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Wealth Creation Study 2001-2006

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Information about Wealth Creation Study 2001-2006

Published on March 11, 2014

Author: MotilalOswalltd

Source: slideshare.net

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11TH ANNUALWEALTHCREATION STUDY 2001-2006

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

Methodology Wealth Creator = Company creating >1b net wealth Wealth Creation study Companies >1b net wealth 2001-06 628 2000-05 383 1999-04 294 1998-03 83 1997-02 85 1996-01 71 1995-00 130 Minimum Wealth Created by a company among top 100 Rs32.5B

The Biggest RANK COMPANY NET WEALTH CREATED (RS B) APPRECIATION (X) 1 O N G C 1678 9.9 2 Reliance Inds. 1078 2.5 3 Indian Oil 555 5.4 4 Infosys Tech. 536 2.9 5 ITC 528 3.6 6 B H E L 515 15.8 7 Wipro 478 2.5 8 St Bk of India 404 4.8 9 S A I L 321 14.9 10 Tata Motors 320 14.3

RANK COMPANY ADJ. PRICE CAGR (%) APPRECIATION (X) M. Cap 2001 (Rs B) 1 Matrix Labs. 183.0 181.7 0.06 2 Kirl. Brothers 170.0 143.4 0.29 3 Pantaloon Retail 169.9 143.2 0.20 4 Aban Offshore 169.0 140.7 0.25 5 Natl. Mineral 154.6 107.1 2.72 6 Unitech 142.6 84.0 0.41 7 Bajaj Hindustan 138.5 77.2 0.57 8 B E M L 135.6 72.6 0.75 9 Hind. Const. 126.4 59.5 0.58 10 Financial Tech. 125.0 57.6 3.14 The Fastest

The Most Consistent RANK COMPANY APPEARED IN WC STUDY (X) PRICE CAGR WITH DIV. REINVEST (%) 1 Hero Honda Motors 10 42.3 2 Ranbaxy Lab. 10 30.9 3 Wipro 9 57.7 4 Dr Reddys Lab. 9 46.3 5 Cipla 9 45.5 6 H D F C 9 44.4 7 Satyam Computers 8 68.2 8 Infosys Tech. 8 53.4 9 ITC Ltd 8 34.1 10 Nicholas Piramal 8 32.6

Comparative Performance V/s BSE Sensex (31.3.01 To 31.3.06)

Wealth Creators V/s BSE Sensex Growth : Sensex V/S Wealth Creators YEAR Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 5 Year CAGR (%) BSE SENSEX 3604 3469 3049 5591 6493 11280 25.6 y-o-y perf. (%)  (27.9) (3.7) (12.1) 83.4  16.1  73.7  Wealth Creators Index 100 115 111 227 274 471 36.3 y-o-y performance (%)   15.1  (3.3) 104.0  21.0  71.6  Sensex EPS 172 201 272 348 450 523 24.9 Sensex PE 20.9 17.3 11.2 16.1 14.4 21.6 Wealth Creators PE 11.2 11.9 8.0 12.9 12.3 19.0

Wealth Creation in Market Particulars Rs tn Market Capitalisation 2001 5.6 Market Capitalisation 2006 30.3 Difference 24.7 TOP 100 Wealth Creators Market Capitalisation 2001 3.9 Market Capitalisation 2006 18.3 Wealth Created 14.3 2006 addition over 2001 TOP 100 Wealth Creators 14.3 528 Wealth creators 4.4 Balance companies and new listings 6 Total 24.7

Industry Classification Industry Speed CAGR (%) No. of Cos. Contr. To Wealth Created (%) Contr. To Net Profit (%) Oil & Gas 46.5 8 19.0 23.5 Banks 46.7 15 12.2 15.3 Metals 59.2 9 11.5 16.2 Engineering 66.1 14 11.0 5.0 IT 23.6 5 9.7 6.6 Petrochem 22.5 2 7.9 10.6 Auto 64.6 8 7.7 5.5 Pharma 31.6 11 5.2 3.1 Cement 47.6 3 2.8 1.9 Sugar 121.3 2 0.8 0.4

