The best and most boring Nifty Next-50 stocks in March 2024

10 Apr 2024 , 09:24 AM

NIFTY NEXT-50 OR THE PROXY FOR FUTURE NIFTY

The Nifty Next-50 index, not surprisingly, has attracted a lot of attention since it was introduced into the markets. The Nifty Next-50 is often referred to as the future Nifty or the stocks with the potential to be part of the Nifty in the future. The Nifty Next 50 stocks straddle a unique middle pat between the Large caps and the mid-cap stocks. Unlike the mid and small cap companies, the business models of the Nifty Next-50 companies are not as narrow and vulnerable to a few clients or a few geographies. Simultaneously, most of these stocks in the Nifty Next-50 are not as closely tracked or pricey in P/E terms like Nifty stocks. More importantly, the Nifty Next-50 has an array of high quality growth stories like defence, IT, PSUs etc. These sectors have been among the star performers in the last couple of years. If you look at the latest month of March 2024, the Nifty Next-50 index gave returns of 2.77%, against the Nifty index which gave about 1.57% returns in March 2024. However, Nifty Next-50 index is not just about returns; but about risk and correlations too.

RANKING ON NIFTY NEXT-50 WEIGHTAGES IN MARCH 2024

The Nifty Next 50 represents the Nifty 100 stocks, less the Nifty 50 stocks. In percentage terms, the Nifty Next 50 represents 10% of the free float market cap of all stocks listed on the NSE; which makes it an important component of the market. While the Nifty Next-50 index is also a free float index, the distribution is a lot more democratic as compared to Nifty. Here are the top 10 stocks based on their weightage in the Nifty Next-50 index.

Stock Name	Weightage (%)
Trent Ltd.	4.80
Bharat Electronics Ltd.	3.98
Tata Power Co. Ltd.	3.68
Hindustan Aeronautics Ltd.	3.43
Indian Oil Corporation Ltd.	3.39
DLF Ltd.	3.18
Power Finance Corporation Ltd.	3.12
REC Ltd.	3.08
Interglobe Aviation Ltd.	2.79
TVS Motor Company Ltd.	2.76

Data Source: NSE

This is the weight of the top-10 Nifty Next-50 stocks in terms of free float weight in the overall index. Out of the Nifty Next-50 stocks, there is only 1 stock with weightage of more than 4%, while 8 stocks have a weightage of more than 3%. The top 10 stocks account for just 34.21% of the Nifty Next-50 index in contrast to 56.10% for the Nifty index weight while the top-20 stocks on the Nifty Next-50 accounted for just 59.03% of the Nifty Next-50 index in contrast to 74.88% for Nifty index. A total of 43 out of the 50 stocks in the Nifty Next-50 had a weight of over 1, showing substantially democratic distribution compared to Nifty.

If you look at the top 10 list, 5 out of these 10 stocks on the Nifty Next-50 index are PSU companies, although they are spread across sectors. There are 2 oil & gas stocks in the top 10 and 2 defence stocks with 2 financial stocks. If you look at the top 20 in terms of Nifty Next-50 weightage, you see the number of financials increasing to 6. LIC and Adani Total Gas have the lowest weightages in the Nifty Next 50, which is out of sync with their market cap, but that is more due to the limited public float in these companies.

RANKING NIFTY NEXT-50 STOCKS ON MARCH 2024 RETURNS

The Nifty Next-50 index, overall, may have given stellar returns for February 2024 at 6.68%, but that glosses over the variation in returns. The table captures top 10 stocks in March 2024 in terms of Nifty Next-50 returns in absolute terms.

