Wealth Creation Study 2006-2011

www.motilaloswal.com16th Annual Wealth Creation Study 1
1017
4258
77
135
174
236246
318
410
468
0
5,000
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30,000
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40,000
1991
1993
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2011
Mcap
INR cr
6 7 13
30 32
45
71
91
125
168
259
307
0
5,000
10,000
15,000
20,000
25,000
30,000
1991
1993
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2011
Mcap
INR cr
Two-minute salute
Asian Paints
Divd up 55x
MCap up 75x
Nestle
Divd up 51x
MCap up 82x

Two-minute salute
Asian Paints, HUL, Nestle, Hero MotoCorp
Dividend up 75x
Market Cap up 70x
57 79 166 321
603
1,010
1,633
2,273
2,036
2,837
2,285
4,282
0
20,000
40,000
60,000
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180,000
0
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5,000
1991
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1997
1998
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2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Divd
INR cr
Mcap
INR cr

Two-minute salute
Let’s take this opportunity to salute …
BLUE CHIPS
The Fountains Of Dividend !
As is rightly said –
A stock is worth only what you can get out of it.
Even so spoke the old farmer to his son:
• A cow for her milk,
• A hen for her eggs,
• And a stock, by heck,
for her dividends.
— John Burr Williams

Discussion Points

The process by which a company enhances market
value of the capital entrusted to it by its shareholders
Change in Market Cap over the study
period adjusted for corporate actions
Wealth Creation Study Methodology

Minimum wealth created should be Rs 100 crores
over the previous five-year period. (This year, the
100th wealth creator created Rs 3,700 cr wealth)
The top 100 wealth creators are sorted by
fastest rise in their adjusted stock price
Based on no. of times a company appeared
in the last 10 studies
Wealth Creation Study Methodology (contd)

10 Biggest Wealth Creators
Rank,
Company
NWC
(Rs cr)
Price
CAGR
1. Reliance Inds 174,221 21
2. TCS 137,928 20
3. SBI 107,521 25
4. Infosys 102,480 17
5. NMDC 83,304 31
Rank,
Company
NWC
(Rs cr)
Price
CAGR
6. HDFC Bank 67,762 25
7. ITC 65,828 13
8. H D F C 63,582 21
9. L&T 62,275 22
10. ONGC 61,641 6
Reliance largest wealth creator for 5th year in a row beating HUL
Total wealth created during 2006-11: Rs 22+ lakh crores
Last 8 years, top wealth creator has been from Oil & Gas:
ONGC for first 3 years, Reliance in the next 5 years

10 Fastest Wealth Creators
Rank,
Company
Times
(x)
Price
CAGR
1. Sanwaria Agro 50 119
2. Adani Enter. 22 86
3. Bhushan Steel 12 64
4. Jindal Steel 11 62
5. Sterling Intl 10 59
Rank,
Company
Times
(x)
Price
CAGR
6. Shriram Tran. 6 44
7. Coromandel 6 43
8. LIC HF 6 43
9. Exide Inds 6 41
10. IndusInd Bk 6 41
Speed thrills … but also kills!
Some of these stocks are classic “transitory multi-baggers”
If they are not sold on time, investors are left not only with no
gains, but most often, a permanent capital loss

Consistent Wealth Creators
Rank,
Company
Appeared
in WC
Study (x)
10-Year
Price
CAGR
1. Kotak Mah Bk 10 47
2. Sun Pharma 10 33
3. Asian Paints 10 31
4. HDFC 10 29
5. HDFC Bank 10 29
Rank,
Company
Appeared
in WC
Study (x)
10-Year
Price
CAGR
6. Reliance Inds 10 27
7. ACC 10 24
8. Infosys 10 24
9. ONGC 10 23
10. Ambuja Cem 10 21
KMB, HDFC, HDFC Bank – Pvt sector financials emerging Blue Chips
Quality of mgmt a key factor behind consistent wealth creation

Wealthex v/s Sensex (2006-2011)
Wealth Creators outperform markets as their earnings growth
is typically higher than benchmark earnings growth
Mar-06 Mar-11 5-yr CAGR
BSE Sensex 11,280 19,445 12
Wealthex (rebased) 11,280 26,095 18
Sensex EPS (Rs) 523 1,024 14
Sensex P/E (x) 22 19
Wealthex EPS (Rs) 596 1,370 18
Wealthex P/E (x) 19 19

