RIL, ONGC, SBI, BHEL, L&T could be out of Sensex in 10 years: Ambit Capital

New entrants could include Flipkart, Paytm, Cafe Coffee Day and ICICI Prudential Life Insurance

Index heavyweights stocks like Reliance Industries (RIL), ONGC, Larsen & Toubro (L&T), State Bank of India (SBI) and BHEL are among 15 stocks that could see an exit from S&P BSE Sensex over the next decade, suggests a June 2015 study co-authored by Saurabh Mukherjea, CEO - Institutional equities at Ambit Capital titled 'The Sensex in 2025'.

Over the next decade, the report predicts the pace of churn in the 30-share index's constituents to gather momentum. The current economic-political environment, Ambit says, will usher in an era of change which will drive Sensex churn higher driven by Prime Minister Narendra Modi's resets to the Indian economy.

According to Ambit's analysis, Sensex's churns over a 10-year window from 1986 to date shows that the churn ratio of the Sensex tends to rise when the economy is undergoing irreversible structural changes.

"After having peaked at 67 per cent in the years following the 1991 reforms (implying 20 replacements in a 30-stocks index), this churn has fallen to historical lows of 27 per cent (i.e. 8 replacements) in the most recent ten-year period (2004-14)," the report says.

As a precedent, the report cites a few stocks like Aditya Birla Nuvo, Bombay Dyeing, Century Textiles, Future Polyester, Hindustan Motors and Premier, Mukand Limited, Ballarpur Industries, Bharat Forge, Cummins India, Siemens and Voltas. These stocks were ejected in the 1990s when the Sensex churn peaked in the four years following the reforms launched by PV Narasimha Rao's government with Manmohan Singh as Finance Minister.

Going ahead, Ambit expects the Modi Government to force the next big disruption - dismantling crony capitalism and the subsidy culture, and directing savings away from land and gold to the financial system.

"We expect Sensex churn to rise to 50 per cent in the next decade (2015 to 2025) from historical lows of 27 per cent during the most-recent decadal bucket (2004 to 2014). This means that 15 stocks will be replaced in the Sensex in the upcoming decade," Ambit says.

New kids on the block

With as many as 15 companies exiting the 30-share index, Ambit applied its proprietary filters like the 'greatness' score, Coffee Can Portfolio and P-75 Index to arrive at the list of new constituents.

To identify potential Sensex entrants from the current listed universe, Ambit used a five step process that included analysis based on efficient capital allocation, consistent financial performance, elimination of Ambit's P-75 companies (i.e. eliminate companies whose core competitive advantage is politically connectivity), market-cap buckets and lastly pick and choose from the short-list.

Ambit believes that the size of a company at the beginning of the decade should play an important role in determining whether or not the company will be in the index a decade later with nearly half of the 15 Sensex entrants of the next decade likely to come from the top-100 stocks ranked by market-cap today.

"Another 10 per cent are likely to come from the next 100 stocks by market-cap (below the top 100). About 6 per cent should come from the universe beyond the top-200. Finally, a third of the entrants are likely to be new offerings," it says.

The entrants from the listed world include Page Industries, Eicher Motors, Asian Paints, Nestle and Pidilite (from Consumer Staples/Discretionary), HCL Technologies (IT Services), and Kotak Mahindra Bank and IndusInd Bank (BFSI). To these eight stocks from the top-100 by market-cap, Ambit has added Torrent Pharma and PI Industries from the next 100 by market-cap.

Five out of the 15 new entrants will enter through the initial public offer (IPO) route, Ambit says, which includes themes like E-commerce (Flipkart and Paytm); Insurance (ICICI Prudential Life Insurance); Consumer Discretionary Services (Cafe Coffee Day); and Disinvestment (Hindustan Aeronautics Limited).