The Echo-nomist

Everyone says the same thing, that the best way to do well in the market is by picking winners: companies with strong fundamentals, market dominance, and steady growth. But is it possible that the companies that have been discarded represent the real market opportunities? 

NIFTY 50 is probably India’s most popular index and represents the weighted-average of 50 of the largest companies listed on the National Stock Exchange (NSE) by market capitalization. Since the market cap of companies keeps changing, the index is reconstituted every six months. Based on what stocks fulfill the eligibility criteria, they might include/eliminate stocks from the index. 

When a stock is removed from the NIFTY 50, it’s often seen as a red flag. Investors assume the company has lost its edge, and index funds tracking the NIFTY 50 are forced to sell, driving the stock price down further. But what if this reaction is exaggerated? 

I wanted to test this theory so I combined a list of all the companies that have been removed from the NIFTY 50 since 2014. Because of my hypothesis, I only selected companies that have been removed due to inadequate market capitalization and not mergers, demergers, delisting etc. This gave me a list of 25 companies. I compared their stock price on the day they were removed from NIFTY 50 and their stock price on 19-03-2025. For the same period I also noted the price of NIFTY 50. Here’s the table:

Okay so I have highlighted some companies in red. The common theme in those companies is that they didn’t perform in the market due to fundamental business issues- Vodafone Idea, IndiaBulls Housing Finance, Yes Bank and Zee Entertainment. 

13 out of these 25 companies outperformed the nifty 50. They gave higher returns than the nifty 50 between their removal and March 2025. If you exclude the 4 companies mentioned above, it means 61.9% of the remaining companies outperformed the index. That isn’t a small percentage.

Here are the three biggest winners – the ones with the highest returns: 

1. Tata Power: Removed in 2017, the stock has since surged +348.6%, crushing the NIFTY 50’s +133.2% gain over the same period.
2. Jindal Steel & Power (JSPL): After being removed in 2015, it initially stagnated but later soared +461.6%, far outpacing the NIFTY’s +181.8% growth.
3. Bharti Infratel: Despite its removal in 2020, the stock skyrocketed +275.2%, outperforming the market.

The takeaway? Most dropouts perform well—unless they’re suffering from deep-rooted structural issues.

But if they’re so good then why were they kicked out? I think there are a few reasons some of these stocks outperformed the Nifty 50 in the same period. 

Overselling & Market Overreaction: When a stock is removed from the NIFTY 50, index funds automatically sell it, often causing an artificial drop in price. Many long-term investors hesitate to buy, fearing further declines. However, once the selling pressure eases, these stocks often recover to their true fundamental value.

Business Cycles & Sectoral Recoveries: Many stocks removed from the index belong to cyclical industries like steel, power, and commodities. If they are dropped during an economic downturn, they often rally back as the cycle turns favorable. JSPL and Tata Power are prime examples.

Post-Index Restructuring & Turnarounds: Companies often use their index removal as a wake-up call, implementing aggressive cost-cutting, restructuring, or growth initiatives.

Being Free from Passive Investing Trends: Once a company is out of the NIFTY 50, it no longer faces constant scrutiny from index funds. This allows it to be judged purely on its financials and potential rather than just its market cap ranking.

So if you exclude stocks that are not performing due to fundamental business reasons, can you actually come up with a NIFTY dropout fund?? 

Maybe, who knows. I’m not an investment expert but maybe it can be a good experiment for my mock portfolio. When a stock is removed from the NIFTY 50, you buy it (make sure there are no issues like debt crises, corporate misgovernance, obsolete business models, etc.). Hold these investments for at least 5 years – you have to give these companies some time to turn things around. 

If I started doing this in 2015, 61.9% of the stocks would beat NIFTY 50. Of course I can say this in hindsight. The key to getting this right is correct judgement about whether a company is undergoing a temporary setback or a structural decline. Even if the company didn’t outperform nifty, they still gave positive returns (minus the 4 stocks we removed for fundamental business reasons).

Just because a stock has been kicked out of the nifty 50 doesn’t mean it’s no good.