Posted on February 24, 2025, by Niftynews
The Nifty 50 index is set to undergo a transformation by the end of March 2025 with the inclusion of Zomato and Jio Financial Services. Their entry into the benchmark index will not only represent a shift in sectoral representation but also inflate the Nifty 50’s Price-to-Earnings (P/E) ratio, raising the index’s valuation by 2.5%. The adjustments will take effect on March 28, 2025, with Zomato and Jio Financial Services replacing BPCL and Britannia Industries.
Impact on Nifty 50 P/E Ratio
The current P/E ratio of BPCL and Britannia Industries stands at 8x and ~57x, respectively. These two companies will exit the Nifty 50 in favor of the two newcomers: Zomato and Jio Financial Services, which have significantly higher trailing P/E ratios of ~320x and ~96x. As a result, Nifty 50’s P/E ratio could experience an inflation of 2.5%, rising from 22.1x to 22.6x, according to estimates by ICICI Securities.
The shift in index composition signals a notable change in the overall valuation of the index. The inclusion of Zomato, a leader in the food delivery market, and Jio Financial Services, a key player in the fintech space, will bring high-growth, new-age tech stocks into the fold. These stocks are characterized by lofty P/E ratios that contrast sharply with the traditional, lower-growth companies being replaced.
Why is This Shift Significant?
The Nifty 50 index has witnessed a gradual transformation since 2018, with new-age stocks from sectors such as fintech, insurance, consumer discretionary, and healthcare replacing old economy stocks from industries like oil & gas, traditional banking, and industrials. According to Vinod Karki, Equity Strategist at ICICI Securities, the divergence between the P/E ratios of incoming and outgoing stocks is exceptionally high, with the median P/E ratio of new entrants at ~60x compared to the ~10x of the stocks exiting the index.
This change in stock composition could make the Nifty 50 appear 8-10% cheaper if the 2018 constituents had remained, with the index P/E ratio sitting around 20x. However, given the latest changes, the index could look more expensive, as incoming stocks are far pricier in comparison.
What’s Driving the Entry of Zomato and Jio Financial Services?
The expansion of Zomato and Jio Financial Services into the Nifty 50 aligns with a broader trend where tech stocks and digital-first companies are increasingly becoming dominant in global indices. As the Indian economy continues to shift towards a digital and service-driven economy, investors are placing greater value on companies that are at the forefront of technology and financial innovation.
In particular, Zomato, with its stronghold in the food delivery sector, and Jio Financial Services, backed by Reliance Industries, represent two of the fastest-growing industries in India: e-commerce and fintech. Their inclusion in the Nifty 50 is expected to reflect the growing prominence of these sectors.
Passive Fund Flows and Stock Rebalancing
The restructuring of the Nifty 50 index will likely lead to significant fund inflows from passive investors. According to estimates by ICICI Securities, Zomato could see a ₹5,900 crore inflow (~3x ADTO), while Jio Financial Services could experience a ₹3,000 crore inflow (~5x ADTO). Meanwhile, Britannia Industries and BPCL will face a significant outflow, with ₹2,300 crore and ₹1,900 crore, respectively, leaving the Nifty 50 ETF funds.
This shift in fund flows will likely affect the stock prices of these companies, at least in the short term. However, the long-term impact on the Nifty 50 index will depend on the broader market trends and the performance of the new constituents.
What’s Next for the Nifty 50?
The composition of the Nifty 50 index is set to reflect the changing dynamics of the Indian economy. With Zomato and Jio Financial Services replacing older, slower-growth companies, the index’s valuation is likely to remain elevated as these new-age tech stocks continue to dominate.
Investors should watch the Nifty 50 closely, as the index’s higher valuation could indicate increased growth potential, but also greater risks. As the market continues to embrace digital-first companies, the outlook for stocks like Zomato and Jio Financial Services could remain positive, but at elevated valuation levels.
