Understanding Nifty Attractiveness Quotient for July 2024

26 Aug 2024 , 01:49 PM

WHAT IS THE NIFTY ATTRACTIVENESS QUOTIENT?

You normally find it tough to explain why a set of stocks go up in a month and why a set of stocks go down. For instance, if you look at the Nifty stocks, then you find stocks like Mahindra & Mahindra and Shriram Finance being on the right side of the rally for a very long time. At the same time, we have seen many of the FMCGs becoming preferred stocks for retail investors and for institutional investors in recent months. What determines if the stock is worth buying from an institutional long term investment perspective.

Broadly, there would 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. Secondly, the lower the risk, the better it is. Therefore, dividing the returns by the volatility or standard deviation of returns gives us a fairly accurate picture of attractive adjusted returns. However, even if the returns are attractive on a risk adjusted basis, there is a limit to the interest that institutions will show. That brings us to the third point.

The third aspect of the attractive quotient of Nifty stocks is the weightage. Greater the weightage, the greater the impact on the Nifty and hence, the circular impact plays out perfectly. Also, institutions want significant stocks that are easily accessible with free float. The fourth and final aspect is the impact cost, and 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 re combined, we have the attractiveness quotient. But we will come back to that in the end. First a look at how the stocks ranked on individual aspects.

DID THE NIFTY HEAVYWEIGHTS CHANGE IN JULY 2024

Between April 2024 and July 2024, the weightages were largely the same. Thanks to the recent really, SBI and Bharti Airtel are now a permanent part of the top-10 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. Weightages on the Nifty are not only based on market cap but also on the free float. That is the reason HDFC Bank has a higher weightage than Reliance, although Reliance market cap is nearly twice of HDFC Bank. Nearly 50% of Reliance shares are held by the Ambani family. In the case of TCS, Tata Sons owns over 70%, and hence TCS gets a lower weight than Infosys. Here are top 15 Nifty weightage stocks.

Stock Name	Weightage (%)
HDFC Bank Ltd.	11.03
Reliance Industries Ltd.	9.23
ICICI Bank Ltd.	7.75
Infosys Ltd.	6.12
ITC Ltd.	4.15
Larsen & Toubro Ltd.	4.04
Tata Consultancy Services Ltd.	4.03
Bharti Airtel Ltd.	3.62
State Bank of India	3.04
Axis Bank Ltd.	3.01
Mahindra & Mahindra Ltd.	2.56
Kotak Mahindra Bank Ltd.	2.41
Hindustan Unilever Ltd.	2.19
Tata Motors Ltd.	1.85
NTPC Ltd.	1.79

Data Source: NSE

Out of the Nifty-50 stocks, only HDFC Bank has double digit weightage with Reliance staying below 10% in July for the third month in a row. The top 15 stocks account for 66.82% of the overall Nifty weight while the top-25 stocks on the Nifty accounted for 81.03% 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 on the Nifty 50 index in July 2024.

If you look at the top 15 list, 5 out of these 15 stocks are banks (HDFC Bank, ICICI Bank, Axis Bank, SBI, and Kotak Bank), while two stocks each belong to IT, FMCG, and Automobiles. If you look at the top 20 in terms of Nifty weightage, then 6 stocks belong to the BFSI space, 3 belong to the IT space, 2 are FMCG companies and 2 are auto stocks. The two stocks that are bottom in weightage viz. Divi’s Laboratories and LTI Mindtree will be replaced by BEL and Trent Ltd effective from September 30, 2024.

WHICH NIFTY STOCKS GAVE THE BEST RETURNS IN JULY 2024

For the month of July 2024, out of the 50 stocks on the Nifty, 39 stocks generated positive returns while only 11 stocks gave negative returns. Ironically, heavyweights like HDFC Bank and Reliance gave negative returns, which kept the Nifty under pressure. Here is a list of 15 stocks delivering the best returns in the month of July 2024.

