17th Annual Wealth Creation Study                           2007-2012                         Economic Moat               ...
Discussion Points           • 17th Wealth Creation Study Findings           • Theme 2013:                                 ...
Wealth Creation 2007-12                Study Findings17th Annual Wealth Creation Study   3   www.motilaloswal.com
Study Methodology  Concept of Wealth Creation  The process by which a company enhances market value  of the capital entrus...
Study Methodology (contd)   Fastest Wealth Creators   The top 100 wealth creators are sorted by   fastest rise in their ad...
Study Methodology (contd)   Biggest Wealth Creators   Top 100 Wealth Creators subject to a new condition that   stock perf...
Top 10 Biggest Wealth Creators Rank,                  NWC         Price       Rank,              NWC Price Company        ...
Top 10 Fastest Wealth Creators Rank,                     Mult. Price       Rank,                Mult. Price Company       ...
Most Consistent Wealth Creators Rank,                      WCS Price        Rank,              WCS Price Company          ...
Wealth Creators v/s Sensex                                    Mar-07    Mar-12    5-yr CAGR  BSE Sensex                   ...
Wealth Creation by IndustryIndustry                 WC         2012 2007 Industry            WC      2012 2007(No of cos.)...
Wealth Creation by PAT growth               Price CAGR (%)                           2007-12 PAT growth range (%) Markets ...
Wealth Creation by base RoE                                           Avg Price                                          C...
Wealth Creation & Valuation Metrics     P/E (x)          No. of        % Wealth Price   PAT                       Cos.    ...
Wealth Creation & Valuation Metrics     P/B (x)        No. of          % Wealth    Price   PAT                     Cos.   ...
Wealth Creation & Valuation Metrics     Payback           No. of       % Wealth Price   PAT     Ratio (x)          Cos.   ...
Wealth Destruction        Company                      Wealth Destroyed     Price                                    Rs cr...
Theme Study17th Annual Wealth Creation Study   18      www.motilaloswal.com
Moat Quote          "(Great companies to invest are like) wonderful          castles, surrounded by deep, dangerous moats ...
What is an Economic Moat?            The concept of Economic Moat has its             roots in the idea of a traditional ...
Why Economic Moat?            Without Economic Moat, competition from             rivals will ensure that high returns of...
Why Economic Moat?            Economic Moat helps sustain superior             profitability multiple pulls and pressures...
Economic Moat & investing            Much like companies, equity investors too             chase high returns on their in...
Economic Moat & investing            Companies with "deep, dangerous moats“             outperform those without, both in...
Hero MotoCorp v/s TVS Motors                The facts …                 Both started business around the same time in the...
Bharti Airtel v/s Tata Teleservices                The facts …                 Both incorporated in 1995 on the eve of In...
L&T v/s HCC                The facts …                 Both long standing construction players in India. In fact,        ...
HDFC Bank v/s Central Bank                The facts …                 Central Bank has recently completed 100 years. HDFC...
Economic Moat: Two factors           1. INDUSTRY STRUCTURE                Interplay of Buyer power, Supplier Power, Threat...
Economic Moat:            Applying in equity investing           1. The Economic Moat hypothesis                Investing ...
Economic Moat:            Applying in equity investing           Backtesting the Economic Moat hypothesis (contd)         ...
Economic Moat:            Applying in equity investing           Backtesting the Economic Moat hypothesis (contd)         ...
Economic Moat:            Applying in equity investing           Backtesting the Economic Moat hypothesis (contd)         ...
Economic Moat:            Applying in equity investing            Backtesting the Economic Moat hypothesis (contd)        ...
Economic Moat:            Applying in equity investing            Backtesting the Economic Moat hypothesis (contd)        ...
Economic Moat:            Applying in equity investing            Backtesting the Economic Moat hypothesis (contd)        ...
Economic Moat:            Applying in equity investing            Backtesting the Economic Moat hypothesis (contd)        ...
Economic Moat:            Applying in equity investing            Backtesting the Economic Moat hypothesis (contd)        ...
