Wealth Creation Study 2008-2013

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Information about Wealth Creation Study 2008-2013
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Published on March 11, 2014

Author: MotilalOswalltd

Source: slideshare.net

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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

Uncommon Profits By Raamdeo Agrawal 13 December 2013 18th Annual Wealth Creation Study 2008-2013 www.motilaloswal.com18th Annual Wealth Creation Study

1 Discussion Points  18th Wealth Creation Study Findings  Theme: Uncommon Profits Emergence & Endurance  Market Outlook  Conclusions

2 Wealth Creation 2008-13 Study Findings

3 Concept of Wealth Creation The process by which a company enhances market value of the capital entrusted to it by its shareholders Net Wealth Created Change in Market Cap over the study period (2008-13), adjusted for corporate actions like dilutions Study Methodology

4 Biggest Wealth Creators Top 100 Wealth Creators subject to the condition that stock performance beats the benchmark (Sensex) Fastest Wealth Creators The top 100 wealth creators are sorted by fastest rise in their adjusted stock price Most Consistent Wealth Creators Based on no. of times a company appeared in the last 10 studies Study Methodology (contd)

5 Rank, Company NWC (Rs cr) Price CAGR 1. TCS 228,376 31 2. ITC 163,506 25 3. HDFC Bank 87,218 19 4. Infosys 83,930 15 5. Sun Pharma 59,244 27 Rank, Company NWC (Rs cr) Price CAGR 6. ONGC 56,665 5 7. HDFC 55,875 12 8. Tata Motors 51,827 17 9. Hind Unilever 51,552 15 10. Wipro 46,865 11 Top 10 Biggest Wealth Creators TCS has swapped places with ITC which was No.1 last year Total wealth created during 2008-13: Rs18+ lakh crores IT, Financials, Consumer dominate top 10 Biggest Wealth Creators

6 Rank, Company Mult. (x) Price CAGR 1. TTK Prestige 28 95 2. Eicher Motors 10 59 3. Page Industries 8 51 4. Wockhardt 8 50 5. Grasim Inds 8 50 Rank, Company Mult. (x) Price CAGR 6. GRUH Finance 7 47 7. GSK Consumer 7 47 8. Supreme Inds 6 45 9. Lupin 6 45 10. Godrej Cons. 6 44 Top 10 Fastest Wealth Creators TTK Prestige is the fastest Wealth Creator again. If only these 10 stocks were held as a portfolio in 2008, average price CAGR for the next 5 years would have been 53% (8x) compared to 4% CAGR of Sensex.

7 Rank, Company WCS (x) 04-13 CAGR 1. Asian Paints 10 36 2. Kotak Mahindra 10 36 3. Sun Pharma 10 33 4. Hindustan Zinc 10 32 5. ITC 10 27 Rank, Company WCS (x) 04-13 CAGR 6. Axis Bank 10 27 7. HDFC Bank 10 26 8. M & M 10 25 9. Bosch 10 23 10. H D F C 10 22 Most Consistent Wealth Creators Asian Paints is Most Consistent Wealth Creator Consistent Wealth Creators are invariably consistent Value Creators i.e. RoE above CoE threshold of 15%

8 Wealth Creators v/s Sensex Wealth Creators defy the commonly heard maxim in equity markets - "High return, high risk". In 2008, Wealth Creators' P/E is lower than benchmark (i.e. lower risk), and yet 2008-13 returns are higher. Mar-08 Mar-13 5-yr CAGR BSE Sensex 15,644 18,836 4 Wealthex – re-based 15,644 34,891 17 Sensex EPS (Rs) 833 1,190 7 Wealthex EPS (Rs) 1,099 2,313 16 Sensex PE (x) 19 16 Wealthex PE (x) 14 15

9 Wealth Creation by Industry Consumer and Technology have beaten the erstwhile two-time leader Financials in Wealth Creation. Technology sector is poised to emerge as India's largest Wealth Creating sector in the near future. Unlike Consumer sector, Tech valuations are reasonable relative to earnings growth and RoE Industry (No of cos.) WC (Rs cr) 2013 (%) 2008 (%) Cons & Retail (24) 445,578 24 5 Technology (7) 419,709 23 5 Financials (23) 360,480 20 13 Healthcare (14) 193,461 11 3 Auto (11) 167,856 9 3 Oil & Gas (5) 108,042 6 23 Industry (No of cos.) WC (Rs cr) 2013 (%) 2008 (%) Cement (5) 69,149 4 2 Metals (2) 33,469 2 17 Media (3) 15,608 1 1 Cap Goods(2) 12,954 1 10 Others (4) 14,989 1 18 Total 1,841,294 100 100

