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Wealth Creation Study 2010-15

The 'Mid-to-Mega 20th Annual Wealth Creation Study (2010-2015)' by Raamdeo Agrawal analyzes economic data, company financials, and stock prices to identify top wealth creators in India. TCS, ITC, and HDFC Bank are highlighted as the biggest wealth creators, while the report emphasizes the shift in wealth from public sector undertakings (PSUs) to private companies across various sectors. The study concludes with a focus on growth characteristics necessary for transitioning companies from mid to mega status in the market.

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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 Wealth Creation & Valuation Metrics (contd)  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 Wealth Creation & Valuation Metrics (contd) 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
16 Mid-to-Mega
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 What it takes for Mid-to-Mega A lollapalooza of MQGLP  M – Midsize  Q – Quality of business & management  G – Growth in earnings  L – Longevity  P – Price
39 What it takes for Mid-to-Mega 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 What it takes for Mid-to-Mega Q of MQGLP – Quality  Quality of business  Quality of management
41 What it takes for Mid-to-Mega Quality of business  Industry Leadership  Economic Moat
42 What it takes for Mid-to-Mega Industry Leadership  88% of Mega companies are industry leaders; trend rising
43 What it takes for Mid-to-Mega Industry Leadership (continued)  Avg 70% of Mid-to-Mega crossovers are leaders; trend rising
44 What it takes for Mid-to-Mega 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 What it takes for Mid-to-Mega 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 What it takes for Mid-to-Mega Quality is necessary but not sufficient Risk of Quality Trap
47 What it takes for Mid-to-Mega 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 What it takes for Mid-to-Mega 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 What it takes for Mid-to-Mega 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 What it takes for Mid-to-Mega 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 What it takes for Mid-to-Mega 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 What it takes for Mid-to-Mega 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 What it takes for Mid-to-Mega 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 What it takes for Mid-to-Mega 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 What it takes for Mid-to-Mega 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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Wealth Creation Study 2010-15