Economic Moat:            Applying in equity investing            Backtesting the Economic Moat hypothesis (contd)     Fin...
Economic Moat:            Applying in equity investing            Backtesting the Economic Moat hypothesis (contd)     App...
Economic Moat:            Applying in equity investing           Applying the methodology to current Nifty           We ha...
Economic Moat:            Applying in equity investing              Nifty: The Economic Moat classification17th Annual Wea...
Market Outlook                   Seems poised for new highs17th Annual Wealth Creation Study   43     www.motilaloswal.com
Market Outlook    Corporate Profit to GDP should be around 5% for 201317th Annual Wealth Creation Study   44       www.mot...
Market Outlook    Interest rates have softened to 8.2%; expect further fall17th Annual Wealth Creation Study   45         ...
Market Outlook    Earnings Yield to Bond Yield at 0.9x is just below parity17th Annual Wealth Creation Study   46         ...
Market Outlook   Sensex forward P/E is currently at 14.4x around LPA17th Annual Wealth Creation Study   47        www.moti...
Market Outlook   Sensex EPS is expected to grow 11% over FY12-1417th Annual Wealth Creation Study   48      www.motilalosw...
In Conclusion      Consumer sector has bounced back into wealth creation       ITC is the largest wealth creator, TTK Pre...
Thank You !        &Happy Investing InEconomic Moats
Motilal Oswal Wealth Creation Gallery
Motilal oswal 17th wealth creation study presentation   economic moat - dec 2012
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Motilal oswal 17th wealth creation study presentation economic moat - dec 2012

  1. 1. 17th Annual Wealth Creation Study 2007-2012 Economic Moat By Raamdeo Agrawal 12 December 201217th Annual Wealth Creation Study www.motilaloswal.com
  2. 2. Discussion Points • 17th Wealth Creation Study Findings • Theme 2013: Fountainhead of Wealth Creation • Market Outlook • Conclusions17th Annual Wealth Creation Study 2 www.motilaloswal.com
  3. 3. Wealth Creation 2007-12 Study Findings17th Annual Wealth Creation Study 3 www.motilaloswal.com
  4. 4. Study Methodology 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 (2007-12), adjusted for corporate actions like dilutions17th Annual Wealth Creation Study 4 www.motilaloswal.com
  5. 5. Study Methodology (contd) 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 studies17th Annual Wealth Creation Study 5 www.motilaloswal.com
  6. 6. Study Methodology (contd) Biggest Wealth Creators Top 100 Wealth Creators subject to a new condition that stock performance beats the benchmark (Sensex) Who missed the bus because of the market outperformance filter NWC Price NWC Price Company Company (Rs cr) CAGR (Rs cr) CAGR ONGC 40,863 4.0 Hindalco 8,838 1.8 Wipro 26,602 5.6 BHEL 7,557 2.6 IOCL 15,839 5.6 Cipla 5,463 5.3 NTPC 10,678 1.7 Oracle Finl 4,594 4.7 NOTE: 5-time topper Reliance Industries did not make it on both counts – absolute wealth created and market outperformance17th Annual Wealth Creation Study 6 www.motilaloswal.com
  7. 7. Top 10 Biggest Wealth Creators Rank, NWC Price Rank, NWC Price Company (Rs cr) CAGR Company (Rs cr) CAGR 1. ITC 118,681 26 6. SBI 55,595 21 2. TCS 108,186 14 7. Infosys 51,573 8 3. HDFC Bank 74,425 32 8. Tata Motors 49,946 26 4. MMTC 67,110 48 9. Hind Unilever 45,746 15 5. H D F C 55,793 21 10. Jindal Steel 43,647 47 ITC largest wealth creator for the first time ever, beating RIL Total wealth created during 2007-12: Rs16+ lakh crores HUL has made it to the top 10 after a long time17th Annual Wealth Creation Study 7 www.motilaloswal.com
