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Infotech takes charge of the Sensex - Views on News from Equitymaster
 
 
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  • Dec 23, 1999

    Infotech takes charge of the Sensex

    Academics are of the view that alterations in the composition of indices are necessary in order to ensure that they stay representative of the class of items (in this case stocks) they are drawn from. After all, the Dow Jones Industrial Average (DJIA) Index today includes only one stock, General Electric, from its original composition. In keeping with this rationale, the 30 share BSE Sensitive Index (Sensex), too, has undergone several 'facelifts' over the last few years.

    The realisation that the high quality of Indian talent and the low operating costs could be capitalised upon to create a world class information technology supplier dawned on the Indian entrepreneur early this decade. Since then, the Indian sub continent has been buzzing with activity - focussing on the creation of world class infotech companies. Success has been forthcoming. India today boasts of a large and vibrant US$ 4 bn infotech sector. The sector has grown at a rate of 60% per annum over the last five years.

    It was only natural that infotech companies find a place in the BSE Sensex. Currently, two companies from this sector are a part of the Sensex - Infosys Technologies and NIIT. Comparisons of the sectoral break up of the Sensex now and at the beginning of the 1999 makes interesting reading.


    Infotech Is The New Heavy Weight In The Sensex
    (as on January 2, 1999) (as on December 22, 1999)

    The weightage of the infotech stocks has increased dramatically from 5% to 18% during the period under study. Infact, this is the only one sector to have logged such a substantial gain. Most other gainers have moved up only marginally. The key losers, on the other hand, were consumer products (weightage declined by 3%) and tobacco (4%). The influence of the infotech sector, Infosys in particular, on the Sensex is apparent. The reason for the increasing influence of this sector in not far to seek.

    Infosys leads the charge!

    Realising the importance of the infotech sector in the country, the government too is initiating measures to ensure that no roadblocks are created in the development process of this sector. Additionally, much credibility has been attributed to the prospects of the infotech industry after McKinsey stated that this would become a US$ 87 (21% of FY99 GDP) bn sector by 2007.

    It would not be surprising if the Sensex were to be restructured to include more infotech companies in view of their increasing influence on the Indian economy. In this case the skew in sector allocation would further shift towards infotech. Wipro, a software major that is not a part of the Sensex, for example, has a market capitalisation of Rs 486 bn (18.5% of the total market capitalisation of the Sensex).

    The seemingly never-ending run up in the stock prices of infotech stocks has resulted in the marginalisation of the other heavy weights in the Sensex. First among these is the consumer products major Hindustan Lever Limited, which has a market cap in excess of Rs 450 bn (17.7% weightage). Other stocks include Reliance Industries (8.4% weightage) and ITC (6.8% weightage). The marginalisation will become evident once the portfolio compositions of various funds that are benchmarked to the Sensex adjust to the new weightages.

    In a poll that was recently conducted on equitymaster.com, over 86% of the respondents felt that Wipro should be made a part of the BSE Sensex. Assuming that Wipro were to replace, say, Tata Power in the Sensex, the sector weightages would alter dramatically. The share of the infotech sector would jump to 30%.


    Wipro makes all the difference!
    (as on December 22, 1999)

    In any case, the infotech sector is on the threshold of gaining a dominant weightage in the composition of the Sensex and, in all likelihood (given the strong uptrend in the stock price of Infosys), it will exceed it in the future. The 'change in leadership' will be justified. Information technology is today affecting every aspect of our existence. It is revolutionising the way we live. It is what will lead the Indian economy into the 21st century.

     

     

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