10 Wealth Creation by PSUs hit the floor Over the years, value has migrated from PSUs to private companies across sectors - Banking, Telecom, Oil & Gas, Metals & Mining, Utilities, Capital Goods etc. 28 30 26 18 25 16 22 24 20 11 49 51 36 25 35 27 30 27 20 9 1999- 2004 2000- 2005 2001- 2006 2002- 2007 2003- 2008 2004- 2009 2005- 2010 2006- 2011 2007- 2012 2008- 2013 No of PSUs % Wealth Created

11 Wealth Creation by base RoE 2008-13 saw near perfect correlation between RoE and Price CAGR. Sustained Value Creation (i.e. RoE > Cost of Equity) is the basis of sustained wealth creation. 36 11 15 12 15 14 17 12 18 15 21 24 <15 15-20 20-25 25-30 30-35 >35 PAT CAGR (%) Price CAGR (%) 2008 RoE Range 2008-13 Average PAT CAGR: 16% 2008-13 Average Price CAGR: 17%

12 Wealth Creation & Valuation Metrics In 2008-13, highest P/E stocks have delivered highest returns. During tough times, enduring quality stocks get expensive and yet deliver superior returns. P/E in 2008 No. of Cos. % Wealth Created Price CAGR % PAT CAGR % <10 22 14 16 14 10-15 21 15 11 11 15-20 23 32 22 19 20-25 15 17 23 20 25-30 11 18 16 25 >30 8 5 24 26 Total 100 100 17 16

13 Wealth Creation & Valuation Metrics (contd) As with P/E, highest P/B band delivered highest return and also accounted for highest share of Wealth Created P/B (x) No. of Cos. % Wealth Created Price CAGR % PAT CAGR % <1 3 1 22 30 1-2 18 11 10 16 2-3 20 16 13 11 3-4 19 10 21 20 4-5 8 11 23 25 5-6 8 15 16 16 >6 24 37 25 19 Total 100 100 17 16

14 Payback ratio (Mkt Cap / 5-years forward PAT) of less than 1x in 2008 did ensure superior wealth creation. This ratio remains the most reliable indicator of superior Wealth Creation across market cycles. Payback Ratio (x) No. of Cos. % Wealth Created Price CAGR % PAT CAGR % <1 24 12 24 22 1-2 39 41 16 14 2-3 25 36 18 17 >3 12 11 16 15 Total 100 100 17 16 Wealth Creation & Valuation Metrics (contd)

15 Wealth Destruction Wealth Destroyed was almost equal to Wealth Created. Reliance factions, PSUs accounted for 1/3rd of Wealth Destroyed. Company Wealth Destroyed Price Rs crores % Share CAGR (%) Reliance Industries 112,788 7 -7 Reliance Communication 92,070 5 -36 MMTC 89,143 5 -29 NMDC 82,209 5 -17 DLF 70,292 4 -18 Reliance Power 61,923 4 -21 B H E L 57,362 3 -16 S A I L 50,556 3 -20 Bharti Airtel 46,025 3 -7 NTPC 45,350 3 -6 Total of Above 70,720 41 Total Wealth Destroyed 1,714,037 100

16 Rs crores

Theme Study Uncommon Profits www.motilaloswal.com18th Annual Wealth Creation Study

