Wealth Creation Study 2010-15

Mid-to-Mega
20th Annual Wealth Creation Study 2010-2015
By Raamdeo Agrawal
11 December 2015

1
Discussion Points
 20th Wealth Creation Study Findings
 Theme: Mid-to-Mega
 Market Outlook
 Conclusions
IMPORTANT DISCLAIMER
• This study is primarily an analysis of economic data, company financials and stock prices.
• The companies mentioned here should not be construed as our investment
recommendations or opinions.

2
Wealth Creation 2010-15
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 (2010-15),
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 number of times a company appeared in the
last 10 studies and 10-year price CAGR
Study Methodology (contd)

5
Top 10 Biggest Wealth Creators
 TCS is largest Wealth Creator for 3rd consecutive year
 ITC & HDFC Bank retain No.2 & 3 for 3rd consecutive year
Rank Company Rs crores % Share 2015 2010 Price PAT 2015 2010
1 TCS 345,758 10 498,891 152,818 27 23 25 22
2 ITC 156,508 5 260,865 100,476 20 18 27 24
3 HDFC Bank 154,001 4 256,377 88,458 21 29 24 29
4 Sun Pharma 140,518 4 211,728 37,066 42 27 47 27
5 Hind. Unilever 137,389 4 188,849 52,075 30 15 43 24
6 H D F C 124,089 4 206,482 77,889 19 22 24 24
7 HCL Tech 113,018 3 137,709 24,191 41 42 19 19
8 Tata Motors 107,068 3 150,506 38,267 29 40 11 15
9 Infosys 104,755 3 254,570 150,060 11 15 21 24
10 Axis Bank 77,364 2 132,844 47,368 19 25 18 19
Total of Top 10 1,460,466 43 2,300,836 770,678 24 24 23 23
Total of Top 100 3,423,348 100 5,247,359 1,694,587 25 19 27 21
Mkt Cap (Rs crores)Net Wealth Created P/E (x)CAGR (%)

6
Top 10 Fastest Wealth Creators
 Eicher and Page in top 10 for last 4 studies in a row
 Base market cap of all companies < Rs 2,000 crores
Price
Rank Company Appn. (x) Price PAT 2015 2010 2015 2010
1 Ajanta Pharma 50 119 56 10,777 213 35 6
2 Symphony 39 108 26 9,088 234 78 6
3 Eicher Motors 25 90 49 43,074 1,727 70 21
4 P I Industries 22 85 42 8,313 299 34 7
5 Page Industries 17 77 38 15,312 890 78 22
6 Wockhardt 13 68 L to P 20,529 1,518 51 N.A.
7 Bajaj Finance 13 68 59 20,542 1,166 23 13
8 GRUH Finance 11 62 24 8,834 757 43 11
9 Blue Dart 10 59 16 17,255 1,687 133 28
10 Amara Raja 10 59 20 14,202 1,398 35 8
Mkt Cap (Rs cr) P/E (x)CAGR (%)

7
Most Consistent Wealth Creators
 8 of top 10 are consumer-facing companies
 Consistent Wealth Creation = Sustainable & Profitable Growth
 Sustainable & Profitable Growth = Quality (Business X Mgmt)
Appeared in
Rank Company WC Study (x) Price PAT 2015 2005 2015 2005
1 Titan Company 10 43 44 34,802 980 42 45
2 Sun Pharma 10 36 28 211,728 8,745 46 22
3 Asian Paints 10 35 23 77,575 3,751 56 22
4 Kotak Mahindra 10 34 34 101,421 4,199 33 25
5 Dabur India 10 31 21 46,627 3,179 44 21
6 Bosch 10 29 13 79,704 6,137 63 17
7 Axis Bank 10 28 36 132,844 6,627 18 20
8 Cummins India 10 27 18 24,322 2,209 36 17
9 Nestle India 10 27 17 61,514 5,638 52 22
10 M & M 10 25 17 73,733 5,767 25 9
P/E (x)Market Cap (Rs cr)10-year CAGR (%)

