Nifty 'Future 50' Visualised

When investors with deep pockets want to invest in the stock market they usually choose the stocks of large, well-established firms.

This is understandable. These stocks provide steady returns, pay good dividends, and are not likely to crash due to a change in fundamentals.

Large, stable companies may face challenges but are likely to overcome them. These companies have overcome challenges to their growth and have achieved the position of market leaders. Thus, these stocks are desirable to investors who seek stability.

These companies also tend to generate strong cash flows which enables them to be generous dividend paying stocks. This adds to their appeal.

Most investors who buy shares of these companies are not looking to make fast profits. Instead, they want consistent compounding stocks. These stocks provide steady, long-term growth, along with regular dividends.

These stocks have another big advantage over other stocks in the market. They form a part of the benchmark index. This ensures a continuous demand for the shares from not only index funds and index ETFs, but also regular funds that benchmark their returns to that index.

All these are compelling reasons to consider index stocks as a strong investment choice. But this is only one side of the story.

The other side of the story involves finding the stocks that could grow to be a part of the index, i.e., grow big enough to be included in the index in the future at the expense of an existing index stock.

Why is this a good investing idea?

Indices are not permanent groupings of stocks. The number of stocks will stay the same but the composition of the index will change regularly.

In the case of the Sensex and Nifty, stocks are removed and replaced year-round. Thus, only a core group of stocks remain as 'regulars' over the long-term. Unsurprisingly, these stocks are also among the biggest multibagger stocks in India.

Investing in stocks that could be a part of the 'future Nifty50' makes sense because these stocks will have to demonstrate solid growth before being included in the Nifty. Thus, it stands to reason that their stock prices will go up significantly too.

So which stocks could be a part of the Nifty in the future?

Here are 5 potential candidates from the Nifty Next 50 index for your watchlist...

#1 Bharat Electronics

Bharat Electronics is a Navratna defence PSU. The company is the dominant supplier of radar, communication, and electronic warfare equipment to the Indian armed forces.

It has a diversified product line, including non-defence products, software, and electronic manufacturing services.

It makes critical components of missiles, radars, aircraft sensors, sonars, electronic warfare systems, and more. When it comes to India's critical defence needs, there no replacing Bharat Electronics.

The company's fundamentals are rock solid too. As per the company's annual report, in the financial year 2023, Bharat Electronics reported a 14.8% YoY increase in revenue. Its operating profit rose 19.1% YoY, largely due to the robust revenue growth.

It registered a growth of 27.7% YoY in net profit. The company's net profit has grown at a CAGR of 16% in the last five years.

This has translated into high return ratios. Its return on equity stands at 22.1% while its return on capital employed stands at 29.5%.

Export revenue for FY23 was US$ 48 m or Rs 3.9 bn. The company is working on the potential of exporting Akash to friendly countries.

Bharat Electronics is a debt free company. It plans to spend around Rs 7-8 bn in capex this year to upgrade existing facilities and build new ones.

With its industry leading position, proven track record and a huge tailwind in the form of the government's defence indigenisation push, Bharat Electronics has a very bright future ahead of it.

#2 LIC

Life Insurance Corporation (LIC) is an Indian statutory insurance and investment corporation. It is under the ownership of government of India.

It's the largest insurance firm in India. LIC functions with 2,048 branch offices, 113 divisional offices, 8 zonal offices, 1,381 satellite offices, and a corporate office.

After the disappointing phase after its IPO listing, the stock has been making a comeback recently. This has been triggered by recent changes in the fundamentals of the company.

If the company can keep its costs in check and steadily grow its profits over the long term, the company shouldn't have any difficulty in getting into the Nifty.

Read more about why LIC's share price is rising.

#3 Godrej Consumer Products

Godrej Consumer Products is one of India's leading home-grown household and personal care company. It has presence in regions like Indonesia, Africa, Latin America, UK, among others. Its domestic operations contribute 53% to the top-line.

The company is driven by a 3x3 strategy which focuses on three business categories (personal care, hair care, and home care) across three geographies (Asia, Africa, and Latin America).

It's the market leader in hair colours, household insecticides and liquid detergents, while, in soaps segment it is the second largest player in India.

The company has struggled to grow its net profit over the last few years due to the unprecedented commodity price inflation.

However, it has retained its market share and competitive position in its categories and has not had much of a problem growing its revenue.

Commodity inflation is not in the company's control and the severe margin pressure has resulted in underperformance of the stock.

But all that is likely to change now as commodity prices have begun to fall. Once the company's profit growth gets back on track, its share price will follow.

It's a debt free company with strong cash flows and a good management. In the long run, the company has a huge runway ahead of it. As long as it doesn't commit a blunder, it could be in a position to enter the Nifty one day.

#4 (A Profitable) Paytm

There is no doubt that Paytm has immense potential in the long term. But that is also it's problem. It needs to survive to get to the long term.

Equitymaster's co-head of research, Tanushree Banerjee, like to say, 'To finish first, you must first finish'.

This is particularly true in the case of Paytm. The company, ever since its founding, has never been profitable. It needs to change that if it is to be taken seriously as a potential Nifty contender.

The good news is that its revenue growth trajectory is on track and its losses are narrowing.

However, its bottom line needs to turn positive in FY25 and grow strongly from there. If the company manages that, there is a strong chance that its marketcap may grow fast enough to justify a place in the Nifty a few years down the line.

If it doesn't achieve this...the company's future will turn very dark, very fast.

#5 Tata Power

Tata Power can be best described as a 50-50 pick for a future Nifty contender.

It certainly has many things going for it - a clear management direction, a focus on costs and profitability, as well as a huge clean energy megatrend.

But all that's in the future. The company's own renewable energy plan is for 2030. So why is this stock on the list today?

Well, you see dear reader, the market has only recently started to believe in the company's long-term strategy...and with good reason. It's very rare for a conventional power company to make a successful transition to a renewable energy company.

There could be many set backs along the way. And even if it succeeds, how profitable will it be in 2030? Who can tell? Then there is the question of the huge debt on the balance sheet.

Well, the good news is that the company is taking care of all these challenges simultaneously and is doing it competently.

The stock market's nature is to price in the future before it happens. If the company succeeds in its plans, the stock will be re-rated upwards long before 2030.

No one can say when exactly this will happen but the recent stock price performance has given confidence to the bulls.

As long as Tata Power stays on track, it has a strong change to become India's pre-eminent power producer...and a serious Nifty contender.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...