Industries With Little Representation Industry No of Cos ROCE (%) PAT (Rs B) PE P/S P/B Cos in Top 100 Chemicals 48 14.5 9.8 15.3 1.2 3.2 Fertilizers 13 15.1 13.8 9.2 0.5 1.5 1 Paper 15 10.7 3.8 11.0 0.9 1.3 Tyres 8 9.6 2.2 23.5 0.5 2.0 Media 26 8.1 2.9 55.6 8.9 3.7 1 Hotels 18 15.6 6.5 30.0 5.7 4.7 1 Agrochemicals 11 14.9 4.1 24.4 2.2 3.4 Chlor-Alkali 5 22.5 2.7 5.9 0.8 1.5

Classification by Size MARKET CAPITALIZATION MEAN SIZE NO. OF COS MEAN SPEED (%) % Wealth Created >= 45 132.5 23 27 51 25 < 45 31.3 10 52 14 12.5 < 25 17.6 17 48 12 5 < 12.5 8.2 21 60 11 2.5 < 5 3.4 10 94 6 < 2.5 0.9 19 118 6 All Companies 38.8 100 36.4 100

Large Unpopular Cos. Of 2001 Company Mkt Cap2006 (Rs B) Mkt Cap 2001 (Rs B) Net Wealth Created (Rs B) Price CAGR (%) P/S 2001 P/B 2001 B H E L 550.0 34.8 515.2 73.7 0.6 0.9 S A I L 344.1 23.1 320.9 71.6 0.2 0.5 Tata Motors 357.1 16.6 320.2 70.3 0.3 0.5 L & T 334.2 55.0 298.7 61.5 0.7 1.4 Bajaj Auto 277.9 26.1 251.9 60.5 0.9 1.0 M & M 151.1 13.3 134.2 59.9 0.4 0.6 O N G C 1867.3 189.0 1678.2 58.1 0.8 0.6 Neyveli Lignite 125.9 15.5 110.5 54.2 0.6 0.3

Business Activity Wealth Creation Study Focused Diversified 2001-06 97 3 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 1992-97 98 2

Product Attribute 2001-06 No. of Companies Wealth Created (RS B) Wealth Created (%) Brands 29 3,065 21.4 Commodity 48 8,084 56.5 Technology 23 3,153 22.0 Total 100 14,303 100.0

Business Dominance PARTICULARS Monopolistic / Dominant Others Total NO OF COMPANIES 62 38 100 NWC (Rs B) 12,108 2,195 14,303 % Net Wealth Created 85 15 100 SPEED (%) 36.0 38.3 36.3

Classification By Capital Allocation Company Name Change in Mkt Cap (Rs B) Change in CE (Rs B) ROCE 06 (%) ROCE 01(%) Chg Mkt cap / Chg CE S A I L 321 -18.5 36.5 5.5 - B H E L 515 30.0 33.4 7.0 17.2 Tata Motors 340 21.9 27.8 -0.1 15.5 ITC 532 47.9 35.6 39.3 11.1 Wipro 486 45.5 36.2 40.3 10.7 Infosys Tech. 548 55.1 39.7 50.5 10.0 O N G C 1678 318.9 32.8 27.5 5.3 Indian Oil 555 191.0 13.9 12.7 2.9 St Bk of India 404 141.8 15.9 11.9 2.8 Reliance Inds. 698 448.9 17.3 18.1 1.6

Classification By Earnings Growth Earnings Growth No. of Companies Wealth Created (%) CAGR in MCAP (%) 0-10 18 7.8 15.3 10-20 16 16.1 37.2 20-30 24 38.6 35.5 30-40 12 15.5 42.5 >40 30 22.0 72.8 Total 100 100 36.4

Classification By Age Group NO. OF YEARS NO. OF COS. WEALTH CREATED (Rs B) % WEALTH CREATED 0-20 17 3135 21.9 21-40 25 4031 28.2 41-50 18 2380 16.6 51-70 22 2949 20.6 >70 18 1807 12.6 Total 100 14303 100.0 Median age is 45 years