8
Wealth Creators v/s Sensex
 Wealth Creators’ outperformance is explained by –
1. Superior earnings growth over Sensex
2. Which also drove P/E re-rating higher than Sensex
Mar-10 Mar-15 5 Year
CAGR (%)
BSE Sensex 17,528 27,957 10
Wealthex - re-based to Sensex 17,528 54,275 25
Sensex EPS (Rs) 834 1,353 10
Wealthex EPS (Rs) 839 2,044 19
Sensex PE (x) 21 21 0
Wealthex PE (x) 21 27 5

9
Wealth Creation by Industry
 Significant re-rating in Consumer sector
 3 of top 5 Wealth Creating sectors seeing Value Migration
 No Wealth Created by Metals/Mining; highest in 2005-10
Industry Wealth
(No. of companies) Rs crores 2015 2010 Price PAT 2015 2010
Consumer & Retail (25) 751,850 22 7 28 16 44 28
Banking & Finance (17) 671,162 20 15 23 21 21 20
Technology (6) 616,973 18 10 23 23 23 22
Auto (14) 491,449 14 5 29 21 23 17
Healthcare (14) 448,121 13 4 31 29 33 30
Cement (5) 133,725 4 2 21 -2 32 11
Capital Goods (5) 68,103 2 10 19 8 51 31
Telecom & Media (2) 61,349 2 3 24 21 24 21
Oil & Gas (3) 57,998 2 17 22 15 13 10
Metals / Mining 0 0 19
Utilities 0 0 6
Others (9) 122,618 4 3 23 18 33 27
Total 3,423,349 100 100 25 19 27 21
Not applicable
Share of WC % 2010-15 CAGR % P/E x)
Not applicable

10
Wealth Creation by PSUs hit the floor
 Over the years, value has migrated from PSUs to
private companies across sectors – Telecom, Mining,
Utilities, Capital Goods, Banking, Oil & Gas, etc.
28 30
26
18
25
16
22 24
20
11 5 5
49 51
36
25
35
27
30
27
20
9
2 2
1999-04
2000-05
2001-06
2002-07
2003-08
2004-09
2005-10
2006-11
2007-12
2008-13
2009-14
2010-15
No. of PSUs % of Wealth Created

11
Wealth Creation & Valuation Metrics
 Turnaround (Bharat Forge, Wockhardt) and expected
turnaround (United Spirits, SPARC) can lead to rapid
Wealth Creation
P/E in
2010
No. of
Cos.
% Wealth
Created
Price
CAGR %
PAT
CAGR %
Loss-making 4 3 35 L to L
<10 12 5 28 1
10-20 33 29 28 21
20-30 35 55 24 20
>30 16 9 24 25
Total 100 100 25 19
P/E

12
Wealth Creation & Valuation Metrics (contd)
 As a rule, P/B up to 2x may be considered attractive
P/B
in 2010
No. of
Cos.
% Wealth
Created
Price
CAGR %
PAT
CAGR %
< 2 11 6 31 17
2-3 22 12 20 15
3-4 16 16 31 18
4-5 12 21 28 25
> 5 39 44 24 20
Total 100 100 25 19
Price/Book

13
 Price/Sales < 1x stocks will likely prove to be huge
Wealth Creators
P/S
in 2010
No. of
Cos.
% Wealth
Created
Price
CAGR %
PAT
CAGR %
<1 20 12 36 32
1-2 21 16 29 16
2-3 23 19 28 14
3-4 11 13 21 22
>4 25 40 23 19
Total 100 100 25 19
Price/Sales

14
 Payback ratio = Mkt Cap / 5-years forward PAT
 Payback < 1 remains the most reliable indicator of
superior Wealth Creation across market cycles.
Payback
ratio 2010
No. of
Cos.
% Wealth
Created
Price
CAGR %
PAT
CAGR %
<1 21 14 38 34
1-2 28 30 28 18
2-3 34 45 23 18
>3 17 11 21 8
Total 100 100 25 19
Payback ratio

