCorp Ltd.	1.63
Tata Motors Ltd.	1.62
Bajaj Auto Ltd.	1.60
Bajaj Finance Ltd.	1.58
SBI Life Insurance Company Ltd.	1.54
NTPC Ltd.	1.53
HDFC Life Insurance Company Ltd.	1.53
Coal India Ltd.	1.51

Data Source: NSE

 

There are some interesting cues that we get from the volatility rankings of the Nifty stocks for September 2024. Out of the 50 stocks there are no stocks with volatility of 2X or more. However, there are about 16 companies with volatility of mor than 1.50X. Interestingly, a number of PSU stocks appear in this list also and it includes names like BPCL, BEL, ONGC, NPTC Ltd and Coal India. 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 September 2024, it stands at around 2.15%. However, if you look at the bottom 15 stocks in terms of volatility, the average returns are to sharply higher at 3.45%. 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 SEPTEMBER 2024

R-Squared measures 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 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.	8.6403	1.16	0.53
Larsen & Toubro Ltd.	3.7333	1.42	0.50
State Bank of India	2.6155	1.49	0.49
Tata Steel Ltd.	1.2052	1.51	0.48
Adani Ports and SEZ	0.9211	2.08	0.48
JSW Steel Ltd.	0.8524	1.34	0.47
ICICI Bank Ltd.	7.7382	1.01	0.45
Adani Enterprises Ltd.	0.6367	2.04	0.45
NTPC Ltd.	1.8109	1.55	0.44
UltraTech Cement Ltd.	1.1623	1.12	0.44
Oil & Natural Gas Corporation Ltd.	0.9961	1.78	0.42
IndusInd Bank Ltd.	0.8250	1.19	0.41
HDFC Bank Ltd.	11.3361	0.99	0.39
Bharat Electronics Ltd.	0.8798	1.73	0.38
Axis Bank Ltd.	3.0302	1.12	0.38

Data Source: NSE

 

There are hardly any surprises in the above list. Reliance has the highest R-Squared followed by Larsen & Toubro, SBI, Adani Ports, and JSW Steel. In this case, all the 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, then 14 are aggressive stocks with Beta of more than 1. 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 turn to the Explanation Factor; 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	0.9211	2.08	0.48	0.9984
Adani Enterprises Ltd.	0.6367	2.04	0.45	0.9180
Oil & Natural Gas Corporation Ltd.	0.9961	1.78	0.42	0.7476
State Bank of India	2.6155	1.49	0.49	0.7301
Tata Steel Ltd.	1.2052	1.51	0.48	0.7248
Larsen & Toubro Ltd.	3.7333	1.42	0.50	0.7100
NTPC Ltd.	1.8109	1.55	0.44	0.6820
Bharat Electronics Ltd.	0.8798	1.73	0.38	0.6574
JSW Steel Ltd.	0.8524	1.34	0.47	0.6298
Reliance Industries Ltd.	8.6403	1.16	0.53	0.6148
Shriram Finance Ltd.	0.8626	1.56	0.37	0.5772
Coal India Ltd.	0.9984	1.55	0.36	0.5580
UltraTech Cement Ltd.	1.1623	1.12	0.44	0.4928
IndusInd Bank Ltd.	0.8250	1.19	0.41	0.4879
ICICI Bank Ltd.	7.7382	1.01	0.45	0.4545

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. These low explanation factor stocks are useful in 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)
HDFC Bank Ltd.	7,748.56
Bharti Airtel Ltd.	992.33
ICICI Bank Ltd.	970.00
ITC Ltd.	732.29
Mahindra & Mahindra Ltd.	656.54
Trent Ltd.	639.08
Axis Bank Ltd.	612.35
Sun Pharmaceutical Industries Ltd.	568.94
Hindustan Unilever Ltd.	550.38
Bajaj Auto Ltd.	492.98
Kotak Mahindra Bank Ltd.	473.22
Titan Company Ltd.	467.50
Tata Steel Ltd.	454.80
Asian Paints Ltd.	447.19
Bajaj Finance Ltd.	410.70

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. Secondly, FMCG is the other sector which finds extensive presence in the attractiveness quotient ranking. The heavyweight stocks like Reliance Industries, TCS and Infosys find themselves at the bottom of the attractiveness quotient list.

What does this attractiveness quotient indicate. Other factors remaining constant, the top names in this list should outperform other Nifty stocks over the medium term.