Stock Name	MOM Returns (%)
ABB India Ltd.	25.75
Avenue Supermarts Ltd.	23.80
Siemens Ltd.	21.31
ICICI Prudential Life Insurance Company Ltd.	18.56
Jio Financial Services Ltd.	18.31
Interglobe Aviation Ltd.	17.11
Pidilite Industries Ltd.	16.55
Zomato Ltd.	14.34
Jindal Steel & Power Ltd.	13.51
Hindustan Aeronautics Ltd.	13.01

Data Source: NSE

In March 2024, the Nifty Next 50, gave moderate returns of 2.77%, compared to 6.68% returns in February 2024. There were 8 companies that gave double digit returns and 17 companies giving over 5% returns in March 2024. Out of the 50 companies in the Nifty Next-50 index, a total of 27 companies have given positive returns while 23 have given negative returns, almost a balanced power show between the gainers and losers. If you look at the top sectoral mix of the top 20 performers, there are 6 financial stocks, 4 capital goods plays, and 3 omnichannel retail plus ecommerce plays. There were 4 PSUs in the list with HAL being the sold non-financial PSU in the top returns list.

HOW DO NIFTY NEXT-50 STOCKS RANK ON BETA FACTOR

Before we embark into an analysis of beta rankers, there is a small point to understand. The Nifty is the index for beta benchmarking even in the case of Nifty Next-50 index and hence the picture of aggressive and defensive stocks will be divided more equitably. Here is a ranking of the top 10 stocks on Beta.

Stock Name	Beta (X)
Indian Railway Finance Corporation Ltd.	1.86
Punjab National Bank	1.70
Power Finance Corporation Ltd.	1.64
REC Ltd.	1.57
Adani Green Energy Ltd.	1.56
Adani Power Ltd.	1.54
Adani Total Gas Ltd.	1.47
Jindal Steel & Power Ltd.	1.46
Info Edge (India) Ltd.	1.34
DLF Ltd.	1.33

Data Source: NSE

Out of the 50 companies in the Nifty Next-50 index, 22 were aggressive stocks with Beta of 1 or above while the balance 28 stocks were defensive stocks with Beta of less than 1. The 50 stocks overall had an average beta of 0.96. Which are the stocks with the highest levels of Beta? The top 4 belong to PSU financials while the next 3 are Adani group stocks. The top 20 stocks by Beta have 6 financials, 5 Adani group stocks and a whopping 10 of the top 20 by beta are PSU stocks.

Which are the stocks that rank at the bottom in terms of Beta. The theme appears to be a lot more complex at the bottom. The bottom 10 stocks in terms of Beta include 4 financial stocks, 2 pharmaceutical stocks, 2 retail stocks and 2 FMCG stocks. Surprisingly, the financials in the Nifty Next 50 are a lot more complex as they dominate the top 10 and the bottom 10 rankings for March 2024.

HOW DO NEXT-50 STOCKS RANK ON VOLATILITY IN MARCH 2024

Beta assumes that the unsystematic risk is diversified away, which may not always be a reasonable assumption to make, especially in the Indian context. Volatility or standard deviation measures the overall risk which includes the systematic and the unsystematic risk, assuming that diversification is only partially successful. The table ranks stocks on volatility.

Stock Name	Volatility (X)
Indian Railway Finance Corporation Ltd.	4.15
Adani Total Gas Ltd.	3.77
Adani Energy Solutions Ltd.	3.58
Adani Green Energy Ltd.	3.42
Jio Financial Services Ltd.	3.19
Tata Power Co. Ltd.	3.04
REC Ltd.	3.01
Power Finance Corporation Ltd.	2.98
Hindustan Aeronautics Ltd.	2.82
Life Insurance Corporation of India	2.80

Data Source: NSE

One quick observation in the Nifty Next-50 index is that the volatility levels are relatively higher as compared to the Nifty stocks. That is because many of these companies are a lot more vulnerable to industry level factors as well as to macros. For instance, macros like crude oil prices and exchange rates tend to have a much deeper impact on the Nifty Next-50 stocks, as compared to the Nifty stocks. There are several cases where the list is common with the returns list and also cases where the returns are unable to justify the risk levels. In terms of sectoral mix, there are 4 financials in the top 10, with the volatility much higher in development financial institutions. Also, 3 of the top 10 by volatility are Adani group stocks.

What about the stocks with low levels of volatility in the Nifty Next-50 index. No prizes for guessing, but the bottom list is again comprising of FMCG names like Marico, United Spirits, Dabur, and Berger Paints. This trend matches with the Nifty as well, where FMCGs dominate the low volatility list. Some of the financials like SBI Cards and ICICI Lombard are surprise inclusions in this bottom list.

