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Making sense of the Sensex

Vivek Patil

Sensex is the most popular and precise barometer of the Indian stock markets. As such it has to keep itself in tune with the constantly changing scenario. It is, after all, a matter of great responsibility to represent a market of more than 6,300 stocks through a 30-stock composite.

The Bombay Stock Exchange, or BSE, authorities have to, therefore, keep a close watch on its composition, so that the Sensex always represents the maximum market capitalisation and the maximum number of sectors.

However, every once in a while there is a need to revamp the Sensex's composition. And this raises numerous queries regarding the implication of any such alteration. Debates rage over whether a particular sector is getting more weightage or otherwise. Then there is talk of Sensex heavyweights that can be used to 'manipulate' the Sensex value.

Since billions of rupees are at stake, these are valid questions. However, they require detailed understanding of the mechanics of Sensex calculation. Let us try to understand this aspect.

Basics of Sensex

1. "Sensex" is the popular name for the Bombay Stock Exchange Sensitive Index.

2. It is the oldest stock market index currently in use.

3. Sensex is the index of market capitalisation.

4. The base value is 100 on April 1, 1979.

5. Sensex consists of only 30 representative stocks.

6. These 30 are the most active and representative stocks selected from over 6,300 scrips that are listed on the BSE.

7. The total market capitalisation of these 30 stocks accounts for more than 38 per cent of the aggregate market capitalisation of all BSE stocks.

8. The Sensex composition is modified by the BSE authorities at irregular intervals, to keep it in tune with the latest realities of the market.

9. A major reshuffle took place in the Sensex on August 19, 1996, when 15 stocks were replaced.

10. Recently, on April 10, 2000, four stocks were replaced. Satyam Computer, Zee Telefims, Dr. Reddy's Labs, and Reliance Petroleum have been included in place of Indian Hotels, Tata Power, Tata Chemicals and IDBI.

Basics of Sensex calculation

1. Market capitalisation is the market value of equity shares, (i.e. market price multiplied by the number of shares). For instance: if ACC has an equity capital of Rs 1.72 billion with each share having a face value of Rs 10 and its closing price on BSE on April 10, 2000 was Rs 166, then ACC's market capitalisation on that date is 17.234*166/10 = Rs 28.61 billion.

2. Calculate market capitalisation of all 30 Sensex stocks on a particular date in the same manner and add this up to get the total market capitalisation of Sensex stocks.

3. Assume that this total market capitalisation is equal to the closing Sensex value on that particular date. The Sensex of any future date can be calculated as a proportion of market capitalisation applied to this Sensex value.

4. An example below shows that the total market capitalisation on April 10, 2000 was Rs 3,731.38 billion, when the Sensex value was 5442.86. If, the total market capitalisation on April 17, 2000 was Rs 3,346.18 billion, then the Sensex for April 17, 2000 is calculated as:

5442.86 * 334617.19 / 373137.82 = 4880.97

NAME FV (Rs) Equity (Rs.Crs) Price 10-04-00 Mkt cap 10-04-00 Price 17-04-00 Mkt cap 17-04-00 ACC 10.00 172.34 166.00 2860.86 155.00 2671.29 BAJAJ A. 10.00 119.39 378.00 4512.97 373.60 4460.44 BHEL 10.00 244.76 125.90 3081.52 117.00 2863.69 BSES 10.00 137.76 256.50 3533.76 222.00 3058.45 CASTROL 10.00 123.50 312.00 3853.30 300.00 3705.10 COLGATE 10.00 135.99 158.30 2152.76 151.10 2054.85 DR.REDDY 10.00 26.49 1627.00 4310.24 1433.00 3796.30 GLAXO 10.00 59.77 445.00 2659.99 403.00 2408.93 GRASIM 10.00 91.66 388.45 3560.90 355.00 3254.26 GUJ.AMBUJA 10.00 147.14 230.50 3391.80 207.70 3056.30 HINDALCO 10.00 74.47 750.00 5585.40 707.00 5265.17 HIND.LEVER 10.00 219.54 2727.00 59869.04 2476.00 54358.54 HPCL 10.00 339.33 141.80 4811.70 132.25 4487.63 ICICI 10.00 769.52 146.40 11265.89 125.65 9669.12 INFOSYS 5.00 33.10 9839.00 65146.62 8521.00 56419.80 ITC 10.00 245.53 734.00 18021.91 630.25 15474.54 L & T 10.00 248.94 316.00 7866.74 259.45 6458.94 M & M 10.00 108.53 355.60 3859.58 284.20 3084.62 MTNL 10.00 630.00 251.75 15860.25 220.40 13885.20 NESTLE 10.00 96.41 363.00 3499.88 345.00 3326.33 NIIT 10.00 38.64 1720.00 6647.39 1975.00 7632.90 NOVARTIS 10.00 31.86 915.00 2915.33 846.00 2695.49 RANBAXY 10.00 115.93 748.00 8671.75 669.00 7755.88 RELIANCE 10.00 933.75 363.00 33895.37 296.85 27718.57 REL.PETRO 10.00 2141.11 62.50 13381.99 54.10 11583.45 SATYAM 10.00 52.03 3907.00 20331.44 3759.00 19561.27 SBI 10.00 526.88 219.00 11538.88 197.00 10379.73 TELCO 10.00 255.93 140.00 3583.07 132.05 3379.60 TISCO 10.00 368.16 119.50 4399.52 113.55 4180.47 ZEE TELE 1.00 38.84 980.00 38067.83 926.00 35970.21 TOTAL MC       373137.82   334617.19 SENSEX       5442.86   4880.97

If on a panicky day, the Sensex falls by 8 per cent (the maximum permissible fall for each of the constituent stock) from the level of say 4880 points, it would mean a fall of 390-odd points. And this would be calculated as follows:

Now consider the fall in Sensex from 5541.54 on April 11, 2000 to 4657.42 on April 20, 2000. It's a drop of 884.12 points. During this fall, Infosys came down from Rs 10,626 to Rs 7,556, i.e. by Rs 3,070. Every Rs 100 of Infosys contributes 9.66 Sensex points. Therefore, the contribution of Infosys to the Sensex fall can be calculated as:

3070/100*9.66 = 297 Sensex points

Similar calculations will show that the new economy stocks were the major contributors to the fall. Infosys, NIIT, Satyam and Zee together contributed about 531 points out of the total Sensex fall of 884 points, which is about 60 per cent by just by these four stocks.

If the Sensex moves wildly, investors can now pin-point the exact reason and take appropriate action.

The author is a Bombay-based technical analyst and creator of the software package ASA.

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