Wealth Creation by Industry
Industry
(No of cos.)
WC
(Rs cr)
2011
(%)
2006
(%)
Financials (21) 519,365 24 12
Metals/Mining (12) 325,386 15 11
Oil & Gas (8) 304,293 14 27
IT (7) 302,401 14 10
FMCG / Retail (12) 170,856 8 6
Engineering (8) 153,982 7 11
Auto (8) 118,298 5 8
Industry
(No of cos.)
WC
(Rs cr)
2011
(%)
2006
(%)
Pharma (8) 90,176 4 5
Ultility (3) 70,600 3 2
Telecom (1) 57,429 3 1
Cement (5) 28,910 1 3
Others (7) 67,951 3 4
Total 2,209,647 100 100
For the first time ever, Financials has emerged the biggest wealth
creating sector.
It is also the fastest with Price CAGR of 28% (average 18%)
Importance of Financials will increase further as insurance
companies get listed, and new banking licenses get issued

Wealth Creation by PAT growth
Markets can neither price hyper-growth or high quality growth,
resulting in huge wealth creation at a rapid pace
Price CAGR (%)

Wealth Creation by base ROE
3 above average performing groups:
1. < 10% RoE – High risk, high return (start-ups, turnarounds)
2. 15-20% RoE – Mainly financials (limited RoE, unllii
3. > 40% RoE – BLUE CHIPS
Price CAGR (%)
Average: 18%

Wealth Creation by valuation
Base year P/E < 10x almost invariably delivers above average
returns, but risk may be high
P/E of 20-30x are the reasonable valuation zone for BLUE CHIPS,
which also deliver above average returns, but with low risk
P/E (x) No. of
companies
% Wealth
Created
Price
CAGR %
<10 14 14 25
10-20 29 34 17
20-30 26 23 22
>30 31 30 16
Total 100 100 18

Wealth Creation by valuation
Payback = Market cap divided by next 5 years’ profit
In every study, Payback ratio of less than 1x has proven to
be the most reliable indicator of rapid wealth creation
Payback
Ratio
No. of
companies
% Wealth
Created
Price
CAGR %
< 1 23 21 30
1-2 38 38 19
2-3 23 14 15
>3 16 11 13
Total 100 100 18

Biggest Wealth Destroyers
The market can ruthlessly punish its own erstwhile darlings, if they
disappoint on growth and particularly corporate governance
Company Wealth Destroyed Price
Rs crores % Share CAGR (%)
Suzlon Energy 33,587 10 -30
Reliance Communication 25,167 8 -19
Satyam Computer 23,228 7 -31
M T N L 8,716 3 -24
Bajaj Hindusthan 7,540 2 -32
H F C L 6,708 2 -14
Tata Communication 6,529 2 -13
Videocon Industries 5,405 2 -15
Punj Lloyd 5,185 2 -22
Jet Airways 4,733 1 -15
Total of Above 122,064 38
Total Wealth Destroyed 325,436 100

Wealth Creation & Purchase Price
There is absolutely no substitute for paying right price.
In the Bible, it says that love covers a multitude of sins.
Well, in the investing field, price covers a multitude of
mistakes.
For human beings, there is no substitute for love.
For investing there is no substitute for paying right
price – absolutely none.”
— Van Den Berg, OID, April 2004

Investing v/s Speculation
“An investment operation is one which,
upon thorough analysis, promises safety
of principal and an adequate return.
Operations not meeting these requirements
are speculative.”
— Graham & Dodd in Security Analysis, 1934
Back to basics

Investing v/s Speculation
“If he buys stocks, and buys as an investor, he holds
for income; if as a speculator, for profit …
Wise investment requires that only such issues as are
selling far below their true worth should be bought;
then, as large income payments are received in
subsequent years … a handsome return on the principal
can be enjoyed.”
— John Burr Williams, Theory Of Investment Value, 1938
Back to basics

Blue Chip Investing –
Buying and selling ONLY Blue Chips,
at the right price
What are Blue Chips?
Highly priced stocks, which typically tend to enjoy
premium valuations due to their high quality
The term “Blue Chip” comes from poker where the highest
and most valued denomination chips are colored blue.
What is Blue Chip Investing