18 Theme Discussion Points  Uncommon Profits: What & why  Emergence & Endurance: What & why  Framework to identify Emerging Value Creators  Methodology to shortlist Emerging Value Creators  Why Enduring Value Creators?  Methodology to shortlist Enduring Value Creators

www.motilaloswal.com18th Annual Wealth Creation Study Uncommon Profits in companies = Uncommon Wealth Creation in markets A simple mantra for Wealth Creation …

www.motilaloswal.com18th Annual Wealth Creation Study Uncommon Wealth Creation #1 0 50 100 150 200 250 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Ambuja Cement Sensex - Rebased Ambuja up 420x in 25 years; 27% CAGR Sensex up 45x; 16% CAGR

www.motilaloswal.com18th Annual Wealth Creation Study Uncommon Wealth Creation #2 0 150 300 450 600 750 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 HDFC Bank Sensex - Re-based HDFC Bank up 64x in 15 years; 32% CAGR Sensex up 7x; 14% CAGR

www.motilaloswal.com18th Annual Wealth Creation Study “Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over forty years and you hold it for that forty years, you’re not going to make much different than 6% return – even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with one hell of a result.” – Charlie Munger, VC, Berkshire Hathaway What leads to Uncommon Wealth Creation?

www.motilaloswal.com18th Annual Wealth Creation Study Uncommon Profits in companies = Uncommon Wealth Creation in markets In simple words …

24 • Uncommon Profitability (%) = RoE > Cost of Equity • Uncommon Profit (abs) = (RoE – CoE) x Equity employed where RoE = Return on Equity Cost of equity = Opportunity cost of equity or Risk free rate + Equity risk premium • In Indian context, Cost of Equity = 15% • Consistent Uncommon Profit earning companies are Value Creators What is Uncommon Profit?

25 What is Emergence & Endurance? • Emergence is first entry of a company into the Uncommon Profit zone i.e. RoE > 15% • The next challenge is Endurance i.e. sustaining RoE > 15% for several years ahead

26 Uncommon Profit & Company Lifecycle Pre-Emergence struggle for survival Time PAT POINT OF EMERGENCE Post-Emergence struggle for Endurance Introduction Growth Maturity (b) Decline (a) Renewal

27 Uncommon Profit Case Study #1 Titan Industries (YoE: 2003) … Uncommon Wealth Creation 26x in 5 years (85% CAGR), 130x in 10 years (59% CAGR) Uncommon Profit generation …

28 Uncommon Profit Case Study #2 Gruh Finance (YoE: 2003) … Uncommon Wealth Creation 10x in 5 years (60% CAGR), 70x in 10 years (54% CAGR) Uncommon Profit generation …

29 Uncommon Profit Case Study #3 Bharti Airtel (YoE: 2005) … Uncommon Wealth Creation 4x in 3 years (59% CAGR) Uncommon Profit generation …

30 Framework to identify Value Creators Contribution of various factors to abnormal profits Contributing factor High Performers Low Performers Emergence Sustainability Emergence Sustainability Year 2% 3% -7% -5% Industry 37% 44% 12% 13% Corporate-parent 18% 19% -4% 2% Segment-specific 43% 34% 99% 90% Source: Paper by Anita McGahan & Michael Porter Year – Economic cycle Industry – Industry-level factors like size of profit pool, competition, stability, strategic opportunity, etc Corporate Parent – Promoter or majority owner Segment-specific – Company-specific factors like quality of management, strategy/unique value proposition, etc

31 Value Creators: Industry-level factors #1 Size of profit pool 10 highest PAT sectors (2013) Sector Rs crores % share Financials - Banks 84,154 21 Energy - Oil & Natural Gas 39,963 10 Technology - Software 34,702 9 Financials - NBFCs 32,376 8 Mining & Minerals 27,261 7 Energy - Refineries 22,774 6 Utilities 22,349 6 Automobiles 21,931 6 Healthcare 16,518 4 Metals - Non-Ferrous 10,520 3 Total of above 312,547 79 Grand Total 394,786 100

32 Value Creators: Industry-level factors #1 Size of profit pool (contd) 10 lowest PAT sectors (2013) Sector Rs crores Aviation -5,695 Telecom - Service & Eqpmt -3,972 Shipbuilding -410 Sugar -212 Shipping -203 Glass & Glass Products -166 Ceramic Products -163 Paper -18 Printing & Stationery -10 Electronics 1 Total of above -10,846 Total Profit Pool 394,786

