Wealth Creation Study 2000-2005

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Information about Wealth Creation Study 2000-2005
Business & Mgmt

Published on March 10, 2014

Author: MotilalOswalltd

Source: slideshare.net

Description

The most special feature of MOSt Research is the Wealth Creation Report. It is work of the foremost value investor in India and the joint MD and promoter– Mr. Raamdeo Agrawal. An equity research stalwart, Mr. Agrawal analyses the most consistent, the fastest and the biggest value creators in the Indian equity universe every year. Though the study is done every year, the report is timeless in its use. The report is unveiled at a special annual function, where the best are felicitated. The Wealth Creation Report is available on request as soft copy or printed format.

10TH ANNUALWEALTHCREATION STUDY 2000-2005

OBJECTIVE Wealth Creation studies are attempts to study the past as a guide to the future and gain insights into How to Value a Business.

CONCEPT Wealth Creation is the process by which a company enhances the market value of the capital entrusted to it by its shareholders.

METHODOLOGY We have identified the top-100 Wealth Creators for the period 2000 2005 in the Indian stock market. These companies have the distinction of having added at least Rs1b to their market capitalization over this period of five years. Wealth Creation Study No. of Companies creating >1b net wealth 2000-05 383 1999-04 294 1998-03 83 1997-02 85 1996-01 71 1995-00 130 1994-99 102 1993-98 124 1992-97 45 1991-96 112

TOP 10 WEALTH CREATORS (2000 - 2005) RANK COMPANY NET WEALTH CREATED (RS B) APPRECIATION (X) 1 O N G C 1065.3 6.5 2 Indian Oil 365.5 3.5 3 Reliance Inds. 348.6 1.7 4 St Bk of India 239.9 3.3 5 S A I L 227.4 8.0 6 T I S C O 179.3 5.2 7 B H E L 157.2 6.1 8 ITC 150.8 1.8 9 ICICI Bank 140.9 1.5 10 H D F C 134.8 3.8 THE BIGGEST

TOP 10 WEALTH CREATORS (2000 - 2005) RANK COMPANY ADJ. PRICE CAGR (%) APPRECIATION (X) 1 Matrix Labs. 167.2 136 2 Aban Loyd Chiles 146.2 90 3 Guj. NRE Coke 140.2 80 4 Sterling Biotech 120.0 52 5 Jubilant Organ. 103.6 35 6 Pantaloon Retail 95.4 28 7 Amtek Auto 95.4 28 8 Sesa Goa 86.1 22 9 Hind.Zinc 80.8 19 10 Bharat Earth Movers 75.7 17 THE FASTEST

TOP 10 MOST CONSISTENT WEALTH CREATORS (1991 - 2005) RANK COMPANY APPEARED IN WC STUDY (X) PRICE CAGR WITH DIV. REINVEST (%) No of times (X) 1 Hero Honda Motor 10 40.8 120 2 Ranbaxy Labs. 10 34.7 65 3 Wipro 9 57.1 552 4 Dr Reddy's Labs. 9 43.5 156 5 H D F C 9 41.8 133 6 Cipla 9 39.6 106 7 Nicholas Piramal 8 33.7 59 8 ITC 8 29.5 37 9 GSK Pharma 8 21.6 15 10 Asian Paints 8 21.4 15

WEALTH CREATORS COMPARATIVE PERFORMANCE V/S BSE SENSEX (31.3.00 TO 31.3.05) (%)

WEALTH CREATORS COMPARATIVE PERFORMANCE V/S BSE SENSEX GROWTH : SENSEX v/s WEALTH CREATORS YEAR Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 BSE SENSEX 5,001 3,604 3,469 3,049 5,591 6,493 y-o-y performance (%) - (27.9) (3.7) (12.1) 83.4 16.1 Wealth Creators Index 100 86 102 113 262 319 y-o-y performance (%) - (13.7) 18.3 10.9 131.4 21.6 Sensex PE (x) 29.0 13.5 13.7 9.4 12.6 11.7 Wealth Creators PE (x) 13.2 9.7 10.6 6.8 12.1 11.2 5Year CAGR (%) Sensex Index 5.4 5Year Earnings CAGR (%) Sensex 26.3 5Year CAGR (%) Wealth Creators Index 26.1 5Year Earnings CAGR (%) Wealth Creators 30.0

