The best and most boring Nifty Next-50 stocks in February 2024

18 Mar 2024 , 07:35 AM

NIFTY NEXT-50 OR THE FUTURE NIFTY

Ever since the Nifty Next-50 index was introduced, it has attracted a lot of attention. In many ways, the Nifty Next-50 is called the future Nifty or the stocks with the potential to be part of the Nifty in the future. The Nifty Next-50 stocks have a unique positioning in that their business models are not as focused and vulnerable as the small and mid-cap stocks. At the same time, many of the stocks are not as closely tracked or pricey in P/E terms like many of the Nifty stocks. Also, the Nifty Next-50 has an array of high quality and high growth stories across select sectors and themes like defence, IT, PSUs etc; which have been among the star performers in the last year or so. If you look back at the last month of February 2024, the Nifty Next-50 index gave returns of 6.68%, in contrast to the Nifty index which gave just about 1.18% returns in the month of February 2024. However, the story of the Nifty Next-50 index is not just about returns; but also, about risk and correlations.

RANKING NIFTY NEXT-50 WEIGHTAGES IN FEBRUARY 2024

There are some basic things one must understand about the Nifty Next-50 index. For instance, Nifty Next 50 represents the Nifty 100 stocks, less the Nifty 50 stocks. It represents about 10% of the free float market cap of all stocks listed on the NSE, so that is a substantial amount of heft, but also allows investors to find pockets of value. Above all, it is also a free flat weighted index, exactly like the Nifty index, but the distribution is a lot more democratic as compared to the Nifty index. Here are the top 10 Nifty Next-50 stocks by their weightage in the Nifty Next-50 index.

Stock Name	Weightage (%)
Trent Ltd.	4.82
Bharat Electronics Ltd.	4.14
Shriram Finance Ltd.	3.82
Tata Power Co. Ltd.	3.55
Indian Oil Corporation Ltd.	3.42
DLF Ltd.	3.27
Hindustan Aeronautics Ltd.	3.25
TVS Motor Company Ltd.	2.81
Bank of Baroda	2.78
GAIL (India) Ltd.	2.77

Data Source: NSE

This is the weight of the top-10 Nifty Next-50 stocks in terms of free float weight in the overall index. Out of the Nifty Next-50 stocks, there are only 2 stocks with weightage of more than 4%; so, the concentration is a lot less here. The top 10 stocks account for just 34.63% of the Nifty Next-50 index in contrast to 57.15% for the Nifty index weight while the top-20 stocks on the Nifty Next-50 accounted for just 58.59% of the Nifty Next-50 index in contrast to 75.28% for Nifty index. A total of 42 out of the 50 stocks in the Nifty Next-50 had a weight of over 1, showing a lot more democratic distribution.

If you look at the top 10 list, 5 out of these 10 stocks on the Nifty Next-50 index are PSU companies, although they are spread across sectors. There are 2 oil & gas stocks in the top 10 and 2 defence stocks with only one banking stocks. If you look at the top 20 in terms of Nifty Next-50 weightage, you see the number of financials increasing to 4. Interglobe Aviation (Indigo Airlines) and Gujarat Ambuja (Adani Group) are surprise inclusions in the top-20 list in the Nifty Next-50 index.

RANKING NIFTY NEXT-50 STOCKS ON FEBRUARY 2024 RETURNS

The Nifty Next-50 index, overall, may have given stellar returns for February 2024 at 6.68%, but that glosses over the variation in returns. The table captures top 10 stocks in February 2024 in terms of Nifty Next-50 returns in absolute terms.