  8. 8. Top 10 Fastest Wealth Creators Rank, Mult. Price Rank, Mult. Price Company (x) CAGR Company (x) CAGR1. TTK Prestige 24 89 6. MMTC 7 482. LIC Housing 10 57 7. Jindal Steel 7 473. Coromandel Inter 9 54 8. Bata India 6 414. Eicher Motors 8 52 9. Titan Inds 5 405. IndusInd Bank 8 50 10. GSK Consumer 5 39 TTK Prestige is the Top 10 fastest wealth creator 4 Consumer companies in Top 10 fastest wealth creators; sector hitherto associated with steady growth seems to be enjoying tailwind of India’s NTD era17th Annual Wealth Creation Study 8 www.motilaloswal.com
  9. 9. Most Consistent Wealth Creators Rank, WCS Price Rank, WCS Price Company (x) CAGR Company (x) CAGR1. Kotak Mahindra 10 48 6. Hero Motocorp 10 302. Siemens 10 44 7. H D F C 10 293. Sun Pharma 10 40 8. ACC 10 294. Asian Paints 10 35 9. Ambuja Cement 10 265. HDFC Bank 10 31 10. Infosys 10 21 Kotak Mahindra Most Consistent for 2nd year in a row Holcim Group is getting its act together in India – both ACC and Ambuja among Most Consistent Wealth Creators17th Annual Wealth Creation Study 9 www.motilaloswal.com
  10. 10. Wealth Creators v/s Sensex Mar-07 Mar-12 5-yr CAGR BSE Sensex 13,072 17,404 6 Wealthex – re-based 13,072 32,884 20 Sensex EPS (Rs) 718 1,125 9 Sensex PE (x) 18 15 Wealthex EPS (Rs) 809 2,102 21 Wealthex PE (x) 16 16 Wealth-creating companies’ financial and stock market performance is above benchmark.17th Annual Wealth Creation Study 10 www.motilaloswal.com
  11. 11. Wealth Creation by IndustryIndustry WC 2012 2007 Industry WC 2012 2007(No of cos.) (Rs cr) (%) (%) (No of cos.) (Rs cr) (%) (%)Financials (21) 367,223 22 13 Oil & Gas (7) 99,634 6 24Consumer (21) 335,845 21 5 Cement (5) 66,842 4 3Metals / Mining (8) 209,492 13 9 Cap Goods(6) 60,902 4 10Technology (3) 173,419 11 10 Ultility (3) 23,549 1 2Auto (11) 163,007 10 6 Others (4) 16,629 1 15Healthcare (11) 121,480 7 4 Total 1,638,021 100 100 Financials the biggest wealth creating sector for 2nd year in a row. Absence of new banks has led to widespread profitability and stock performance. Consumer sector a very close second.17th Annual Wealth Creation Study 11 www.motilaloswal.com
  12. 12. Wealth Creation by PAT growth Price CAGR (%) 2007-12 PAT growth range (%) Markets can neither price hyper-growth or high quality growth, resulting in huge wealth creation at a rapid pace.17th Annual Wealth Creation Study 12 www.motilaloswal.com
  13. 13. Wealth Creation by base RoE Avg Price CAGR: 20% High RoE alone does not guarantee superior Wealth Creation. Profit growth is equally important. Economic Moat (or compe- titive advantage) protects profits and ensures Wealth Creation.17th Annual Wealth Creation Study 13 www.motilaloswal.com
  14. 14. Wealth Creation & Valuation Metrics P/E (x) No. of % Wealth Price PAT Cos. Created CAGR % CAGR % <10 18 17 20 18 10-15 21 18 22 24 15-20 19 10 21 20 20-25 13 18 25 24 25-30 13 28 16 21 >30 16 10 25 24 Total 100 100 20 21 Unlike most past studies, low P/E alone did not ensure high speed of wealth creation during 2007-12. PAT CAGR was a key determinant of Price CAGR.17th Annual Wealth Creation Study 14 www.motilaloswal.com
  15. 15. Wealth Creation & Valuation Metrics P/B (x) No. of % Wealth Price PAT Cos. Created CAGR % CAGR % <1 6 6 25 28 1-2 20 12 20 19 2-3 10 7 24 21 3-4 11 13 20 20 4-5 13 14 22 24 5-6 11 14 26 21 >6 29 34 17 19 Total 100 100 20 21 P/B below 1x did deliver high returns, but returns from higher P/B stocks were also comparable (except when P/B > 6)17th Annual Wealth Creation Study 15 www.motilaloswal.com