WEALTH CREATORS: NATURE OF BUSINESS Industry Speed CAGR (%) No. of Cos. Contr. To Wealth Created Net Profit CAGR (%) Sales CAGR (%) Oil & Gas 17.1 11 30.3 22.9 14.5 Banks 32.6 15 15.8 16.5 8.6 Metals 34.6 10 12.6 - 19.4 Engineering 32.9 10 7.3 22.1 12.0 Auto 27.3 10 6.8 31.5 16.6 Petrochem 18.9 3 6.6 26.8 31.1 Pharma 21.2 8 4.8 30.8 18.3 Ultility 41.2 4 3.5 23.0 14.5 FMCG 13.6 4 3.4 21.1 12.4 Cement 26.3 5 3.0 26.1 10.0 Textiles 45.3 5 1.4 - 4.1 IT 0.7 1 0.2 45.4 50.7 Others 42.8 14 4.2 35.8 12.1 Total 22.2 100 100.0 30.0 15.4

WEALTH CREATORS CLASSIFICATION BY MARKET CAP – SPEED VS SIZE

WEALTH CREATORS: BUSINESS ACTIVITY WEALTH CREATION STUDY FOCUSED (%) DIVERSIFIED (%) 2000-05 97 3 1999-04 96 4 1998-03 98 2 1997-02 96 4 1996-01 100 0 1995-00 95 5 1994-99 96 4 1993-98 93 7

WEALTH CREATORS CLASSIFICATION BY PRODUCT ATTRIBUTE 2000-05 WEALTH CREATED (RS B) WEALTH CREATED (%) Brands 1,830 30.1 Commodity 3,981 65.6 Technology 261 4.3 Total 6,072 100.0

WEALTH CREATORS OWNERSHIP: STATE V/S PRIVATE WEALTH CREATORS: STATE OWNED V/S PRIVATELY OWNED 2000-2005 STATE-OWNED PRIVATE Number of Wealth Creators 30 70 5-year Earnings CAGR (%) 27 34 5-year Market Cap CAGR (%) 37 20 P/E at the beginning of study period (x) 6.0 24.2 P/E at the end of study period (x) 8.6 14.3 Wealth Created (%) 50.6 49.4

WEALTH CREATORS: NEW V/S OLD ECONOMY 2000-2005 OLD NEW Number of Wealth Creators 99 1 5-year Earnings CAGR (%) 29.7 45.4 5-year Market Cap CAGR (%) 29.7 0.7 P/E (x) at the beginning of study period 10.7 200.7 P/E (x) at the end of study period 10.7 32.0 % Wealth Created 99.8 0.2

WEALTH CREATORS VALUATIONS

WEALTH CREATORS VALUATIONS 2000 2005 Sensex Wealth Creators Sensex Wealth Creators Median Price/Book Value 1.93 0.82 3.24 3.09 Median Price/Sales 1.86 0.50 2.54 1.90 Median Price/Earnings 12.71 6.84 15.36 14.66

WEALTH DESTROYERS Industry No. of Cos. Net Wealth Created Share in Wealth Destroyed IT 42 -1,466 56.7 Media 8 -404 15.6 Telecom 10 -335 13.0 FMCG 6 -294 11.4 Consumer Durables 5 -14 0.6 Finance 5 -8 0.3 Others 24 -64 2.5 Total 100 -2,586 100.0 WEALTH DESTROYERS CLASSIFICATION BY INDUSTRY (2000-2005) (RS B)