  • 1.
    Mid-to-Mega 20th Annual WealthCreation Study 2010-2015 By Raamdeo Agrawal 11 December 2015
  • 2.
    1 Discussion Points  20thWealth 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.
  • 3.
  • 4.
    3 Concept of WealthCreation 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
  • 5.
    4 Biggest Wealth Creators Top100 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)
  • 6.
    5 Top 10 BiggestWealth 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 (%)
  • 7.
    6 Top 10 FastestWealth 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 (%)
  • 8.
    7 Most Consistent WealthCreators  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 (%)
  • 9.
    8 Wealth Creators v/sSensex  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
  • 10.
    9 Wealth Creation byIndustry  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
  • 11.
    10 Wealth Creation byPSUs 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
  • 12.
    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
  • 13.
    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
  • 14.
    13 Wealth Creation &Valuation Metrics (contd)  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
  • 15.
    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 Wealth Creation & Valuation Metrics (contd) Payback ratio
  • 16.
    15 Wealth Destruction  8of 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.
  • 18.
    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
  • 19.
    18 Key challenge ofequity 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
  • 20.
    19 Importance of growth Basicmathematics 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%
  • 21.
    20 Two key growthchallenges 1. Search for and calibration of future growth 2. Knowing how much growth is already priced in
  • 22.
    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
  • 23.
    22 Growth implication  Sincegrowth is uniquely company specific, look for high-growth approaches & situations  We covered one approach last year - 100x  This year we do Mid-to-Mega
  • 24.
    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
  • 25.
    24 Defining the terms Rankapproach 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
  • 26.
    25 Why ranks Roadmap forthe 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
  • 27.
    26 What is Mid-to-Mega Crossoverby a company from Mid to Mega category  Achievement of critical mass & scale  Recognition by markets of the same
  • 28.
    27 Why Mega Bedrock ofIndia’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
  • 29.
    28 Why Mega  Increasinglydifficult to dislodge Megas from their category  40 companies have stayed in this club since 1995
  • 30.
    29 Why Mid-to-Mega Mega dropoutsgetting replaced by Mid-to-Mega stocks
  • 31.
    30 Why Mid-to-Mega Most profitable& plausible of the 3 buy crossovers –  Mini-to-Mega  Mini-to-Mid  Mid-to-Mega
  • 32.
    31 Why Mid-to-Mega Two evidencesfor above conclusion 1. Performance track record of Mid-to-Mega portfolios 2. Returns and associated probability of crossovers
  • 33.
    32 Why Mid-to-Mega Performance trackrecord of Mid-to-Mega portfolios
  • 34.
    33 Why Mid-to-Mega Performance of2010-15 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
  • 35.
    34 Why Mid-to-Mega Returns &associated probabilities of crossovers Eicher, Bajaj Finance, Wockhardt JP Power Ventures, Lanco Infratech, D B Realty
  • 36.
    35 Why Mid-to-Mega Mid-to-Mega hashighest probability of the 3 crossovers
  • 37.
    36 Why Mid-to-Mega Rank crossovers: Returns & probability matrix
  • 38.
    37 What it takesfor 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
  • 39.
    38 What it takesfor Mid-to-Mega A lollapalooza of MQGLP  M – Midsize  Q – Quality of business & management  G – Growth in earnings  L – Longevity  P – Price
  • 40.
    39 What it takesfor Mid-to-Mega 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
  • 41.
    40 What it takesfor Mid-to-Mega Q of MQGLP – Quality  Quality of business  Quality of management
  • 42.
    41 What it takesfor Mid-to-Mega Quality of business  Industry Leadership  Economic Moat
  • 43.
    42 What it takesfor Mid-to-Mega Industry Leadership  88% of Mega companies are industry leaders; trend rising
  • 44.
    43 What it takesfor Mid-to-Mega Industry Leadership (continued)  Avg 70% of Mid-to-Mega crossovers are leaders; trend rising
  • 45.
    44 What it takesfor Mid-to-Mega 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%
  • 46.
    45 What it takesfor Mid-to-Mega 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
  • 47.
    46 What it takesfor Mid-to-Mega Quality is necessary but not sufficient Risk of Quality Trap
  • 48.
    47 What it takesfor Mid-to-Mega 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
  • 49.
    48 What it takesfor Mid-to-Mega 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
  • 50.
    49 What it takesfor Mid-to-Mega 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
  • 51.
    50 What it takesfor Mid-to-Mega 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)
  • 52.
    51 What it takesfor Mid-to-Mega 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
  • 53.
    52 What it takesfor Mid-to-Mega 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%
  • 54.
    53 What it takesfor Mid-to-Mega 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)
  • 55.
    54 What it takesfor Mid-to-Mega 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
  • 56.
    55 What it takesfor Mid-to-Mega P of MQGLP – favourable price  Typically low P/E  Very low P/E for Mid-to-Mega stocks unlikely due to track record
  • 57.
    56 Shortlisting potential Mid-to-Mega ApplyingMQGLP 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)
  • 58.
    57 Shortlisting potential Mid-to-Mega Investorsmay adapt these 6 steps to increase the probability of the Mid-to-Mega lollapalooza.
  • 59.
    58 Mega-to-Mid  Reverse ofMid-to-Mega i.e. companies which drop out of top 100 Findings of Mega-to-Mid from 2005 to 2015
  • 60.
    59 Mega-to-Mid Findings of Mega-to-Midfrom 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
  • 61.
  • 62.
    61 Corporate Profit toGDP is bottoming out Market Outlook Corporate Profit to GDP (%)
  • 63.
    62 Commodity prices hurtingSensex earnings; expect recovery in FY17 Market Outlook
  • 64.
    63 Downward journey ininterest rates has started Market Outlook
  • 65.
    64 Earnings Yield toBond Yield at LPA; lower interest rates to help Market Outlook
  • 66.
    65 Market Cap toGDP below LPA for much of the last 5 years Market Outlook
  • 67.
    66 Sensex P/E at16x in line with long-period average Market Outlook
  • 68.
    67  Value Migrationis 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
  • 69.
    68 Thank You ! & HappyInvesting 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.