Nifty rejig and the problem with index-based valuation

Changes to the benchmark Nifty50 index will be effective from 28 March. Jio Financial Services Ltd and Zomato Ltd will replace Bharat Petroleum Corp. Ltd (BPCL) and Britannia Industries Ltd. The reshuffle will alter the index’s price-to-earnings (P/E) multiple and revive the debate over whether Nifty’s valuation is expensive or justified—particularly among fund managers who rely on index-based valuations for capital allocation to countries.

But how useful is index-based valuation? To answer that, it is essential to understand how Nifty constituents are selected and how index valuation is calculated.

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The Nifty index includes companies with the highest free-float market capitalization—that is, market cap excluding the valuation of shares owned by promoters. However, from the index valuation perspective, the total market capitalization of companies should be considered. This means the combined market cap of companies entering the index should be compared with that of the companies being replaced.

How is the index valuation arrived at? Unlike individual companies, the index’s earnings per share (EPS) isn’t directly available. Instead, Nifty’s P/E ratio is calculated by dividing the aggregate market capitalization of all constituents by their aggregate net profit. The index’s EPS is then derived by by dividing the Nifty index value by its P/E ratio.

This makes the latest reshuffle particularly interesting, as it presents a paradox. While BPCL and Britannia’s combined market capitalization stands at ₹2.4 trillion, Zomato and Jio Financial’s total is significantly higher at ₹3.6 trillion. As a result, Nifty’s overall market cap will rise.

However, the incoming companies are far less profitable than those they are replacing. According to Bloomberg consensus, BPCL and Britannia’s combined estimated FY26 net profit is ₹15,974 crore. In contrast, Zomato’s projected FY26 profit is just ₹1,465 crore, largely driven by interest income on its cash reserves. Meanwhile, Jio Financial’s business model is still evolving and is yet to be widely covered by brokerages. Still, its 9MFY25 consolidated net profit stands at ₹1,296 crore, including ₹241 crore in dividend income from Reliance Industries Ltd.

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This means that the incoming companies will contribute significantly less profit than those exiting, lowering Nifty’s EPS and making the index appear more expensive after the rejig.

Why P/E comparisons can be misleading

Index-based valuation has its limitations, as stocks like Zomato and Jio Financial are priced based on their perceived high growth potential, translating into higher profits in the future. Beyond profit expectations, the nature of a business plays a key role in valuation. For instance, Zomato operates in high-growth sectors like food delivery and quick commerce, which often justify higher P/E multiples. In contrast, BPCL, being in the oil refining and marketing business—a commodity-driven sector—typically commands a lower P/E multiple.

To summarize, it would not be fair to say that the Nifty is trading at a premium or discount to its historical average in view of the fact that its constituents have undergone substantial changes. Even if some constituents, such as Reliance Industries Ltd., have remained the same, it must be noted that the company’s business model is now tilted in favour of retail and telecom from the old economy business of oil and gas.

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This is why comparing the P/E multiples of the indexes of different countries makes little sense, as much depends on the kind of companies included in the index. For instance, commodity companies Petrobras (oil) and Vale (mining) of Brazil are quoting at 4-6x P/E ratio based on 2025 estimates, which pulls down the overall valuation of Brazil’s Ibovespa index.