WEALTH DESTROYERS No Company Price CAGR (%) No of Times Price Adjusted Net Wealth Created PE FY00 (x) Profit CAGR 1 Wipro Ltd -18 0.4 -796.1 507.0 43.2 2 Zee Telefilms Ltd -33 0.1 -364.2 507.7 14.6 3 Hindustan Lever Ltd -12 0.5 -247.8 41.0 -1.8 4 Himachal Futuristic Comm. Ltd -60 0.01 -128.5 141.1 -214.6 5 Satyam Computer Services Ltd -14 0.5 -126.8 191.6 42.0 6 Videsh Sanchar Nigam Ltd -21 0.3 -121.5 20.8 -2.1 7 GTL Ltd -46 0.04 -93.9 41.9 -14.3 8 Mahanagar Telephone Nigam Ltd -13 0.5 -75.7 13.6 -2.7 9 NIIT Ltd -38 0.1 -70.1 35.4 -41.0 10 SSI Ltd -62 0.01 -62.5 99.8 -194.7 TOP 10 WEALTH DESTROYERS (2000-2005) (RS B)

“There is absolutely no substitute for paying right price. In the Bible, it says that love covers a multitude of sins. Well, in the investing field, price covers a multitude of mistakes. For human beings, there is no substitute for love. For investing there is no substitute for paying right price – absolutely none.” (Van Dan Berg, OID, April 2004)

MARKET OUTLOOK

MARKET OUTLOOK To form our opinion on the markets, we have looked at the following parameters: 1. Corporate earnings 2. Interest rates 3. Valuations

INDIA: CORPORATE PROFIT TO GDP (%) EXPECT SUSTAINABLE EARNINGS GROWTH OF 14%

INDIA: 10-YEAR G-SEC YIELD (%) MARKET OUTLOOK

EARNINGS YIELD/G-SEC YIELD DESPITE THE RUN-UP, INDIAN EQUITIES ARE STILL REASONABLY VALUED Median 0.48

SENSEX & P/E DESPITE THE RUN-UP, INDIAN EQUITIES ARE STILL REASONABLY VALUED Median PE 15.8

Theme 2006: CONSISTENT WEALTH CREATORS- THE CORNERSTONE OF A SOLID PORTFOLIO

15 YEARS – A DEFINING PERIOD 1991 2005 Growth (X) 14 Year CAGR (%) GDP (Rs B) 5,110 28,305 6 13 Corporate Profits (Rs B) 74 1,404 19 23 Corporate Profits/ GDP (%) 1.5 5.0 SENSEX 1,168 6,493 6 13 Market Cap (Rs B) 852 17,047 20 24 Market Cap/ GDP (%) 16.7 60.2 Risk Free Interest Rate (%) 10.8 6.7

TOP 10 CONSISTENT WEALTH CREATORS Company Industry No of Times appeared in WC study Price CAGR (%) with dividend reinvestment Net Wealth Created (RSB) Hero Honda Motor Automobiles 10 40.8 10,829 Ranbaxy Labs. Pharmaceuticals 10 34.7 17,689 Wipro Technology 9 57.1 46,178 Dr Reddy's Labs. Pharmaceuticals 9 43.5 4,175 H D F C Bank 9 41.8 17,241 Cipla Pharmaceuticals 9 39.6 7,521 Nicholas Piramal Pharmaceuticals 8 33.7 3,944 ITC FMCG 8 29.5 31,507 GSK Pharma Pharmaceuticals 8 21.6 4,704 Asian Paints FMCG 8 21.4 3,420

TOP 10 CONSISTENT WEALTH CREATORS Characteristics: • 9 out of top 10 companies are consumer companies. • 5 out of 10 are pharmaceutical companies • All these businesses are non cyclical in character. • All the companies are leaders in their respective business segments. • The companies are highly profitable in terms of return on networth.

ABSOLUTE PERFORMANCE (5-YEAR ROLLING) OF TOP 10 CONSISTENT WEALTH CREATORS   Company Negative  Returns Returns from  0-25% Returns from  25-50% Returns  >50% 1 Hero Honda 0 4 3 3 2 Ranbaxy 1 5 3 1 3 Wipro 1 2 0 7 4 DR REDDYS 1 2 5 2 5 HDFC 1 6 2 1 6 CIPLA 0 3 4 3 7 Nicholas Piramal 2 7 0 1 8 ITC 2 5 3 0 9 GSK Pharma 2 4 3 0 10 Asian Paints 0 9 1 0   Total 10 47 24 18 Average absolute return 29%.

