In the next Nifty constituents rejig that is due on March 27, 2020, Dabur India is set to replace Yes Bank. And post the change experts see Nifty 50 valuations further soaring, which are already stretched at the current levels. Dabur India, the new proposed constituent trades at a price-earnings (PE) multiple of 46 times its estimated FY20 earnings, while Yes Bank for Nifty 50 trades at a PE of 14 times.
As per an investor note of ICICI Securities, Dabur, Godrej Consumer, Shree Cement have only marginal difference when it comes to average six-month free float m-cap. But Dabut leading the charts is most likely to replace Yes Bank.
"On an FY20 PE basis, NIFTY50 is likely to become expensive from 17x to 17.07x as the likely new entrant has a much higher FY20 PE multiple relative to the likely exiting stock," the brokerage said.
If Dabur India finds its place in the Nifty 50, it shall be the third consumer stock being added to the index since 2019. Previously Nestle India and Britannia found their place in the broader index after replacing Indiabulls Housing Finance and HPCL, respectively.
How stocks are being included in the broader index such as Nifty?
There are several criterions such as liquidity, free float market cap, trading frequency in the stock etc. Also, the stock needs to be available for F&O or derivatives trading on NSE. Also it should be a part of the Nifty 100 index. So, despite the fact HDFC Life and SBI Life command a higher free float they cannot be currently in the Nifty 50 as there are not available for F&O trading on the NSE.