Wealth Creation Study 2008-2013

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

Theme Study
Uncommon Profits

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

Uncommon Profits in companies
=
Uncommon Wealth Creation in markets
A simple mantra for Wealth Creation …

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

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

“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?

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
Gruh Finance (YoE: 2003)
10x in 5 years (60% CAGR),

29
Bharti Airtel (YoE: 2005)

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
#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
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

35

36
#2 Competitive landscape & bargaining power
Porter’s 5 forces
framework to
assess competition
& bargaining power

37
#3 Value Migration

38
#4 Stability of industry
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
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
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
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
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

Wealth Creation Study 2008-2013

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