Stock Name	MOM Returns (%)
Trent Ltd.	25.75
Zydus Lifesciences Ltd.	23.80
Bosch Ltd.	21.31
Zomato Ltd.	18.56
Havells India Ltd.	18.31
Canara Bank	17.11
ABB India Ltd.	16.55
ICICI Lombard General Insurance Company Ltd.	14.34
Adani Green Energy Ltd.	13.51
Siemens Ltd.	13.01

Data Source: NSE

It is not surprising that for an index that gave 6.68% returns, there are several top performers giving double digit returns. While the industry classification of the top gainers is a lot more widespread, the numbers are quite interesting. Out of the 50 companies in the Nifty Next-50 index, a total of 38 companies have given positive returns and only 12 have given negative returns, a performance that is far superior to the Nifty index. There are a total of 14 companies giving double digit returns in February 2024 in the index while a total of 31 companies have given positive returns in excess of 5%. If you look at the top sectoral performers, it is dominated by FMCG sector, with participation from financials and power sectors too.

RANKING NIFTY NEXT-50 STOCKS ON BETA

Here there is a small difference that investors must understand. The Nifty is the index for beta benchmarking even in the case of Nifty Next-50 index and hence the picture of aggressive and defence stocks will be divided more equitably. The bias is more towards low beta and here is a ranking of the top 10 stocks in the Nifty Next-50 index on Beta.

Stock Name	Beta (X)
Punjab National Bank	1.68
Canara Bank	1.34
Bank of Baroda	1.34
Info Edge (India) Ltd.	1.31
Ambuja Cements Ltd.	1.30
DLF Ltd.	1.28
Jindal Steel & Power Ltd.	1.23
Adani Wilmar Ltd.	1.21
Tata Power Co. Ltd.	1.18
GAIL (India) Ltd.	1.17

Data Source: NSE

Out of the 50 companies in the Nifty Next-50 index, 16 were aggressive stocks with Beta of 1 or above while the balance 34 stocks were defensive stocks with Beta of less than 1. Which are the stocks with the highest levels of Beta? The top 3 belong to PSU banks, which his not very surprising since it moves in tandem with the Bank Nifty, which has a close correlation to the Nifty index. The other top beta companies in the last are from an array of diversified sectors like power, steel, consumer goods, defence, and autos.

Which are the stocks that rank at the bottom in terms of Beta. The theme appears to be the same as in the Nifty. The bottom 7 stocks in terms of Beta include 2 pharmaceutical stocks, 1 retail stock and 4 FMCG stocks. Clearly, the low beta story for these defensive sectors appears to be valid for the Nifty Next-50 index also.

RANKING NIFTY NEXT-50 STOCKS ON FEB-24 VOLATILITY

Having seen Beta, we take a broader look at volatility of the Nifty Next-50 index stocks by looking at the overall volatility as measured by standard deviation. Beta assumes that the unsystematic risk is diversified away, which may not always be true. Standard deviation measures the overall risk which includes the systematic and the unsystematic risk, assuming that diversification is only partially successful in diversifying away the risk. The table below ranks the stocks with the highest volatility.

Stock Name	Volatility (X)
Trent Ltd.	4.47
Indian Oil Corporation Ltd.	3.70
ABB India Ltd.	3.34
Life Insurance Corporation of India	2.89
Adani Energy Solutions Ltd.	2.74
Adani Wilmar Ltd.	2.72
Canara Bank	2.50
Adani Green Energy Ltd.	2.49
Punjab National Bank	2.47
Bank of Baroda	2.26

Data Source: NSE

One quick observation in the Nifty Next-50 index is that the volatility levels are relatively higher as compared to the Nifty stocks. That is because many of these companies are a lot more vulnerable to industry level factors as well as to macros. Trend has been a top performer, but that high performance has also come at the cost of high levels of volatility. Three out of the tope 10 stocks are Adani group stocks, which is not surprising considering that most of the stocks in the group have been historically volatile. In terms of sectoral mix, there are 4 financials in the top 10, which includes 3 PSU banks and LIC, which is a surprising inclusion since the stock has been languid for a long time. However, in recent months, the stock has nearly doubled and that makes the stock vulnerable to higher volatility levels.

