With the Sensex Index Committee planning to drop Dr. Reddy from the index and replacing it with Vedanta, it will reduce the share of pharma further in the index. Lupin and Cipla are already out of the Sensex, leaving Sun Pharma as the only pharma stock in the index.

A steep fall from FY2016…

As the chart above captures, the share of pharma in the Sensex has fallen from a high 8.3% in 2016 to 1.7% in 2018. This has been largely driven by the underperformance in the pharma stocks in the last 2 years. With stiff competition from generic players and OPMs getting thinner in the US markets, most pharma stocks are showing negative growth. That is inevitable considering that the US remains their largest market by a huge margin. FDA has been one more issue. The question is whether 1.7% share of the index for pharma represents the Indian economy?

Constant index shifts…

There is a central difference between the way an MSCI sets its index weights and the Sensex sets its weights. The MSCI is an investment portfolio; the Sensex is a representative index of the stock market. The stock market is reflective of the underlying economy. Whether a 6.5% weightage to ITC, 40% weightage to BFSI and 1.7% weightage to pharma is sensible or not; is a question that needs to be answered. There is another angle. Metal stocks have appreciated manifold in the last 2 years and most fund managers have already bought into the same well in advance. Now when the index adds Vedanta, it is almost being reactive. The logic of adding and subtracting stocks from the index needs to be examined all over again. That also explains why 80% Indian fund managers outperform the index while the figure is as low as 10% in other markets. Food for thought!