15
Wealth Destruction
 8 of top 10 Wealth Destroyers are in global commodities
 6 of top 10 Wealth Destroyers are PSUs
Company Wealth Destroyed Price
Rs crores % Share CAGR (%)
MMTC 152,206 10 -50
Reliance Industries 81,969 6 -5
S A I L 75,772 5 -23
NMDC 65,061 4 -15
B H E L 59,266 4 -13
Jindal Steel 50,474 3 -26
NTPC 49,184 3 -7
Hindustan Copper 43,508 3 -35
Vedanta 42,663 3 -17
Tata Steel 29,260 2 -13
Total of Above 649,365 44
Total Wealth Destroyed 1,463,226 100

17
Theme Discussion Points
 Key challenge of investing
 Importance of growth
 Some Growth characteristics
 100x v/s Mid-to-Mega
 What is Mid-to-Mega
 Why Mid-to-Mega
 What it takes to achieve Mid-to-Mega
 How to shortlist potential Mid-to-Mega ideas

18
Key challenge of equity investing
Finding stocks with -
 Moat
 Growth
 Right valuation
Moat is now almost a science …
– competitive advantage reflected in RoE above cost of equity
… but growth and valuation are complete art
– little or no literature on growth
– some investors treat growth as mere amplifier of returns,
having bought a stock cheap in the first place

19
Importance of growth
Basic mathematics of making money in equities –
Long-term profit growth = Long-term price growth
2005-15 PAT CAGR Price CAGR
Sensex 12% 16%
TCS 24% 22%
Reliance Industries 11% 14%
O N G C 3% 8%
HDFC Bank 32% 25%
Sun Pharma 28% 36%
H D F C 26% 25%
Tata Motors 26% 21%
Lupin 39% 43%
Hindustan Zinc 26% 25%
Marico 23% 32%
Godrej Consumer 27% 30%

20
Two key growth challenges
1. Search for and calibration of future growth
2. Knowing how much growth is already priced in

21
Some Growth characteristics
 Nothing grows to the sky
 High growth is not everywhere
 Growth is always probabilistic
 All growth is not profitable
 Growth can be found in any size of company
 There can be growth even in adverse environment
 Growth is uniquely company specific

22
Growth implication
 Since growth is uniquely company specific,
look for high-growth approaches & situations
 We covered one approach last year - 100x
 This year we do Mid-to-Mega

23
100x v/s Mid-to-Mega
 “100x” refers to stock prices rising 100-fold over time
(theme of our last year’s Wealth Creation Study)
 100x: Highly aspirational, somewhat theoretical
 Ideas few & far between (47 stocks in 20 years)
 Requires high level of patience (average 12 years)
 Mid-to-Mega: A more practical alternative
 9-12 stocks every year
 High returns within realistic time-window of 5 years

24
Defining the terms
Rank approach rather than market cap approach
 Mega : Top 100 stocks by market cap rank
 Mid : Stocks ranked next 200 i.e. 101 to 300
 Mini : Stocks ranked below 300

25
Why ranks
Roadmap for the future
GDP, Market Cap & Market Cap Ranks Trend
Rs crores 2000 2005 2010 2015 CAGR 00-15 2020
GDP 1,972,509 3,178,259 6,350,057 12,653,762 13% 23,719,042
Total Mkt Cap 738,883 1,581,721 5,933,582 9,808,765 19% 19,728,931
MC % of GDP 37% 50% 93% 78% 83%
Top 100 stocks 655,214 1,276,728 4,546,192 7,421,559 18% 14,796,698
% of MC 89% 81% 77% 76% 75%
THE MEGA STOCKS
Top stock 125,876 125,874 351,450 498,891 10% 986,447
% of MC 17.0% 8.0% 5.9% 5.1% 5.0%
100th stock 778 2,391 10,440 20,529 24% 39,458
% of MC 0.1% 0.2% 0.2% 0.2% 0.2%
THE ASPIRANTS
300th stock (Mid) 120 455 2,159 3,823 26% 7,892
% of 100th stock 15% 19% 21% 19% 20%
500th stock (Mini) 39 160 757 1,405 27% 2,762
% of 100th stock 5% 7% 7% 7% 7%
Mid-to-Mega
10x, 58% CAGR
Mini-to-Mid
5.6x, 41% CAGR