NIFTY NEXT-50 STOCKS RANKED ON R-SQUARED IN MARCH 2024

R-Squared is a slightly more complex financial measure; both in terms of the calculation and in terms of the interpretation. The benchmark here is once again the Nifty index, like we did for Beta. Hence, R-Squared, in this case, is not just a measure of how much of the returns are explained by the Nifty movements, but also whether these Nity Next-50 stocks can diversify the risk of a large cap portfolio. There is one more critical role that the R-Squared performs. Is the Beta actually showing a relationship with the Nifty index or is it just a random occurrence that cannot be explained. It can be either and we can get a confirmation for that question by looking at the R-Squared. Normally, the average R-Squared of the Nifty Next-50 is around 0.11, so any R-Squared figure of 0.20 to 0.25 shows a significant Nifty Next-50 movement explanation. However, low levels of R-Squared means that this is a good diversification candidate.

Stock Name	Weightage (%)	Beta (X)	R-Squared (X)
Punjab National Bank	2.04	1.70	0.25
DLF Ltd.	3.18	1.33	0.22
Jindal Steel & Power Ltd.	1.72	1.46	0.21
Info Edge (India) Ltd.	2.39	1.34	0.21
SRF Ltd.	2.05	0.95	0.21
Dabur India Ltd.	1.69	0.83	0.21
Bharat Electronics Ltd.	3.98	1.23	0.20
GAIL (India) Ltd.	2.69	1.32	0.20
Bank of Baroda	2.71	1.27	0.20
Ambuja Cements Ltd.	2.01	1.28	0.19

Data Source: NSE

There are hardly any surprises in the above list. The list is again dominated by the banks and the PSUs. Most of the other names like PNB, DLF, BEL and Ambuja Cements have always been stocks that have shown a tendence to reflect the broader market undertone.

Let us finally to a quick ranking of the top 10 stocks on the Explanation Factor, which is the product of the Beta and R-Squared. It shows how much of the stock risk is genuinely explained by the Beta.

Stock Name	Weightage (%)	Beta	R-Squared	Explanation Factor
Punjab National Bank	2.04	1.70	0.25	0.4250
Jindal Steel & Power Ltd.	1.72	1.46	0.21	0.3066
DLF Ltd.	3.18	1.33	0.22	0.2926
Info Edge (India) Ltd.	2.39	1.34	0.21	0.2814
GAIL (India) Ltd.	2.69	1.32	0.20	0.2640
Power Finance Corporation Ltd.	3.12	1.64	0.16	0.2624
Bank of Baroda	2.71	1.27	0.20	0.2540
Bharat Electronics Ltd.	3.98	1.23	0.20	0.2460
Canara Bank	2.15	1.29	0.19	0.2451
Ambuja Cements Ltd.	2.01	1.28	0.19	0.2432

Data Source: NSE

The ranking of top stocks by the explanation factor, broadly corresponds with the R-Squared list. The highest volatility stocks like Punjab National Bank JSPL and DLF are in the explanation list too, which is not too surprising. At the bottom of the explanation factor rankings, you obviously have the FMCG, pharma and retail plays; with little explanation of the stock returns coming from the market returns. However, there is an additional interpretation when it comes to the Nifty Next-50 index with the explanation factor. Those companies with top 10 or top 20 explanation factors may not be too effective in diversifying the risk of a large cap portfolio comprising predominantly of Nifty stocks. However, one can get substantial diversification benefits, if investors focus on the stocks than rank lower on the explanation factors. This would apply a lot more to stocks that are in the bottom 20 list of this ranking. That would be a good story for diversification of a large cap portfolio.

The month of March 2024 saw returns on the Nifty Next 50 index much lower than February. That is more due to year to fiscal year-end profit booking. But, what is more important, is that the Nifty Next 50 is not just about emerging starts. It is also about a list of high quality stocks that can diversify and reduce the risk of a large cap portfolio.