  16. 16. Wealth Creation & Valuation Metrics Payback No. of % Wealth Price PAT Ratio (x) Cos. Created CAGR % CAGR % <1 19 14 26 25 1-2 37 33 23 24 2-3 26 29 20 15 >3 18 23 15 16 Total 100 100 20 21 Payback ratio (Mkt Cap / 5-years forward PAT) of less than 1x in 2007 did ensure superior wealth creation. Also, again here, correlation of PAT and Price CAGR is high. Economic Moats help sustain PAT and PAT growth.17th Annual Wealth Creation Study 16 www.motilaloswal.com
  17. 17. Wealth Destruction Company Wealth Destroyed Price Rs crores % Share CAGR (%) Reliance Communication 67,698 12 -28 Unitech 29,399 5 -32 Suzlon Energy 27,558 5 -34 Satyam Computer 24,948 5 -30 Bharti Airtel 16,918 3 -2 SAIL 8,280 2 -4 Tech Mahindra 8,161 2 -13 MTNL 7,519 1 -29 Himachal Futuristic 7,367 1 -12 B F Utilities 7,315 1 -30 Total of Above 190,482 35 Total Wealth Destroyed 542,546 100 4 of top 10 wealth destroyers are telecoms. Breach of Economic Moat causes massive wealth destruction.17th Annual Wealth Creation Study 17 www.motilaloswal.com
  18. 18. Theme Study17th Annual Wealth Creation Study 18 www.motilaloswal.com
  19. 19. Moat Quote "(Great companies to invest are like) wonderful castles, surrounded by deep, dangerous moats where the leader inside is an honest and decent person. Preferably, the castle gets its strength from the genius inside; the moat is permanent and acts as a powerful deterrent to those considering an attack; and inside, the leader makes gold but doesnt keep it all for himself. Roughly translated, we like great companies with dominant positions, whose franchise is hard to duplicate and has tremendous staying power or some permanence to it.” – Warren Buffett17th Annual Wealth Creation Study 19 www.motilaloswal.com
  20. 20. What is an Economic Moat?  The concept of Economic Moat has its roots in the idea of a traditional moat A moat is a deep, wide trench filled with water, that surrounds the rampart of a castle or fortified place.  An Economic Moat protects a companys profits from being attacked by business forces Traditional management theory terms: "Sustainable Competitive Advantage" or "Entry Barriers"17th Annual Wealth Creation Study 20 www.motilaloswal.com
  21. 21. Why Economic Moat?  Without Economic Moat, competition from rivals will ensure that high returns of a company are lowered to the level of economic cost of capital … or even below What is happening in the Indian Telecom sector is a classic example of this Moat Quote The dynamics of capitalism guarantee that competitors will repeatedly assault any business "castle" that is earning high returns … Business history is filled with "Roman Candles," companies whose moats proved illusory and were soon crossed.” – Warren Buffett17th Annual Wealth Creation Study 21 www.motilaloswal.com
  22. 22. Why Economic Moat?  Economic Moat helps sustain superior profitability multiple pulls and pressures Companies do not compete only with rivals for profit, but also with customers, suppliers, potential entrants and substitute products Porters Five Forces of Industry Economic Moat protects profits being eroded by such forces17th Annual Wealth Creation Study 22 www.motilaloswal.com
  23. 23. Economic Moat & investing  Much like companies, equity investors too chase high returns on their investments In the long run, equity investors can only make as much money and return as the company itself makes  Investing in companies with Economic Moats is the only way to enjoy a share of their high profits and create wealth Moat Quote “A truly great business must have an enduring moat that protects excellent returns on invested capital.” – Buffett17th Annual Wealth Creation Study 23 www.motilaloswal.com
  24. 24. Economic Moat & investing  Companies with "deep, dangerous moats“ outperform those without, both in terms of financial performance and stock returns. Markets worldwide are replete with examples similar to cross-sector cases given below in India 1. Hero MotoCorp v/s TVS Motors 2. Bharti Airtel v/s Tata Teleservices 3. L&T v/s HCC 4. HDFC Bank v/s Central Bank17th Annual Wealth Creation Study 24 www.motilaloswal.com
