Motilal Oswal 16th Annual Wealth Creation Study

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Motilal Oswal 16th  Annual Wealth Creation Study

Reliance Industries, Sanwaria Agro Oils & Kotak Mahindra Bank –

Biggest, Fastest & Most Consistent Wealth Creators
Back to basics; revealing the Secret of ‘Creating Wealth from Dividends’

 

 

 

Key Conclusions of Motilal Oswal 16th Wealth Creation Study

• Reliance Inds, Sanwaria Agro Oils & Kotak Mahindra Bank – Biggest, Fastest & Most Consistent Wealth Creators respectively.

• Financials have emerged as the largest wealth creating sector for the first time ever. Going forward, expect the sector to maintain its top slot led by existing and new private banks, and eventual listing of insurance companies.

• Very fast growth in stock prices creates transitory multi-baggers. In most cases, what follows is prolonged and painful price and/or time correction.

• Blue chips are fountains of dividend, and offer as much, if not more, investment growth potential than lesser quality companies, but with far less risk.

• In investing, there is no profitable substitute for quality. Understanding quality of the company doesn't stop at profits and profitability, it must extend to dividend payouts and longevity.

• Most Blue Chips enjoy premium valuation. In deciding when to buy, one should focus not only on P/E, but also consider payout ratio, relative dividend yield, and earnings growth potential.

• In India, over last 20 years, Blue Chips have significantly outperformed benchmark indices with much lower risk.

Part 1) Wealth Creation Study findings

 

The Wealth Creation Study analyzes the top 100 wealth creating companies during the period 2006-11. Wealth created is calculated as change in the market cap of companies between 2006 and 2011, duly adjusted for corporate events such as mergers, de-mergers, fresh issuance of capital, buyback, etc. The Study based on research data for the period 2005-10 analyses capital market behavior, plots key trends in wealth creation, provides insights into winning companies and examines the reasons behind their success. This in-depth analysis is thereafter crystallized in the form of a study to identify the Fastest, Biggest and Most Consistent wealth creators.

Study Highlights – Wealth Creation

·       Reliance Industries has emerged as the biggest wealth creator for the 5th time in a row from 2007. This is a record, beating HUL’s four times in a row from 1996 to 1999.

 

·       Sanwaria Agro emerged as a surprise fastest wealth creator, adding INR43b to its market cap at a CAGR of 119% per annum. But "Speed thrills … also also kills!" Most of the fastest wealth creating companies have lost anywhere between 30-98% of their peak value in next 3 years.

 

·         For the first time more than 10 companies have qualified for the title of Most Consistent Wealth Creators, by featuring among the top 100 wealth creators in 10 consecutive studies. In such a case, 10-year price CAGR is used as the tie-breaker, and Kotak Mahindra Bank has emerged the fastest on that count.

 

·         The contribution of the top 10 wealth creators has been declining steadily from 76% in 2003 to 42% in 2011 indicating a more widespread wealth creation.

 

·         Successful investments are those which prove to be enduring (not transitory) multi-baggers, which are an outcome of high quality business and high quality management. Blue Chip Investing is one such sound strategy.

 

·         Besides Kotak Mahindra Bank, HDFC and HDFC Bank also figure in the list of top 10 Most Consistent Wealth Creators. Clearly, private sector financials are emerging as blue chip stocks with high, and more importantly, consistent growth performance (e.g. HDFC Bank has delivered 30% PAT growth for the last 38 consecutive quarters).

 

·         Quality of management is a key factor behind consistent wealth creation. The top 10 list also features two cement majors - ACC and Ambuja (now, both owned by Holcim). Change in management has significantly contributed to their consistent performance.

 

·         Wealth creating companies' earnings performance is superior to benchmark not only in terms of higher 5-year CAGR but also lower volatility, with standard deviation of annual returns at 13% compared to 16% for the Sensex.

 

·         For the first time ever, Financials have emerged the largest wealth creating sector. The new leader has steadily increased its share of wealth from 12% in FY06 to 24% in FY11.

 

·         Size apart, Financials is also the fastest wealth creating sector with price (i.e. market cap) CAGR of 28%, significantly higher than the average of 18%.

 

·         Going forward, importance of Financials will increase further as insurance companies get listed, and new banking licenses get issued.

 

·         Markets are slaves of earnings power. Pace of wealth creation is almost singularly decided by quantum of earnings growth, at least in the short- and medium term. Over the longer term, however, it is the quality of earnings which decides their sustenance, translating into premium valuations. Two indicators of earnings quality are RoE and Dividend Payout.

 

·         Payback Ratio less than 1 continues to deliver the highest level of returns to the largest number of companies (23 companies had Payback ratio of < 1 in 2006). (Payback is a proprietary ratio of Motilal Oswal, defined as current market cap divided by estimated profits over the next five years. We back-test this in 2006, based on the actual profits reported over the next five years.)