26
What is Mid-to-Mega
Crossover by a company from Mid to Mega category
 Achievement of critical mass & scale
 Recognition by markets of the same

27
Why Mega
Bedrock of India’s corporate sector & markets
 Top 100 stocks – 75% of market cap, 88% of profits
 88 of 100 stocks – industry leaders i.e. No.1, 2 or 3 by sales

28
Why Mega
 Increasingly difficult to dislodge Megas from their category
 40 companies have stayed in this club since 1995

29
Why Mid-to-Mega
Mega dropouts getting replaced by Mid-to-Mega stocks

30
Why Mid-to-Mega
Most profitable & plausible of the 3 buy crossovers –
 Mini-to-Mega
 Mini-to-Mid
 Mid-to-Mega

31
Why Mid-to-Mega
Two evidences for above conclusion
1. Performance track record of Mid-to-Mega portfolios
2. Returns and associated probability of crossovers

32
Why Mid-to-Mega
Performance track record of Mid-to-Mega portfolios

33
Why Mid-to-Mega
Performance of 2010-15 Mid-to-Mega companies
KEY FINDINGS:
— Every single company has
outperformed the Sensex
— 18 out of 24 are industry leaders
— Of the 6 non-leaders, 5 are
Value Migration beneficiaries

34
Why Mid-to-Mega
Returns & associated probabilities of crossovers
Eicher, Bajaj Finance,
Wockhardt
JP Power Ventures,
Lanco Infratech,
D B Realty

35
Why Mid-to-Mega
Mid-to-Mega has highest probability of the 3 crossovers

36
Why Mid-to-Mega
Rank crossovers : Returns & probability matrix

37
What it takes for Mid-to-Mega
… a lollapalooza effect !!
What is this thing called lollapalooza effect?
A term popularized by Charlie Munger, denoting several factors acting together
“I’ve been searching for lollapalooza results all my life, so I’m very interested in
models that explain their occurrence … Really big effects, lollapalooza effects,
will often come only from large combinations of factors.”
– Charlie Munger

38
A lollapalooza of MQGLP
 M – Midsize
 Q – Quality of business & management
 G – Growth in earnings
 L – Longevity
 P – Price

39
M of MQGLP – Midsize
 200 companies with market cap rank between 101 and 300
(currently between Rs 4,000-20,000 crores)
 Benefit of low-base effect compared to Mega companies
 Well-established track record for informed decision-making

40
Q of MQGLP – Quality
 Quality of business
 Quality of management

41
Quality of business
 Industry Leadership
 Economic Moat

42
Industry Leadership
 88% of Mega companies are industry leaders; trend rising

43
Industry Leadership (continued)
 Avg 70% of Mid-to-Mega crossovers are leaders; trend rising

44
Economic Moat
 Distinct value proposition
 RoE consistently higher than Cost of Equity (15% in India)
73 of the Mega companies have 5-year average > 15%

45
Quality of management
 Unquestionable integrity
– Impeccable track record of corporate governance
– Concern for all stakeholders
– Preferably paying full tax and a well-articulated dividend policy
 Demonstrable competence
– Excellence in strategic planning and execution
– Sustainable competitive advantage over its peers
 Growth mindset
– Long-range profit outlook
– Efficient capital allocation
– Persisting with growth plans despite temporary setbacks

46
Quality is necessary but not sufficient
Risk of Quality Trap

47
G of MQGLP – Growth in earnings
 Value Migration
 Sustained industry tailwind
 Small base with large opportunity
 New large investment getting commissioned
 Inorganic growth through M&A
 Consolidation of competition
 Operating & Financial leverage
 Turnaround from loss to profit

48
Value Migration
Private banks’ PAT now exceeds PSU Banks
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
PAT trend (Rs crores)
PSU Banks
Private banks

49
Sector tailwind
Housing Finance offers long-term tailwind
1,133
11,304
2005 2015
Housing Finance Sector PAT (Rs cr)
26% CAGR for
last 10 years

50
Small base with large opportunity
2005-15 Ajanta Pharma PAT up from Rs 10 cr to Rs 315 cr
10 12 15 22 25 34
51
77
112
234
315
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Ajanta Pharma 2005-15 PAT CAGR: 41%
(Figures in Rs crores)

