Zomato, Jio Financial to bloat Nifty valuation, making it even pricier

The inclusion of Zomato and Jio Financial Services in the Nifty 50 index from March-end is expected to inflate the headline equity index’s price-to-earnings (PE) ratio by 2.5%, according to calculations done by ICICI Securities. The brokerage highlights that the continued entry of high-valuation new-age stocks into the benchmark index has been a key driver of its elevated valuation metrics in recent years.

According to the latest announcement by NSE indices, BPCL (trailing P/E of ~8x) and Britannia (trailing P/E of ~57x) will exit Nifty 50, making way for Zomato (trailing P/E of ~320x) and Jio Financial (trailing P/E of ~96x) on March 8. Given this shift, ICICI Securities estimates that Nifty’s trailing PE will rise from 22.1x to 22.6x.

Also read | Zomato, Jio Financial earn Nifty 50 ticket at Britannia, BPCL’s expense

This trend of high PE stocks replacing relatively lower valuation companies has been ongoing since 2018, with newer entrants primarily from fintech, consumer discretionary, and healthcare sectors, while older economy stocks from oil & gas, industrials, and traditional lenders have been phased out.“The trend is peculiar given that the divergence of P/E of incoming (median P/E of ~60x) and outgoing stocks (median P/E of ~10x) at the time of index changes was very high and above normal levels. Hence, on like-to-like basis, Nifty50 index would have appeared 8-10% cheaper with a trailing P/E of 20x and FY26 P/E of 17.9x, assuming 2018 index constituents had not changed,” said ICICI’s Vinod Karki.

Buying and Selling Flows to Impact Market Liquidity

The changes in Nifty 50 constituents will trigger substantial fund flows from passive investors. ICICI Securities estimates buying demand of about Rs 5,900 crore (~3x ADTO) for Zomato and Rs 3,000 crore (~5x ADTO) for Jio Financial, while Britannia and BPCL could see sell orders worth Rs 2,300 crore (~11x ADTO) and Rs 1,900 crore (~6x ADTO), respectively.

Financials & Energy Sector Remain Cheap

Despite the overall rise in Nifty valuations, the brokerage points out that the largest profit pool — comprising the financials and energy sectors (excluding Reliance Industries)—has actually become 40% cheaper since 2018, with the sector’s PE dropping from 26x to 16x. Meanwhile, sectors like IT, consumer discretionary, and industrials have witnessed the largest expansion in PE multiples since 2018.

ICICI Securities notes that the structural shift in Nifty 50 composition towards high-growth, high-valuation stocks will likely continue pushing the index’s PE higher. However, the bulk of earnings growth still comes from financials and energy, which have seen a contrasting trend of valuation compression.

With Zomato and Jio Financial’s inclusion, the Nifty 50 will reflect the ongoing re-rating of new-age companies, further driving the optical expansion of index valuations.