Adani Enterprises to attract $285 million flows on Nifty inclusion

With Adani Enterprises expected to enter the Nifty from 30ths September in place of Shree Cements, the million dollar question, is how much foreign investment flows will this attract? According to estimates by Brian Freitas, a highly respected ex-derivatives trader, Adani Enterprises could attract inflows to the tune of $281 million as it joins the Nifty. That is about Rs2,250 crore of fresh buying in Adani Enterprises just to correct the allocation imbalance by the exit of Shree Cements and the entry of Adani Enterprises into Nifty. 

Why would such a huge inflow come into Adani Enterprises? It will come from the passive funds that track the Nifty Index. Passive funds are the index funds and the index ETFs that are normally linked to the Nifty or the Sensex and allocate based on the MSCI allocations. Most of these passive funds never try to beat the index, except for Smart Beta plays. Instead, they create a portfolio that mirrors the index. Obviously, when the underlying index changes, the portfolio changes too. In this case, it will be selling Shree and buying AEL.

Ironically, the inclusion of Adani Enterprises comes at a time when the controversial CreditSights report had raised questions over the excess leverage in the Adani group. Experts opine that typically these passive funds will need to acquire more than 7% of free-float shares in Adani Enterprises. Hence, even after the allocation is done and dusted, the buying may continue from the passive funds to get the share of free float. Adani Enterprises is the second Adani group company on the Nifty after Adani Ports & SEZ.

Typically, for a stock to be included in the index, it needs to adhere to several criteria. Adani Enterprises satisfies all the inclusion criteria. Some of the criteria, apart from being representative and of macro importance to the markets pertain to the impact cost. For instance, for inclusion in the index, the stock in question must have traded at an average impact cost of 0.50% or less during the last six months for 90% of the observations for a portfolio of Rs10 crore. This will ensure that large orders don’t distort the price.

Adani Enterprises is among the most valuable Adani group companies and has been a rank outperformer in 2022 so far. The stock of AEL has given 102% returns in 2022 year to date as against just a flat 0.7% for the Nifty index. The inclusion is likely to bolster the index value too. For June quarter, Adani Enterprises saw net profits rise 73% to Rs469 crore while sales revenues surged 223% to a level of Rs41,066 crore in the June 2022 quarter. This was driven  by strong performance by integrated resources management (IRM) and airport business.

There have bene changes made to the other indices too; apart from the Nifty 50 index. For instance, Adani Total Gas, BEL, HAL, IRCTC and Mphasis will now find a place in the Nifty Next-50 index. However, it is only in the Nifty inclusions and exclusions that you find substantial fund flows happening.