Ownership: State V/S Private WEALTH CREATORS: STATE OWNED V/S PRIVATELY OWNED 2001-2006 STATE-OWNED PRIVATE Number of Wealth Creators 26 74 5-year Earnings CAGR (%) 20 26 5-year Market Cap CAGR (%) 47 32 P/E at the beginning (x) 4.8 18.3 P/E at the end of study period (x) 13.6 23.5 Wealth Created (%) 35.9 64.1

Export Performance 0 5 10 15 20 25 30 35 40 45 50 2002 2003 2004 2005 2006 8 9 10 11 12 13 14 15 16 Sales Growth (%) Export Growth (%) Export % to Sales 49 Companies have <15% export T/O 36 Companies have >15% export T/O

Valuations 2001 Price to Book (x) No of Cos % Wealth Created MCAP CAGR % <1 51 50.2 56.6 1-2 21 13.0 33.4 >2 28 36.8 25.7 P/E (x) No of Cos % Wealth Created MCAP CAGR % <5 37 35.7 56.3 5-10 24 17.7 39.9 >10 39 46.7 28.3 P/Sales (x) No of Cos % Wealth Created MCAP CAGR % < 0.5 40 27.6 52.5 0.5-1.0 21 31.8 57.0 >1 39 40.6 25.2

Valuations 2001 Payout (%) No of Cos % Wealth Created MCAP CAGR % >50 13 7.9 18.8 25-50 40 44.3 46.7 0-25 47 47.9 35.0 Payback Ratio (x) No of Cos % Wealth Created MCAP CAGR % 0.0-0.5 41 44.3 59.0 0.5-1.0 21 16.1 45.6 1.0-2.0 22 22.2 30.5 >2 16 17.3 20.1 Cash Flow/ Price(x) No of Cos % Wealth Created MCAP CAGR % <5 33 40 54 5-10 13 22 30 >10 39 38 28

Wealth Destroyers Co_Name Market Cap 2006 Rs B Market Cap 2001 Rs B Net Wealth Destroyed Rs B Loss in Mkt. Cap (%) Terms of Trade Pentamedia 1.1 42.6 36.6 94 194 NIIT 5.7 27.7 21.9 59 158 Sterlite Optical 5.7 20.3 14.9 73 103 Morepen Labs. 1.5 8.9 8.8 93 208 Silverline Tech 1.2 6.2 8.0 94 384 Only 5 companies have destroyed wealth of over Rs5b. Total wealth destroyed by top 50 destroyers is only Rs124b. Hence, there is no serious wealth destruction over the last 5 years

“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)

THEME 2007: Importance of ‘Terms of Trade’ in Wealth Creation

Why ‘Terms of Trade’ 66% of wealth creators have earnings growth of over 20% 76 of the 85 non-banking wealth-creating companies have positive operating cash flow Operating cash flow = cash profit + working capital change It is not only important to make profit but also to realize it in the form of cash.

Terms Of Trade Business entity primarily deals with two outside forces – (1) suppliers, dealings with whom reflect in creditors; and (2) customers, dealings with whom reflect in debtors FAVORABLE TERMS OF TRADE ADVERSE TERMS OF TRADE

Companies categorized into four situations Classification According to Terms of Trade Creditors Cycle Debtors Cycle Long Short Long Bad, but manageable Great Short Worst situation Good

Determinants of Terms of Trade Instances of low debtors: Consumer businesses Commodities quoted in global markets on spot basis Monopolistic suppliers of goods and services Goods and services sold on prepaid basis Goods in short supply

Effect on Companies Benefits of favorable terms Reduction in capital intensity  Strong free cash flows Adverse Terms of Trade  Banks control the destiny

Wealth Creators Enjoy Favorable ‘Terms of Trade’ No of companies Wealth Created (Rs B) % wealth created Speed CAGR (%) Favourable 70 10123 81 33.2 Adverse 15 2437 19 29.3 Total 85 12560 100 35.2

