The current market consensus is in favour of large-cap stocks. Mid caps and small caps, the pacesetters in the past few years, are expected to see a moderation in returns. However, even as the attention shifts to the large-cap space, investors are not merely looking at blue chips. The Nifty Next 50 has caught the eye in recent times, but is it a better play in the large-cap arena?
Large caps in disguise
As the name suggests, the Nifty Next 50 index is a basket of 50 companies positioned just beyond the top 50 biggest companies by market cap. They are all part of the Nifty 100 index, which encompasses the entire largecap universe as defined by Sebi. Despite falling under the large-cap umbrella, the Nifty Next 50 index offers a different investment proposition than its bellwether sibling, the Nifty 50. It is essentially the incubator of businesses aspiring to be tomorrow’s blue chips. Mohit Khanna, Fund Manager, Purnartha Investment Advisers, observes, “Most of these companies are challengers in their respective markets, not exactly market leaders.” Anil Rego, CEO and Founder, Right Horizons PMS, points out, “The two largecap indices are very different from each other as they have significant differences in sectoral weights, and not really comparable.”To be sure, the Nifty Next 50 index is a more balanced index than its larger peer. It has low weight concentration among individual stocks as well as sectors, resulting in a more diversified portfolio. The Nifty 50 index is heavily skewed towards financials, which account for 33% of the index. Its three biggest sectoral positions take up 57% space in the index. Meanwhile, the Nifty Next 50’s financials bet, its biggest, forms 22% of the index, even as the index carves out 42% of its portfolio towards its top three sector positions. The Nifty Next 50 index affords exposure to a wider range of sectors. Even within financials, it takes a more diversified stance, with exposure across banks, NBFCs, insurance and asset management companies. The Nifty 50 index takes outsized positions in individual stocks, while the Nifty Next 50 is more evenly diced. The top five stock bets of the Nifty 50 and Nifty Next 50 index form 38% and 20% of the portfolio, respectively.
Nifty Next 50 differs from its bigger gauge in many ways
Despite positioning as a large-cap index, it behaves more like a mid-cap index.
The Nifty Next 50 also differs from the Nifty 50 in earnings profile. While the behemoths of the Nifty 50 are experiencing slower growth, the aspirants from the Nifty Next 50 are putting on quite a show. The earnings per share (EPS) of the Nifty 50 index has risen by 20% over the past year.Meanwhile, the EPS for Nifty Next 50 index has jumped 70%. Over the past three years, the Nifty 50 basket of companies has clocked 17.6% growth in sales and 18% growth in profits, respectively. The Nifty Next 50 businesses have clocked 19% and 24.5% jump in sales and profits, respectively. Clearly, the growth in the large-cap space lies beyond the Nifty 50. The divergence in the earnings profile is reflected in the performance of the two indices. Over the past year, the Nifty 50 has gained 27%, even as the Nifty Next 50 index has surged 64%. The two indices have fetched 38.5% and 68.5%, respectively, over the past three years. Even after this sharp outperformance, the Nifty Next 50 index commands very little valuation premium over the Nifty 50 index. It currently trades at a price to earnings (PE) multiple of 24 times, even as the Nifty 50 index is only marginally cheaper at a PE of 23.5. The price to book (PB) multiple for the two indices is at 4 and 3.75, respectively. The valuations for the Nifty Next 50 seem very compelling in context of the returns.However, the question is, does the Nifty Next 50 offer the same comfort in terms of risk, relative to the benchmark gauge? In large caps, investors typically expect a degree of sanity even during phases of market turbulence. The smaller gauge is prone to bigger hiccups. Drawdowns have been more pronounced in the Nifty Next 50 compared to the Nifty 50. The Nifty Next 50 has exhibited return behaviour similar to the Nifty Midcap 150 index, while also catching the volatility associated with the latter. Anish Teli, Managing Partner, QED Capital Advisors, asserts, “Even though it is a large-cap index, the Nifty Next 50 behaves like a mid-cap offering. The returns are lumpier, exhibiting high volatility.”
Horses for courses
Over longer time frames, the junior basket has typically offered a superior risk-reward proposition. Yet experts maintain that the bellwether index offers better prospects in the near term. Khanna insists, “Historically, Nifty Next 50 has done better because it is closer to mid caps. In an uptrending market, the Nifty Next 50’s contenders are more lucrative, but in the current market scenario, where consolidation is expected, the Nifty 50’s market leaders offer better resilience.”
Rego asserts, “In the phases that mid and small caps are in favour, the Nifty Next50 tends to fare better. But in periods when the broader market is not expected to do well, the Nifty50 index is a better bet.” Teli reckons the Nifty Next 50 will underperform the larger gauge in the next few years. He maintains that the Nifty Next 50 works as a tactical call when it has underperformed in the preceding two-three years.