33 Value Creators: Industry-level factors #1 Size of profit pool (contd) Highest PAT CAGR (03-13) with minimum PAT of Rs 2,000 crores in 2013 Sector 03-13 PAT PAT Sector 03-13 PAT PAT CAGR (%) Delta CAGR (%) Delta Textiles L to P 5,653 Infra Developers 28 6,233 Realty L to P 3,799 Metals - Steel 28 3,006 Fertilizers L to P 2,821 Metals - Non-ferrous 27 9,556 Cement 57 7,825 Healthcare 20 13,843 Tech - Software 54 34,239 Capital Goods 19 5,413 Gems & Jewelry 46 3,176 Tobacco Products 18 6,275 Financials - NBFC 46 31,647 Banks 18 67,998 Mining & Minerals 46 26,627 Auto Ancillaries 17 2,917 Automobiles 39 21,101 Chemicals 29 3,115 TOTAL CORP. SECTOR 20 331,719

34 Value Creators: Industry-level factors #1 Size of profit pool (contd)

35 Value Creators: Industry-level factors #1 Size of profit pool (contd)

36 #2 Competitive landscape & bargaining power Value Creators: Industry-level factors Porter’s 5 forces framework to assess competition & bargaining power

37 #3 Value Migration Value Creators: Industry-level factors

38 #4 Stability of industry Value Creators: Industry-level factors 5551 1804 11440 715 4078 2337 0 2000 4000 6000 8000 10000 12000 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Baltic Freight Index Cyclicality makes industries risky

39 #5 Emergence of new industry /strategic opportunity Value Creators: Industry-level factors 0 300 600 900 1,200 1,500 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Jubilant Foodworks Sensex - Rebased Jubilant up 6x in under 4 years; CAGR of 65% v/s 7% for Sensex Uncommon Wealth Creation

40 Value Creators: Corporate-parent factors 3Is – Integrity + Intelligence + Initiative #1 Value system #2 Processes #3 Capital allocation #4 Management skill v/s Luck

41 Value Creators: Company-specific factors #1 Unique value proposition / Strategy #2 Nature of business: Consumer Adv v/s Production Adv #3 Market leadership or pioneering

42 Pitfalls to avoid in Emergence #1 Pre-empting emergence #2 Emergence during peak of good times “…the risk of paying too high a price for good-quality stocks – while a real one – is not the chief hazard confronting the average buyer of securities. Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions.” – Benjamin Graham in his book The Intelligent Investor

43 Methodology for Emerging Value Creators #1 Age criterion Select listed companies below 25 years of age #2 Meaningful Emergence 15% RoE for first time with minimum PAT size, say, Rs 10 crores #3 View on corporate-parent/management based on group performance, Annual Reports, payout policy, etc #4 Avoid cyclicals Incorporating stability of industry #5 Valuation check considering risk of non-Endurance P/E typically not exceeding 20x

44 Backtesting during 2001 to 2008 Emerging Value Creators’ financial & stock market performance Company Year of P/E (x) 5-year post emergence (%) Emerg. in YoE PAT CAGR Price CAGR Rel Perf. Shriram Transport 2001 1 56 85 60 Accelya Kale 2008 3 36 60 56 Shriram City Union 2004 3 45 70 58 GRUH Finance 2003 4 33 60 22 Plastiblends (I) 2004 4 1 4 -8 Manappuram Finance 2007 4 123 70 64 Havells India 2004 7 P to L 39 27 Cera Sanitaryware 2008 7 36 29 17 KPIT Tech 2004 8 36 4 -7 Blue Dart Express 2001 9 22 45 20 Titan Industries 2003 12 53 85 46 Hitachi Home 2006 12 14 22 11 Tata Elxsi 2001 16 20 23 -3 Emami 2007 18 31 33 27 Suprajit Engg. 2006 18 21 0 -12 IL&FS Invt Managers 2007 18 32 9 3 Asahi India Glass 2002 19 25 51 21 AVERAGE 10 24 41 24

45 Backtesting during 2001 to 2008 Applying Value Creator checklist items (“amplifiers”)  Industry Profit pool size  Nature of business  Leadership Amplifier No. of cos. 5 years post-emergence (%) PAT CAGR Avg RoE Price CAGR Rel. Perf. Industry Profit Pool High 10 26 29 55 37 Low 7 21 37 20 4 Nature of business advantage Consumer 9 21 34 46 31 Production 8 27 30 34 16 Leadership i.e. among top 3 players Yes 10 19 32 45 28 No 7 31 32 34 18 Portfolio avg 17 24 32 41 24

