How Sensex and NIFTY influencing Stock Market?

Stock Exchange of India at Mumbai - File Photo

As we all know, the NIFTY and Sensex in India influence the stock markets position resulting in a change in its share prices.


Let us know first what are free-float shares. The shares held by promoters and interested persons of the promotors are excluded for this computation of Free Float Shares, that means these shares only will be sold and purchased by the public in the stock market. Suppose in Srikanta Chalapathi Polymers Ltd the promoters shares are 77% and rest in the name of the public. So Free Float Shares are 23% only. Only these shares will be generally traded in the stock market. So if the promoters shares are less then Free Float shares are more and market cap increases.

As of now, Sensex was calculated by taking the top 31 companies market cap value of the Free Float shares. Market Cap means share value multiplied by the number of shares of the company. But after thorough analysis, I have certain observations as follows :

First Sensex analysis.

  1. Only 5439 companies have been listed in stock markets in India till now. There are more than 125,000 companies having the capability to get registered for the Stock market.

Generally, huge profit margins of 15% and above companies do not prefer listing in the Stock market, by offering shares to the public. Say majority of exporters, Cinema making companies, importers of chemicals – edible oils – plastic items- electronic items – medical equipment, Corporate Hospitals, Midsize contractors with a turnover up to Rs.500 crore, 3 star and 4-star hotels etc do not issue shares to the public.

  1. Based on Market Cap of company top 31 companies were considered for Sensex with the base year 1977-78 as 100 basis points.
  2. Of the 31 companies taken for computation of Sensex, six companies are in Financial sectors such as HDFC, SBI, HDFC Bank, Kotak Mahindra Bank, ICICI Bank and Axis bank are dominating with around Rs.16 lakh crore market cap. Followed by five automobile companies shares such as Hero Motocorp, M&M, Tata Motors, Maruti Suzuki. and four Pharma shares such as CIPLA, Dr Reddy Labs, Lupin labs and Sun pharma.

So fifteen shares plus Reliance Industries Ltd shares having a weightage of more than 77% will dominate the Stock market movement. So if there is no change in these shares indicate no changes in the stock market generally.

Even in these 31 companies of Sensex Free Float share market cap of NTPC, Adani Ports, Bajaj Auto, Coal India, Mahindra & Mahindra, Dr Reddy Lab and Cipla are less than Rs.100,000 crore only. So even if these companies post huge profits and shares increase by 10% the increase in Sensex is very small.

But free-float market cap of RIL is 10.07 lakh crore, TCS 7.64 lakh crore, HDFC Bank 5.39 lakh crore, HUL 4.94 lakh crore, HDFC 3.03 lakh crore, Airtel 3.01 lakh crore will have more weightage. If these shares increase Sensex automatically increases in good numbers.

  1. There are ten companies whose share value is above Rs.10,000 except Proctor & Gamble others are not in the 31 companies of Sensex such as MRF, Honeywell Automation, Page Industries, 3M Media, Eicher Motors, Nestle, Abbott India, Tastebite Eatables and Bosch company. Of these 9 companies highest quoted share is MRF Tyres at above Rs.62,896. This is not found a place in Sensex or in NIFTY.
  2. Shares quoted above 2000 times of issue price are six in number. Of these only Tata Consultancy Services Ltd has placed in Sensex. Other five are MRF, Eicher Motors, Page Industries, Britannia and Honeywell Automation have no place in Sensex or NIFTY.

NIFTY analysis

  1. Top fifty companies from 14 different categories were placed in NIFTY with weightage.
  2. Here again, the Financial Sector has a weightage of 33.34% in NIFTY. Oil & Gas ( including RIL 11.88% ) has weightage of 14.29% in NIFTY. information & Technology has a weightage of 14.66%, Consumer goods of 13.41% weightage, Automobile a weightage of 5.55% are major contributors in deciding NIFTY. That means these five sectors represent 80% of NIFTY. Remaining nine sectors such as Telecom, metals, Cement, ports, power, construction, Fertilizers, Media and Pharma sector put together have just 20% share of weightage in NIFTY.
  3. Top ten companies of the fifty quoted have a weightage of 61.26% in NIFTY. So if there is a raise in the Share price of these ten companies then NIFTY increases substantially.

Remaining 40 company shares in NIFTY have a weightage of 38.74% only. So even if these shares increase by 10% the increase in NIFTY will be marginal.

The top ten companies which decide the growth or fall of NIFTY are with weightage as follows:
RIL – 11.88%, HDFC Bank 10.34%, HDFC 7.20%, infosys 6.35%, ICICI bank 5.39%, TCS 5.20%, ITC 4.32%, Kotak Mahindra Bank 4.11%, HUL 3.69% and L& T 2.89%.

If take the next three companies Axis Bank 2.18%, SBI 1.55% and Bajaj Finance 1.3% also for computation of NIFTY the share comes to 66.29%.

My Alternate system suggested is top 3 shares of each sector to be taken for all sectors quoted in Stock exchange, the market cap should not be taken as criteria. Only share price to be taken as a yardstick and NIFTY or Sensex to be framed. Then Sensex or NIFTY index represents the true picture of Indian Corporate position.

Another danger is that share prices of ICICI bank, HDFC bank, Kotak Bank, Axis Bank, IndusInd Bank, HDFC, Bajaj Finance, and Lakshmi Vilas Bank are increasing every year. Say after three years these shares by market cap of free Float shares may represent 60% of Sensex or NIFTY.

Another unforeseen thunderbolt result may be from RIL results for 2020- 21 as petroleum business is not picking up due to lockdown and transportation bottlenecks and Reliance Mart, the E-Commerce company, has to post first results now in this year, though Jio is doing well.

Companies like Muthoot Finance are posting good results and opening up branches in the USA, UK and UAE also may emerge as One in Fifty companies of NIFTY in the next few years. Same is the case with Bajaj Finance also it is growing year after a year already found a place in NIFTY with 1.3% share.

As deposit rates nosedived to 5.50% in all banks now this year other listed banks such as Canara, PNB, BOI, BOB, Central Bank of India, Indian bank also may post at least Rs.2000 crore profit for Fy 2020-21.

So the financial sector only may decide the fate of Sensex and NIFTY in the next two years. Hence, I feel this is the time to change the computation of Sensex or NIFTY.