Wealth Destroyers Have Adverse ‘Terms of Trade’ No of Cos Wealth Destroyed Rs B % Wealth Destroyed Speed CAGR (%) Adverse 37 -105 84.8 -22.6 Favourable 13 -19 15.2 -18.9 Total 50 -124 100.0 -21.9

Terms of Trade Are Usually Stable BSE 500 Companies No of companies % of companies Original Terms Final Terms Final Terms Favorable Adverse Total Favorable Adverse Total Adverse 62 124 186 14 29 43 Favorable 205 38 243 48 9 57 Total 267 162 429 62 38 100 77% of BSE 500 companies had unchanged terms of trade

Wealth Creators Enjoy Favorable ‘Terms of Trade’ Co_Name Terms of Trade 01 (%) Terms of trade 06 (%) Price CAGR (%) ROCE 01 (%) ROCE 06 (%) Matrix Labs. 63 70 183 23 22 Pantaloon Retail 59 10 170 6 11 Unitech 13 4 143 9 16 Bajaj Hindustan 9 32 139 9 17 B E M L 66 65 136 5 32 Hind.Construct. 2 1 126 21 9 Areva T&D 100 79 121 3 28 Bharat Forge 92 46 94 17 17 Bharat Electronic 42 45 93 34 43 Siemens 57 66 87 31 47

Wealth Creators with Adverse ‘Terms of Trade’ Co_Name Terms of Trade 01 (%) Terms of trade 06 (%) Price CAGR (%) ROCE 01 (%) ROCE 06 (%) Wockhardt 113 110 32 25 18 Ranbaxy Labs. 114 108 19 14 7 Sesa Goa 122 155 118 7 74 Wipro 123 114 20 40 36 Glenmark Pharma 134 222 92 14 10 Sun Pharma. 157 158 45 33 16 Satyam Computer 218 266 29 55 33 Cummins India 250 133 33 25 31 Infosys Tech. 258 172 24 51 40 Tata Chemicals 325 120 47 12 15 HCL Tech. 409 126 12 27 26

Wealth Creators With A Positive Shift Co_Name Terms of Trade 01 (%) Terms of trade 06 (%) Price CAGR (%) ROCE 01 (%) ROCE 06 (%) Thermax 105 44 93 -1 41 Crompton Greaves 115 82 113 2 29 Asian Paints 115 59 31 28 44 Jindal Steel 118 36 83 19 18 Glaxosmithkline 118 31 28 28 71 Dabur India 122 25 32 21 47 Kirl. Brothers 126 84 170 14 57 B H E L 130 81 74 7 33 Financial Tech. 131 4 125 13 41 Engineers India 136 61 54 28 21

Wealth Creators - Shift From Favorable To Adverse Co_Name Terms of Trade 01 (%) Terms of trade 06 (%) Price CAGR (%) ROCE 01(%) ROCE 06 (%) Tata Power Co. 64 112 42 12 11 Cipla 90 138 27 33 30 Zee Telefilms 89 156 14 4 4 Hind.Zinc 31 166 90 24 57 Natl. Mineral 93 205 155 27 69

‘Terms of trade’ are broadly stable. Favorable ‘terms of trade’ is one of the enablers of high RoCE and should be looked for while searching for winners. Conclusions From Terms of Trade

Looking Forward Company Book Value Price Price / Book Value Terms of Trade (%) HPCL 275 270 1.0 20 JSW Steel 320 379 1.2 28 Usha Martin 150 174 1.2 56 Shipping Corp. 170 167 1.0 31

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 (%)

India: 10-year G-sec Yield (%)

Earnings Yield/G-sec Yield Despite the run-up, Indian equities are still reasonably valued

Sensex & P/E Despite the run-up, Indian equities are still reasonably valued

Conclusions Only corporate earnings growth is not sufficient for markets to rise to higher levels. Large unpopular companies have been the source of bulk of wealth creation. Favorable 'terms of trade' are an important characteristic of a wealth creating company. 'Terms of trade' are broadly stable and don’t change often. But when 'terms of trade' change from adverse to favorable, the impact on speed of wealth creation can be significant.

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