  25. 25. Hero MotoCorp v/s TVS Motors The facts …  Both started business around the same time in the 1980s  Both were Indo-Japanese JVs – Hero Group with Honda and TVS Group with Suzuki MOAT IMPACT:  Hero MotoCorp: World’s largest two-wheeler company  TVS Motor: Struggling to retain its hitherto No 3 spot in India17th Annual Wealth Creation Study 25 www.motilaloswal.com
  26. 26. Bharti Airtel v/s Tata Teleservices The facts …  Both incorporated in 1995 on the eve of India’s telecom boom. In fact, Tata Tele had the rich Tata legacy  Both journeyed India’s wireless explosion – massive value migration from wired telephony. MOAT IMPACT:  Bharti: India’s No1 telecom co with global aspirations  Tata Tele: Yet to report a single quarter of profit17th Annual Wealth Creation Study 26 www.motilaloswal.com
  27. 27. L&T v/s HCC The facts …  Both long standing construction players in India. In fact, HCC was incorporated in 1926, earlier than L&T (1946)  Both have benefited from India’s exponential growth in infra, construction, real estate MOAT IMPACT:  L&T: Arguably India’s answer to General Electric  HCC: Struggling to make profit plus issues like BOTs, Lavasa17th Annual Wealth Creation Study 27 www.motilaloswal.com
  28. 28. HDFC Bank v/s Central Bank The facts …  Central Bank has recently completed 100 years. HDFC Bank, in contrast, is less than 20 years old.  Central Bank’s has 60% more branches than HDFC Bank (4,000+ v/s 2,500) MOAT IMPACT:  HDFC Bank: FY12 PAT 10x of Central Bank, Mkt Cap 24x  Central Bank: Lagging on most metrics – NPA, RoE, RoTA, etc17th Annual Wealth Creation Study 28 www.motilaloswal.com
  29. 29. Economic Moat: Two factors 1. INDUSTRY STRUCTURE Interplay of Buyer power, Supplier Power, Threat of new entrants/substitutes, etc 2. COMPANY STRATEGY 5 elements – (1) Distinct value proposition (2) Tailored value chain (3) Trade-offs (4) Fit (5) Continuity over time Moat Quote “Why are some companies more profitable than others? … First, companies benefit from (or are hurt by) the structure of their industry. Second, a company’s relative position within its industry can account for even more of the difference.” – Joan Magretta, in her book Understanding Porter17th Annual Wealth Creation Study 29 www.motilaloswal.com
  30. 30. Economic Moat: Applying in equity investing 1. The Economic Moat hypothesis Investing in a portfolio of EMCs (Economic Moat Companies) should lead to sustained outperformance over benchmark indices across years, irrespective of market conditions. 2. Backtesting the hypothesis Step 1: The backtesting framework 1. Arrive at a list of EMCs as on March 2002 and invest in them 2. Monitor price performance from March 2002 to March 201217th Annual Wealth Creation Study 30 www.motilaloswal.com
  31. 31. Economic Moat: Applying in equity investing Backtesting the Economic Moat hypothesis (contd) Step 2: Deciding Economic Moat criteria 2A. The principles: 1. Economic Moat ultimately reflects in financials, with RoI significantly superior to peers 2. Competitive advantage is relevant only within sectors 2B. The practice: 1. For each of the last 8 years, calculate for all sectors RoE of companies and sector average RoE 2. A company is an EMC if for at least 6 years, its RoE exceeds industry average 3. Discretionary adjustment to the final list based on then known facts and figures17th Annual Wealth Creation Study 31 www.motilaloswal.com