The Glut Hero Honda: Rolling return considering dividend reinvestment Year &  Month Invested Sum (RS lakhs) PE Earnings  Growth RoE ROLLING GROWTH 1 YEAR 5 YEAR 10 YEAR 14 YEAR 199103 1 7   79         199203 4 28 -4 47 269       199303 2 12 3 35 -57       199403 5 35 -1 27 193       199503 4 23 26 28 -15       199603 5 22 35 31 30 39     199703 5 12 91 43 5 8     199803 16 23 52 44 193 58     199903 32 29 58 48 101 47     200003 36 20 58 51 12 55     200103 26 11 29 46 -27 38 39   200203 63 14 88 70 140 63 33   200303 39 6 25 75 -38 19 37   200403 104 13 25 65 170 27 36   200503 120 14 11 62 16 28 41 41 Mean 18.0   50.1         Median 14.4   46.6        

The Glut Ranbaxy: Rolling return considering dividend reinvestment Year &  Month Invested Sum  (RS in lakhs) PE Earnings  Growth RoE ROLLING GROWTH 1 YEAR 5 YEAR 10 YEAR 14 YEAR 199103 1 11   27         199203 6 46 36 29 491       199303 4 20 115 38 -34       199403 12 37 80 39 211       199503 11 25 74 22 -6       199603 13 24 22 19 13 67     199703 12 20 14 16 -10 15     199803 13 20 21 16 12 27     199812 10 20 -16 12 -31 -4     199912 35 54 26 14 247 27     200012 26 43 -7 12 -26 16 40   200112 27 32 38 14 4 19 17   200212 37 18 147 36 39 25 26   200312 70 26 27 38 88 47 20   200412 81 44 -34 22 15 18 22 38 Mean 29.3   23.4         Median 24.8   21.9        

ABSOLUTE PERFORMANCE OF TOP 10 CONSISTENT WEALTH CREATORS (5-YEAR ROLLING)     Absolute Performance       Negative 0-25% 25-50% >50% Grand Total Deviati on  from  median  P/E < -50% 0 1 3 9 13  -25 to -50% 0 2 6 2 10 0 to -25% 0 10 5 3 18 0 to 25% 1 10 5 2 18 25 to 50% 2 9 0 1 12 > 50% 7 15 5 1 28   Grand Total 10 47 24 18 99 100% chance of positive return if bought below median. Average absolute return 45.7% if bought below median.

IF YOU WANT, on a 5 Year basis: No chance of absolute loss Out performance to SENSEX of 35% Absolute performance of 45.7% The ONLY thing you need to do is: Buy the Consistent Wealth Creators below the  median valuation.

WILL HISTORY REPEAT ITSELF??? Company TTM PE Median PE 1 3M India 31.5 71.3 2 Aventis Pharma 24.4 39.0 3 Merck 12.0 18.6 4 Nestle India 29.3 38.3 5 GSK Pharma 31.1 40.3 6 Castrol India 21.0 25.7 7 Monsanto India 18.0 20.9 8 Pfizer 34.1 38.4 9 Britannia Inds. 24.8 27.2 10 Hind. Lever 33.3 36.4 11 Hindalco Inds. 12.4 13.4 12 Tata Elxsi 22.0 21.9 13 Glaxo C H L 23.3 22.9 14 M I C O 24.0 22.8 15 Wipro 37.7 35.1

CONCLUSION • Fad investing in 2000 at exorbitant prices was the single biggest source of wealth destruction. • Commodity companies have gained further importance as a source of wealth creation. • At parity, Earnings/Bond Yield is far above the historical median of about 0.5, signifying limited downside and a potential upside in the markets. • Consistent wealth creators can create significant wealth at respectable pace, with limited risk to the capital, if purchased below long-term average valuations

Thank you

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