What about the stocks with low levels of volatility in the Nifty Next-50 index. No prizes for guessing, but the bottom list is again comprising of FMCG names like Marico, P&G, Avenue Supermarts, Dabur, Colgate and Havells; all of which feature in the bottom volatility list. This is surprisingly the trend in the Nifty and also in the Nifty Next-50 index, wherein the FMCG stocks remain low volatility plays on both the indices.

RANKING NIFTY NEXT-50 STOCKS ON FEB-24 R-SQUARED

R-Squared is a slightly more nuanced financial measure as it shows how much of the stock returns are explained by the returns on the index. The benchmark here is once again the Nifty index, like we did for Beta. Hence, this is not just a measure of how much of the returns are explained by the Nifty movements, but also a measure of whether these Next-50 stocks can diversify the risk of a large cap portfolio. There is one more role that the R-Squared plays. Is the Beta actually showing a relationship with the Nifty index or is it just a random occurrence that cannot be explained. It can actually be a mix of both factors. That gap is captured by the R-Squared. Normally, the average R-Squared of the Nifty Next-50 is around 0.11, so any R-Squared figure of 0.25 to 0.30 shows a significant Nifty Next-50 movement explanation to Nifty. However, low levels of R-Squared means that this is a good diversification candidate.

Stock Name	Weightage (%)	Beta (X)	R-Squared (X)
Punjab National Bank	2.04	1.68	0.25
Bank of Baroda	2.78	1.34	0.23
Info Edge (India) Ltd.	2.30	1.31	0.22
DLF Ltd.	3.27	1.28	0.22
Canara Bank	2.13	1.34	0.21
SRF Ltd.	1.96	0.91	0.21
Bharat Electronics Ltd.	4.14	1.15	0.20
Ambuja Cements Ltd.	2.51	1.30	0.19
Dabur India Ltd.	1.77	0.78	0.19
Tata Power Co. Ltd.	3.55	1.18	0.18

Data Source: NSE

There are hardly any surprises in the above list. The list is again dominated by the banks but Dabur looks like a surprise inclusion in the above list. Other names like Bharat Electronics and Ambuja Cements are anyways high beta names, so their presence in this list is not too surprising.

Finally, we will look at a ranking of the top 10 stocks on the Explanation Factor, which is the product of the Beta and R-Squared. It shows how much of the stock risk is genuinely explained by the Beta.

Stock Name	Weightage (%)	Beta	R-Squared	Explanation Factor
Punjab National Bank	2.04	1.68	0.25	0.42
Bank of Baroda	2.78	1.34	0.23	0.31
Info Edge (India) Ltd.	2.30	1.31	0.22	0.29
DLF Ltd.	3.27	1.28	0.22	0.28
Canara Bank	2.13	1.34	0.21	0.28
Ambuja Cements Ltd.	2.51	1.30	0.19	0.25
Bharat Electronics Ltd.	4.14	1.15	0.20	0.23
Tata Power Co. Ltd.	3.55	1.18	0.18	0.21
GAIL (India) Ltd.	2.77	1.17	0.18	0.21
Jindal Steel & Power Ltd.	1.61	1.23	0.17	0.21

Data Source: NSE

The ranking of top stocks by the explanation factor, broadly corresponds with the R-Squared list. The highest volatility stocks like Punjab National Bank and Bank of Baroda are in the explanation list, which is not too surprising. At the bottom of the explanation factor rankings, you obviously have the FMCG and the healthcare names, with little explanation of the stock returns coming from the market returns. However, there is an additional interpretation when it comes to the Nifty Next-50 index with the explanation factor. Those companies with top 10 or top 20 explanation factors will not be very effective in diversifying the risk of a largely cap portfolio comprising predominantly of Nifty stocks. For full diversification benefits, investors must look at stocks than rank lower on the explanation factors, ideally stocks that are in the bottom 20 list of this ranking. That would be a good story for diversification of a large cap portfolio.

The month of February 2024 has been a strong month for the Nifty Next-50 index overall with 6.68% returns. It has come at the cost of higher volatility, but the good news is that the Nifty Next-50 still offers valuable choice of stocks to diversify a large cap portfolio.