Stock Name	MOM Returns (%)
Oil & Natural Gas Corporation Ltd.	21.88
HDFC Life Insurance Company Ltd.	20.24
Infosys Ltd.	19.24
SBI Life Insurance Company Ltd.	17.54
Tata Motors Ltd.	16.86
ITC Ltd.	16.58
Bharat Petroleum Corporation Ltd.	15.17
Sun Pharmaceutical Industries Ltd.	13.05
HCL Technologies Ltd.	12.54
Tata Consultancy Services Ltd.	12.33
Coal India Ltd.	10.37
NTPC Ltd.	9.95
Tata Consumer Products Ltd.	9.68
Hindustan Unilever Ltd.	9.41
Maruti Suzuki India Ltd.	8.99

Data Source: NSE

The top-15 is a fairly eclectic mix this time around. There are 4 PSU stocks (ONGC, BPCL, Coal India, and NTPC), 3 IT stocks (Infosys, HCL Tech, and HCL Tech), 3 FMCG stocks (ITC, Tata Consumer and Hindustan Unilever), 2 auto stocks (Tata Motors and Maruti), and 2 life insurers (HDFC Life and SBI Life). Life insurance saw a sharp rebound in the month while FMCG sector sent 3 top gainers to the Top-15 list. Interestingly, some of the heavyweights on the index like Reliance Industries and HDFC Bank ended up at the bottom of the list.

HOW NIFTY STOCKS RANKED ON BETA IN JULY 2024

Beta measure systematic risk of the stock vis-à-vis the index (Nifty) and signifies the risk that cannot be diversified away. That is why; it is also called systematic risk. While Nifty has a beta of 1, there could be wide variations in the beta of Nifty components. Beta shows the extent to which the stock moves in response to the index. For example, beta of 1.5 means every 1% move in Nifty will result in a 1.5% move in the stock; both up and down. 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 outperforming in bullish conditions but tend to underperform in bearish market conditions. Here is the list of top-15 by Beta.

Stock Name	Beta (X)
Adani Ports and Special Economic Zone Ltd.	2.09
Adani Enterprises Ltd.	2.08
Oil & Natural Gas Corporation Ltd.	1.72
NTPC Ltd.	1.66
Coal India Ltd.	1.55
Tata Steel Ltd.	1.54
Shriram Finance Ltd.	1.52
State Bank of India	1.47
Bharat Petroleum Corporation Ltd.	1.46
Larsen & Toubro Ltd.	1.41
JSW Steel Ltd.	1.38
IndusInd Bank Ltd.	1.34
Power Grid Corporation of India Ltd.	1.27
Reliance Industries Ltd.	1.16
Mahindra & Mahindra Ltd.	1.13

Data Source: NSE

Out of the 50 companies in the Nifty index, 22 were aggressive stocks with Beta of 1 or above while the balance 28 stocks were defensive stocks with Beta of less than 1. In terms of low-beta stocks, 8 out of the bottom 10 belong to defensive sectors like FMCG and pharma, which is not too surprising. If you look at the high Beta stocks, there are just a handful of stocks like Adani Enterprises, Adani Ports SEZ, ONGC, NTPC and Coal India that have a Beta in excess, showing highly aggressive price behaviour by these stocks. In fact, beta and returns do not seem to be really related with underperforming stocks found adequately distributed between the high beta stocks and the low beta stocks. What about returns on the high beta and low beta stocks. If you take the average returns on the 15 stocks with the highest Beta, the average returns for July 2024 was around 4.62%. However, if you look at the bottom stocks in terms of Beta, the average returns are to the tune of 7.25%. A clear indication that that stocks with lower volatility tend to give higher risk adjusted returns over a longer period of time.

RANKING NIFTY STOCKS ON VOLATILITY FOR JULY 2024

Like the Beta, the volatility (standard deviation) is also a measure of risk. It is just that standard deviation is a much broader measure of risk. The problem with Beta is that it only considers the systematic risk in stocks and assumes that the unsystematic risk fully diversified. However, that is not a very practical assumption in the Indian context. 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 July 2024.