  32. 32. Economic Moat: Applying in equity investing Backtesting the Economic Moat hypothesis (contd) Step 3: The findings #1 – EMCs handsomely outperform #2 – EMCs’ outperformance is earnings and valuations agnostic #3 – EMCs’ outperformance is sector agnostic #4 – Future not too meaningful for EMCs, but critical for non-EMCs17th Annual Wealth Creation Study 32 www.motilaloswal.com
  33. 33. Economic Moat: Applying in equity investing Backtesting the Economic Moat hypothesis (contd) Finding #1: EMCs handsomely outperform  Over 2003-12, overall return of 177 companies was 18%  EMCs returned 25% whereas non-EMCs returned 12%  Sensex return was 18%, implying 7% Alpha for EMCs and negative 6% Alpha for non-EMCs 2003-12 Avg Price CAGR (%) EMCs Non-EMCs Overall Return 25% 12% 18% Sensex 18% 18% 18% Alpha +7% -6% 0%17th Annual Wealth Creation Study 33 www.motilaloswal.com
  34. 34. Economic Moat: Applying in equity investing Backtesting the Economic Moat hypothesis (contd) Finding #1: EMCs handsomely outperform (contd)  Besides point-to-point outperformance, EMCs outperformed the Sensex in every year over the 10 years  Also, after 3 years, EMCs outperformed even non-EMCs Payoff profile17th Annual Wealth Creation Study 34 www.motilaloswal.com
  35. 35. Economic Moat: Applying in equity investing Backtesting the Economic Moat hypothesis (contd) Finding #2: EMCs’ outperformance is earnings and valuations agnostic The most plausible explanation for this:  Earnings agnosticism EMCs’ strong competitive advantage which ensures that they enjoy a more-than-fair share of the growth inherent in most sectors in India  Valuation agnosticism Continuous rollover of EMCs’ competitive advantage period (CAP)17th Annual Wealth Creation Study 35 www.motilaloswal.com
  36. 36. Economic Moat: Applying in equity investing Backtesting the Economic Moat hypothesis (contd) Explaining EMCs’ valuation agnosticism: CAP  Competitive advantage period (CAP) is the time during which a company is expected to generate returns on incremental investment that exceed its cost of capital.  Markets do assign premium valuations to EMCs, given their reasonably accurate assessment that such companies enjoy a very long CAP.  Where the markets fail is in recognizing that barring a low mortality rate of less than 15%, EMCs leverage their moat and sustain high return even with passage of time.  The CAP of EMCs simply rolls over with each passing year, creating incremental excess return for investors.17th Annual Wealth Creation Study 36 www.motilaloswal.com
  37. 37. Economic Moat: Applying in equity investing Backtesting the Economic Moat hypothesis (contd) CAP rollover plausibly explains EMCs’ valuation agnosticism Return=WACC CAP in Year 0 CAP rolls over by 1 year17th Annual Wealth Creation Study 37 www.motilaloswal.com
  38. 38. Economic Moat: Applying in equity investing Backtesting the Economic Moat hypothesis (contd) Finding #3: EMCs’ outperformance is sector agnostic  EMCs are likely to outperform benchmarks across sectors, even if the sector itself is out of market favor.  Thus, out of our 22 homogenous sector groupings, EMCs underperformed the Sensex in only two sectors – Oil Refining and Textiles.17th Annual Wealth Creation Study 38 www.motilaloswal.com
  39. 39. Economic Moat: Applying in equity investing Backtesting the Economic Moat hypothesis (contd) Finding #4: Future not too meaningful for EMCs, critical for non-EMCs  Mortality rate of EMCs is likely to be low. By 2012 only 11 of 74 turned into non-EMCs (mortality<15%). But even these companies beat the Sensex  EMCs which remained so did not do much better than initial performance  Non-EMCs who upgraded into EMCs delivered the highest return at 27%, albeit with a mortality rate of 75%  Worse of all, non-EMCs which remained so delivered only 8% return. Payoff Matrix 2003-12 Yes 27% 26% EMCs No 8% 20% No Yes 2003-12 Sensex return was 18% 1995-02 EMCs17th Annual Wealth Creation Study 39 www.motilaloswal.com
