Be bullish on new Financial Services Index

NSE is launching derivatives on a new index effective January 11, 2021. The index is known as Financial Services Index and would comprise of 20 stocks. There is a similar index known as Bank Nifty Index which comprises of 12 stocks and has derivative instruments as well.

The Financial Services Index would have stocks from banking, housing finance companies, insurance companies both general and life insurance, NBFCs and also an asset management company. There would be four business houses which would be dominating the index. They are HDFC, ICICI, Bajaj and SBI. A total of 12 stocks out of 20 would be from these four business groups with a weightage of about half being assigned to just the HDFC group.

The companies include HDFC, HDFC Bank, HDFC Standard Life and HDFC AMC. The ICICI pack includes ICICI Bank, ICICI Prudential and ICICI Lombard. The Bajaj pack includes Bajaj Finserve, Bajaj Financial Services and Bajaj Holdings. The State Bank pack includes State Bank of India or SBI and SBI Life.

The remaining stocks include two banks, Kotak Bank and Axis Bank. It has four NBFCs in Cholamandalam Finance, Mahindra and Mahindra Finance, PEL (Piramal Enterprises) and Shriram Transport Finance. There are two public sector financial institutions which cater to the power generation and distribution sectors, namely PFC and REC which complete the pack of 20 stocks.

This index would take cues from the Bank Nifty. Bank Nifty has not performed well in calendar year 2020 and was down on an annual basis by 2.79 per cent. Two of the heavyweights in the same namely the HDFC twins outperformed the index but underperformed the broader Nifty which was up 14.90 per cent.

HDFC gained 6.05 per cent while HDFC Bank gained 12.97 per cent. However, their performance was far better than Bank Nifty and this would be a positive for the new index.

How does one play this index? There are four distinct components of this index and they can be categorised as banks, insurance companies, NBFC's and financial institutions catering to the power sector. The weightage of HDFC AMC and Bajaj Holdings which do not fall in these categories is comparatively lesser. On a broader front HDFC though a housing finance company can also be looked at as a NBFC.

One has to look at the bigger India growth story and expect India to have a strong recovery post covid-19 going forward. In such a scenario even though there would be NPAs and some amount of struggle for banks, the bigger picture remains intact and positive.

The banks in the index have not done anything on an annual basis and are more or less in the red with HDFC Bank being the exception. Insurance companies have a positive trend simply because of the under penetration of insurance and risk in the country. NBFCs have had a tough time but seem to be getting out of their issues and the niche companies would have an edge.

While there would always be volatility in this index and that would be the reason why another one has been created, one would have to trade this index with a positive mindset and take a clear stand on the heavyweight stocks like the HDFC twins.

Sticking my neck out, it may make sense to play this index on the long side and be bullish on the same. The bankers would be the HDFC pack and the three insurance companies with ICICI Bank and Axis Bank chipping in as well.

(The author is a stock market expert and founder of Kejriwal Research and Investment Services, an advisory firm)