Stock Name	Volatility (X)
Wipro Ltd.	2.64
Shriram Finance Ltd.	2.58
Oil & Natural Gas Corporation Ltd.	2.14
Titan Company Ltd.	1.98
Mahindra & Mahindra Ltd.	1.94
Tata Motors Ltd.	1.93
Bharat Petroleum Corporation Ltd.	1.84
Divi’s Laboratories Ltd.	1.71
Tata Consultancy Services Ltd.	1.70
NTPC Ltd.	1.69
SBI Life Insurance Company Ltd.	1.60
Tata Consumer Products Ltd.	1.59
Maruti Suzuki India Ltd.	1.58
Tata Steel Ltd.	1.57
ITC Ltd.	1.53

Data Source: NSE

There are some interesting cues that we get from the volatility rankings of the Nifty stocks for May 2024. Out of the 50 stocks only 6 stock can be classified as highly volatile with volatility of 2X or more. These include Wipro Ltd, Shriram Finance, and ONGC. Interestingly, a number of PSU stocks appear in this list also and it includes names like ONGC, BPCL and NTPC. 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, the average returns for July 2024 was around 9.08%. However, if you look at the bottom 15 stocks in terms of volatility, the average returns are to the tune of 4.23%. This is ironic. In the case of Beta, the low beta stocks have a much higher average return compared to high beta stocks. The reverse has proven to be true in the case of volatility.

HOW NIFTY STOCKS RANKED ON R-SQUARED IN JULY 2024

What does R-Squared signify? This measure shows 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. How can you be sure if the Beta reflects a real dependence on the Nifty or just chance. This gap is filled 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. The interpretation here is that Beta is a lot more significant when R-Squared is also high; because it then means that the relationship is not random.

Stock Name	Weightage (%)	Beta (X)	R-Squared (X)
Reliance Industries Ltd.	9.23	1.16	0.51
JSW Steel Ltd.	0.80	1.38	0.49
Tata Steel Ltd.	1.23	1.54	0.48
Larsen & Toubro Ltd.	4.04	1.41	0.46
State Bank of India	3.04	1.47	0.46
NTPC Ltd.	1.79	1.66	0.45
IndusInd Bank Ltd.	0.86	1.34	0.45
ICICI Bank Ltd.	7.75	1.01	0.44
Adani Ports SEZ	1.05	2.09	0.43
ONGC Ltd	1.18	1.72	0.41

Data Source: NSE

There are hardly any surprises in the above list. Reliance has the highest R-Squared followed by HDFC Bank, JSW Steel and Tata Steel. If you look at the above list, the stock with the highest R-Squared are also generally aggressive stocks and the high R-Squared makes the Beta as a measure of market risk, more reliable. In this case, all the top 10 stocks by R-Squared are also aggressive stocks with a beta of more than 1. If you look at the top 10 stocks on R-Squared, 3 of them are banks, 3 are commodity companies, and 3 are infrastructure companies. Which are the low R-Squared stocks? Once again, the bottom list is dominated entirely by stocks from the healthcare, FMCG  and auto space. That is an indication of these sectors offering good diversification benefits on a large cap portfolio.

Finally, we will turn to ranking of top 10 stocks on the Explanation Factor. The explanation factor as the product of 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
Adani Ports SEZ	1.05	2.09	0.43	0.899
Adani Enterprises Ltd.	0.75	2.08	0.40	0.832
NTPC Ltd.	1.79	1.66	0.45	0.747
Tata Steel Ltd.	1.23	1.54	0.48	0.739
ONGC Ltd	1.18	1.72	0.41	0.705
State Bank of India	3.04	1.47	0.46	0.676
JSW Steel Ltd.	0.80	1.38	0.49	0.676
Larsen & Toubro Ltd.	4.04	1.41	0.46	0.649
IndusInd Bank Ltd.	0.86	1.34	0.45	0.603
Reliance Industries Ltd.	9.23	1.16	0.51	0.592

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 in this case. 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 stocks are best portfolio diversifiers.

WHICH STOCKS RANKED HIGH ON ATTRACTIVENESS SCORE

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)
Infosys Ltd.	5,119.51
ITC Ltd.	2,248.59
Tata Consultancy Services Ltd.	1,461.47
Larsen & Toubro Ltd.	1,091.38
Hindustan Unilever Ltd.	1,000.38
Sun Pharmaceutical Industries Ltd.	953.22
HCL Technologies Ltd.	825.55
Tata Motors Ltd.	808.06
HDFC Life Insurance Company Ltd.	481.23
Bharti Airtel Ltd.	425.35

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. Clearly, this list captures 2 interesting themes in the month. The first theme is the turnaround in the IT theme and secondly there is the shift to defensives. What about the bottom. Since this captures the momentum, the negative returns stocks still automatically go to the bottom. This attractiveness quotient gives a good summary of the most preferred stocks for investors.