  40. 40. Economic Moat: Applying in equity investing Backtesting the Economic Moat hypothesis (contd) Applying the methodology to Nifty constituents in year 2002 We applied our backtesting methodology to 38 constituents of Nifty in 2002. The results were similar to that of the broader universe –  EMCs outperform both non-EMCs and overall Nifty  Non-EMCs underperform Nifty  EMCs which maintain status quo do not report materially high returns  But non-EMCs which upgrade to EMCs deliver high returns  Non-EMCs which stay so perform the worst Stock returns on 2002 Nifty Nifty payoff matrix Price CAGR No. of cos. 2003-12 Yes 21% 22% EMC 22% 29 EMCs No 4% 14% No Yes Non-EMC 16% 9 38 stocks return: 20% Nifty return: 16% 1995-02 EMCs17th Annual Wealth Creation Study 40 www.motilaloswal.com
  41. 41. Economic Moat: Applying in equity investing Applying the methodology to current Nifty We have bifurcated current Nifty stocks into EMCs and non- EMCs using the backtesting methodology – 1. Company and sector average RoE data 2005 to 2012, and 2. In some cases, discretion based on currently known information and subjective opinion Prognosis based on past experience 1. In our view, there are 27 EMCs and 23 non-EMCs in the current Nifty 2. Expect EMC basket to outperform non-EMCs and Nifty itself 3. Expect about 6 non-EMCs (25% of 23) to upgrade to EMCs and deliver handsome returns 4. Non-EMCs which maintain status quo will eventually be replaced in the Nifty17th Annual Wealth Creation Study 41 www.motilaloswal.com
  42. 42. Economic Moat: Applying in equity investing Nifty: The Economic Moat classification17th Annual Wealth Creation Study 42 www.motilaloswal.com
  43. 43. Market Outlook Seems poised for new highs17th Annual Wealth Creation Study 43 www.motilaloswal.com
  44. 44. Market Outlook Corporate Profit to GDP should be around 5% for 201317th Annual Wealth Creation Study 44 www.motilaloswal.com
  45. 45. Market Outlook Interest rates have softened to 8.2%; expect further fall17th Annual Wealth Creation Study 45 www.motilaloswal.com
  46. 46. Market Outlook Earnings Yield to Bond Yield at 0.9x is just below parity17th Annual Wealth Creation Study 46 www.motilaloswal.com
  47. 47. Market Outlook Sensex forward P/E is currently at 14.4x around LPA17th Annual Wealth Creation Study 47 www.motilaloswal.com
  48. 48. Market Outlook Sensex EPS is expected to grow 11% over FY12-1417th Annual Wealth Creation Study 48 www.motilaloswal.com
  49. 49. In Conclusion  Consumer sector has bounced back into wealth creation ITC is the largest wealth creator, TTK Prestige the fastest, HUL back in top 10.  Financials has emerged the largest wealth creating sector for the second time in a row. Absence of new entrants is leading to widespread profitability and stock performance.  Economic Moat protects the profit and profitability of companies from competitive attack.  Extended CAP of EMCs drives superior profits and stock returns. Over 2002-2012, EMCs in India have meaningfully outperformed benchmarks.  Breach of Economic Moat causes massive wealth destruction. The Telecom sector is a classis case.  Markets seem poised to touch new highs in the next 12 months. On the back of earnings growth of 10-11%, imminent moderation in interest rate, and reasonable current valuation.17th Annual Wealth Creation Study 49 www.motilaloswal.com
  50. 50. Thank You ! &Happy Investing InEconomic Moats
  51. 51. Motilal Oswal Wealth Creation Gallery
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