Reason #1: Quality
The problem of poor quality: "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, The Intelligent Investor
The advantage of high quality: “Good quality companies
with strong dividend histories offer as much, if not more,
investment growth potential than poor quality companies; and
they do so with far less risk.” — Geraldine Weiss, The Dividend Connection
Why Blue Chip Investing

Reason #2: Longevity
Power of compounding works best over long term
US$ 10,000
US$ 40 billion4 million times in 70 years.
Big number; but CAGR is only 24%
What is this?
? How Warren Buffet has
compounded his initial
capital of US$ 10,000

21
33
57
150
293
451
461
479
508
600
721
837
946
1,230
1,214
1,314
1,728
1,996
2,263
2,566
2,910
3,300
3,743
4,244
4,813
5,458
FY51
FY60
FY70
FY80
FY90
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12E
FY13E
FY14E
FY15E
FY16E
FY17E
FY18E
FY19E
FY20E
1st US$ tn
2nd US$ tn
4 years
58 years
3rd US$ tn
4th US$ tn
2 years
3.5 years
5th US$ tn
1.5 years
Reason #3: Growth
India’s growth story far from over
The NTD journey is on …

Reason #4: Low risk
High return but with significantly low risk
0
1,000
2,000
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8,000
Mar-91
Mar-92
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Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
BSE Sensex Blue Chip Index (both re-based to 100)
(Mkt Cap of Asian Paints, HUL, Hero, Nestle)

Two Key Steps –
#1 Understanding Quality
 Business Performance
 Financial Performance
 Investment Performance
#2 Recognizing Value
 Buying stocks at reasonable price
Blue Chip Investing Process

All listed companies
Screen #1
20 years of uninterrupted dividends
Screen #2
Dividends raised in 5 of last 12 years
Screen #3
Earnings growth in 7 of last 12 years
6-Screen Quality Filter
Screen #4
Average 12-year RoE of 15%
Screen #5
At least 5 million shares outstanding
Screen #6
At least 80 institutional holders
3,000

Screen-tested 48 Blue Chips
Descending Order of Total Return (2000-11)
Over same period: BSE Sensex CAGR: 13% Median Total Return: 23%

#1 Longevity
Median age of 48 Blue Chips: 57
Blue Chip Characteristics
No. of companies

#2 Dominant Market Position
44 out of 48 Blue Chips

#3 Concentrated Business
Out of 48 — 27 high, 7 Medium

#4 Consumer-facing have an edge
Out of 48 — 23 Consumer, 6 Financials

#5 High quality of management
Reflected in above-average RoE, Payout

How To Overcome The High P/E Phobia
Understand the Payout-Yield Connection
Divd Yield = D(ividend) ÷ P(rice)
= D/E ÷ P/E (dividing both by E)
= Payout ÷ PE
So, PE = Payout ÷ Divd Yield
Even assuming higher end of Divd Yield band of say 3%,
for an 80% payout company –
Floor P/E = 80 ÷ 3 = 27
The Valuation Dilemma

Testing the “High Payout = High P/E” hypothesis
Back-to-basics investing math: Classical DDM
P = D
k – g
Dividing both sides by E (for earnings)
P/E = D/E = Payout
k – g k – g
Thus, higher the payout, and higher the
growth, higher should be the P/E

Empirical Evidence
P/E distribution of all listed, profit-making companies by payout range
Near perfect
correlation
between
Payout & P/E
P/E (x)

3 Company-level Case Studies
Case Study #1: Across sectors
Infosys v/s Asian Paints v/s HUL
HUL’s 5-year avg P/E
higher than Asian
Paints and Infosys,
despite low growth
Only reason:
High Payout

Case Study #2: Within sector (Non-financial)
Cement : ACC v/s Birla Corp
Both companies’ EPS
CAGR is flat; Birla Corp’s
RoE is much higher than
that of ACC
Birla Corp’s Payout is
1/3rd of ACC
P/E is also exactly 1/3rd

Case Study #3: Within sector (Financial)
HDFC v/s Shriram Transport
STF’s performance is
superior on most counts –
EPS CAGR, Divd CAGR,
and RoE
But STF’s Payout is 2/3rd
of HDFC
P/E is also exactly 2/3rd