46 Backtesting during 2001 to 2008 Optimized portfolio with Amplifiers Company P/E (x) 5-year post emergence (%) in YoE PAT CAGR Price CAGR Rel. Perf. Manappuram Finance 4 123 70 64 Shriram Transport 1 56 85 60 Titan Industries 12 53 85 46 Havells India 7 P to L 39 27 Blue Dart Express 9 22 45 20 AVERAGE 7 – 65 43

47 Emerging Value Creators to bet on now Potential Value Creators by applying methodology for years 2009-13 (Rs crores) FY13 1HFY14 Nov-13 PAT PAT Gr. % RoE % PAT Gr. % Price Mkt Cap P/E (x) With amplifiers Bajaj Finserv 1,574 18 24 36 739 11,760 7 Bajaj Corp 161 38 35 15 231 3,410 19 Zydus Wellness 97 43 44 29 544 2,127 20 Symphony 59 11 29 27 408 1,427 23 Others Cairn India 11,882 49 25 6 324 61,868 5

48 Why Enduring Value Creators  Emerging Value Creators are rare (we could get only 17 in 8 years 2001-08)  Enduring Value Creators too outperform despite being fully discovered and fairly discounted  A suitable methodology may help to shortlist Enduring Value Creators

49 Methodology for Enduring Value Creators #1 Quality & Longevity criteria RoE >= 15% for each of the last 10 consecutive years #2 View on corporate-parent/management based on group performance, Annual Reports, payout policy, etc #3 Growth Last 3-year CAGR of at least 15% #4 Value-enhancing growth Postive delta RoE over the last 5 years #5 Reasonable valuation Not more than 50% premium to market i.e. P/E typically not exceeding 30x

50 Backtesting during 1999 to 2008 2008 Enduring Value Creators’ financial & stock market performance Company 2008-13 P/E PAT CAGR Price CAGR Rel. Perf. 2008 2013 Berger Paints 19 40 36 12 31 Torrent Pharma 28 38 34 9 13 Asian Paints 22 33 29 28 43 Castrol India 15 27 23 20 33 Colgate-Palmolive 16 27 23 22 34 Marico 18 26 22 26 37 City Union Bank 26 25 21 7 8 H D F C 20 12 8 25 19 Wipro 13 11 7 19 18 Glenmark Pharma -1 -1 -5 19 20 AVERAGE 16 24 20 21 20

51 Enduring Value Creators to bet on now Applying methodology for years 2004 to 2013; preferred bets highlighted Company 2010-13 2003-13 P/E Price Return CAGR PAT CAGR % Avg RoE % (x) (INR) 08-13 (%) City Union Bank 28 23 7 49 25 Axis Bank 28 20 10 1,155 11 Suprajit Engg 24 31 11 39 34 Torrent Pharma 27 26 15 462 38 HCL Technologies 47 26 16 1,087 25 M & M Financial 36 22 17 296 28 Zydus Wellness 28 37 20 544 38 VST Industries 25 31 20 1,664 37 HDFC Bank 32 18 23 661 19 Astral Poly Technik 29 30 24 250 35 GRUH Finance 28 27 26 233 47 ITC 21 29 34 320 25 Hindustan Unilever 16 77 40 594 17 Page Industries 42 62 44 5,265 51

52 Market Outlook Risk-Reward favorable

53 Corporate Profit to GDP down to 10-year low levels Market Outlook

54 Market Cap to GDP reasonable at 61% Market Outlook

55 Interest rates at recent high levels; could correct sharply Market Outlook

56 Earnings Yield to Bond Yield at 0.8x below LPA Market Outlook

57 Sensex EPS is expected to grow 15% in FY15 Market Outlook

58 Sensex forward P/E at 16x is almost at 10-year average Market Outlook

59  Uncommon Profits in companies = Uncommon Wealth Creation in stock markets.  Successful Emergence of Value Creators is very rare; a strong corporate-parent in a non-cyclical business significantly increases the probability.  Endurance of Value Creators is mainly threatened by disruptive innovation/competition, major regulatory changes, and capital misallocation.  State-owned companies have become marginalized in Wealth Creation with their share collapsing from 51% in 2005 to 9% in 2013.  The worst is over for Indian equities; the risk-reward equation is favorable for long-term investing. In Conclusion

Thank You ! & Happy Investing For Uncommon Profits

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