51
Inorganic growth through M&A
Motherson Sumi’s highly successful inorganic strategy
-200
0
200
400
600
800
1,000
1,200
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Motherson Sumi Consolidated PAT trend
Subsidiary PAT : 36% CAGR
Standalone PAT : 23% CAGR
Consol PAT : 28% CAGR

52
Operating & Financial Leverage
High operating & financial leverage in Bharti Infratel
Rs crores Mar-11 Mar-15 CAGR
Sales 8,508 11,668 8%
Total Expenditure 5,379 6,664 6%
EBITDA 3,129 5,004 12%
EBITDA Margin 36.8% 42.9%
Interest cost 433 290 -10%
% of sales 5.1% 2.5%
Adjusted PAT 539 1,771 35%
% of sales 6.3% 15.2%

53
Turnaround in profit
Tata Motors turns around JLR
2,127 1,937
-2,796
1,526
9,064
14,115
10,271
14,642 14,028
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Tata Motors PAT trend
(Rs crores)

54
L of MQGLP – Longevity of quality & growth
 Extending CAP (Competitive Advantage Period)
 Delaying mean reversion of growth rate
Companies typically enjoy a certain CAP … … successful company continuously extend it

55
P of MQGLP – favourable price
 Typically low P/E
 Very low P/E for Mid-to-Mega stocks unlikely due to track record

56
Shortlisting potential Mid-to-Mega
Applying MQGLP through a 6-step process
1. Start with 200 Mids (M of MQGLP)
2. Filter for year of purchase RoE at least 20% (Q of MQGLP)
3. Of the above list, select Industry Leaders and beneficiaries of
Value Migration / Industry tailwind (Q of MQGLP)
4. Post step 3, select companies with 2-year PAT CAGR of 20%
as growth momentum (G of MQGLP)
5. Next, prefer seculars over cyclicals (for L of MQGLP)
6. Finally, decide a suitable purchase P/E for the stock based on
a call on management competence, integrity & growth
mindset (P of MQGLP)

57
Shortlisting potential Mid-to-Mega
Investors may adapt these 6 steps to increase the
probability of the Mid-to-Mega lollapalooza.

58
Mega-to-Mid
 Reverse of Mid-to-Mega i.e. companies which drop out of top 100
Findings of Mega-to-Mid from 2005 to 2015

59
Mega-to-Mid
Findings of Mega-to-Mid from 2005 to 2015
 In Mid-to-Mega, 2 in every 3 companies are industry leaders;
in Mega-to-Mid, 3 in 4 companies are non-leaders
Reinforces our case:
Mid-to-Mega – the power of industry leadership in Wealth Creation

60
Market Outlook
A macro perspective

61
Corporate Profit to GDP is bottoming out
Market Outlook
Corporate Profit to GDP (%)

62
Commodity prices hurting Sensex earnings; expect recovery in FY17
Market Outlook

63
Downward journey in interest rates has started
Market Outlook

64
Earnings Yield to Bond Yield at LPA; lower interest rates to help
Market Outlook

65
Market Cap to GDP below LPA for much of the last 5 years
Market Outlook

66
Sensex P/E at 16x in line with long-period average
Market Outlook

67
 Value Migration is increasingly becoming the key driver
of rapid Wealth Creation.
 Industry leadership is a necessary pre-requisite to be
a megacorp.
 Market cap rank is a powerful tool to assess a company's
current standing and the roadmap ahead.
 Mid-to-Mega marks a big change in ranks, driven by the
lollapalooza effect of MQGLP (Mid-size, Quality, Growth,
Longevity and Price).
 Acceleration in earnings coupled with softening interest
rates will likely usher in the next round of market
expansion, albeit a few quarters later.
In Conclusion

68
Thank You !
&
Happy Investing for
Mid-to-Mega !
IMPORTANT DISCLAIMER
• This study is primarily an analysis of economic data, company financials and stock prices.
• The companies mentioned here should not be construed as our investment
recommendations or opinions.

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