Key points to note:
 P/Es are directly related to Payout and Growth
 Dividend Yields are more structural and homogenous
 Blue Chips are unlikely to trade at throwaway
prices, due to superior quality (high RoE, high Payout)
 So, focus on buying at reasonable valuation,
not necessarily cheap by conventional measures
“We try to invest in outstanding companies at
sensible prices rather than in average companies at
bargain prices.” — Warren Buffett
Blue Chips: When To Buy

Back-tested two signals for last 5 years
Signal #1
 Current Divd Yield higher than long-period median yield
and at the same time
 Current P/E lower than long-period median P/E
Signal #2
 Current Divd Yield > 3%, irrespective of median
Blue Chips: When To Buy

Top Blue Chips on Buy Signals
BLUE CHIP CMP Dividend Yield (%) P/E (x)
(INR) Current Median Delta Current Median Delta
Hero MotoCorp 2,003 5.2 3.3 2.0 19 17 1
Blue Star 178 3.9 2.5 1.5 24 17 7
Infosys 2,608 2.3 0.9 1.4 22 28 -6
Wipro 378 1.6 0.9 0.7 19 29 -10
Cummins India 356 3.0 2.4 0.6 18 21 -3
Tata Steel 385 3.1 2.6 0.5 5 7 -2
Motherson Sumi 152 1.8 1.4 0.4 20 20 1
Ashok Leyland 25 4.1 3.6 0.4 11 13 -2
Bharat Forge 259 1.4 1.1 0.3 16 28 -12
Exide Industries 116 1.3 1.0 0.2 20 22 -2

 Even the bluest of Blue Chips must be sold at
extreme valuations, else they will significantly
underperform for a long period
e.g. Infosys and Wipro since the dotcom boom of 2000
Blue Chips: When To Sell

Potential Blue Chips
Catching ‘em early
Screening criteria to identify potential Blue Chips
Quantitative Criteria Qualitative Criteria
1. Uninterrupted dividends
for the last 5 years
1. Dominant player in line of
business
2. EPS increase in at least
3 of last 5 years
2. Huge size of opportunity
3. Dividend increase in at least
2 of last 5 years
3. Competent management
(prima facie corroborated by
high minimum 15% RoE)4. RoE not less than 15%
in any of the last 5 years
5. 5-year PAT CAGR of at
least 10%

Recognized Blue Chips
Those with Mkt Cap > Rs 10,000 crores
20 Recognized Blue Chips
1. Axis Bank
2. B H E L
3. Cadila Health.
4. Canara Bank
5. Castrol India
6. Coal India
7. Godrej Consumer
8. HDFC Bank
9. Jindal Steel
10. Lupin
11. NMDC
12. Oil India
13. Petronet LNG
14. Punjab National Bank
15. REC
16. Shriram Transport
17. Sun Pharma
18. Sun TV Network
19. TCS
20. UltraTech Cement

Potential Blue Chips
Current Mkt Cap < Rs 10,000 crores
28 Potential Blue Chips
1. BGR Energy
2. Biocon
3. Coromandel Inter
4. Crompton Greaves
5. Deepak Fertilisers
6. eClerx Services
7. Emami
8. GRUH Finance
9. Guj Gas Company
10.Hawkins Cookers
11. Indraprastha Gas
12. Info Edge (India)
13. Kansai Nerolac
14. Karur Vysya Bank
15. M & M Financial
16. Mahindra Holiday
17. Manappuram Finance
18. Opto Circuits
19. Page Industries
20. Rupa & Company
21. Shriram City Union
22. Talwalkar
23. TD Power Systems
24. Thermax
25. TTK Prestige
26. Voltas
27. VST Tillers Tractors
28. Zydus Wellness

Floating the concept of MDO
Bringing back the long-term investor
Country Pay-out ratio (%)
Taiwan 76
Malaysia 60
Philippines 49
Pakistan 49
Thailand 45
Germany 40
Brazil 40
UK – FTSE 39
Nikkei 37
Indonesia 36
Singapore 31
Hong Kong 31
Korea 28
China 26
India – Sensex 23
MSCI India 21
Russia 12

 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 pvt 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, 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 significantly outperformed
benchmark indices with much lower risk.
In Conclusion

Thank You !
&
Happy Blue Chip Investing !!

Wealth Creation Study 2006-2011

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Wealth Creation Study 2006-2011