14th Motilal Oswal Wealth Creation Study

Reliance Industries, Unitech, HDFC - biggest, fastest, most consistent wealth creators 'Winner Categories + Category Winners' formula unveiled to find wealth creators

Every year, Mr Raamdeo Agrawal, Managing Director of Motilal Oswal Group, commissions an Annual Wealth Creation Study. The Motilal Oswal 14th Annual Wealth Creation Study (2004-09) is divided into three parts -

1. Wealth Creation Study findings
2. Winner Categories + Category Winners = Formula for Wealth Creation in the NTD Era
3. Market Outlook

Part 1: Wealth Creation Study findings

Part 1 analyzes the top 100 wealth creating companies during the period 2004-09. (Wealth created is calculated as change in the market cap of companies between 2003 and 2009, duly adjusted for corporate events such as mergers, de-mergers, fresh issuance of capital, buyback, etc.)

The key highlights of this section are:

• Reliance Industries has emerged as the biggest wealth creator for the third time in a row. It has created 1514 billion RS worth of wealth contributing 15.6% of total wealth created in FY09.
• Unitech is the Fastest Wealth Creator during 2004-09, for the second time in a row. Its 5-year stock price CAGR is a staggering 122%
• Five companies - HDFC, Sun Pharma, Reliance Inds, Hero Honda and Infosys - have featured among the top 100 wealth creators in each of the last 10 years. HDFC is ranked as the most consistent by virtue of its 10-year price CAGR being the highest.
• For the last six years, the biggest wealth creator in India has emerged from Oil & Gas - the first three years led by ONGC and next three by Reliance.
• This year, NMDC has the unique distinction of featuring in both the biggest and the fastest wealth creators list.
• This year, eight of the top 10 most consistent wealth creators are consumer-facing businesses with strong franchise.
• Comparing the performance of the top 100 Wealth Creating companies(Wealthex); over the entire period, the Wealthex outperformed the Sensex by 83%, Wealthex earnings CAGR was 24.2% compared to 18.8% for the Sensex and the Wealthex P/E was 16.3x, lower than 16.8x for the Sensex.
• Oil & Gas continues to be the largest wealth creating sector. However, over the last five years, its share has fallen from 43% of wealth created to 22%, clearly indicating value cmigration to sectors such as Telecom and FMCG. Telecom's rising share of wealth created can be attributed to superior PAT CAGR of 62% over the last 5 years. On the other hand, FMCG PAT CAGR is a muted 14%; however, the sector has seen a valuation re-rating, more so given the flight to safety phenomenon during the market downturn in FY09.
• FY04-09 marks a semblance of the MNC resurgence, with number of top wealth creating companies more than doubling from 10 to 23 and share of wealth created increasing from 7% to 14%. A major factor for this resurgence is FMCG, led by ITC, Hindustan Unilever and Nestle.
• 74 of the top 100 wealth creating companies had a base market cap of less than Rs50b in 2004.
• A sure shot formula for multi-baggers is -

- P/E of less than 10x

- Price/Book of less than 1x

- Price/Sales of 1x or less

- Payback ratio of 1x or less.

• Of the top 100 wealth creators, 66 were companies which enjoyed entry barriers. These companies accounted for a disproportionate 86% share of the total wealth created.

Part 2: Winner Categories + Category Winners: Formula for Wealth Creation

The theme of this year's study outlines a winning formula for wealth creation

1. Winner Categories = Categories benefiting from India's Next Trillion Dollar GDP opportunity + Scalability

2. Category Winners = Winner Categories + Entry Barriers + Great management

3. Winning investments = Category Winners + Reasonable valuation

Winner Categories: India's NTD Era will see a huge boom in consumption and savings/investment, which will throw up several Winner Categories i.e. those which grow at over 1.5x GDP growth rate, and are consolidated in nature. The study identifies 21 Winner Categories:

1. Alcoholic beverages 12. Finance - Housing
2. Auto - 2 wheelers 13. FMCG - Personal Care
3. Auto - Cars & UVs 14. FMCG - Processed Food
4. Auto - Tractors 15. Gas distribution
5. Capital Goods - Power equipment 16. Infrastructure
6. Construction 17. Insurance
7. Engineering - Turnkey 18. Media - Entertainment
8. Finance - Banks, Private Sector 19. Real Estate
9. Finance - Banks, Public Sector 20. Retailing
10. Finance - Brokerages 21. Telecom
11. Finance - Credit rating

Category Winners: These are companies from Winner Categories, which have high Entry Barriers and great managements.

Winning investments: Category Winners bought at reasonable (not necessarily cheap) valuation create significant wealth over the long term. The study constructs a model portfolio for the NTD Era, based on the above principles.

Model portfolio for India's NTD Era

1. • Auto - 2 wheelers : Hero Honda
   • Auto - Cars & UVs: Maruti Suzuki
   • Auto - Cars & UVs/tractors: Mahindra & Mahindra
   • Capital Goods - Power equipment: BHEL
   • Engineering - Turnkey: Larsen and Toubro
   • Finance - Banks, Private Sector: HDFC Bank
   • Finance - Banks, Public Sector: SBI
   • Finance - Credit rating: CRISIL
   • Finance Housing: HDFC
   • FMCG Personal Care: Dabur India
   • FMCG Processed food: Nestle India
   • Infrastructure: Mundra Port
   • Media - Entertainment: Sun TV
   • Retailing: Pantaloon Retail
   • Telecom: Bharti Airtel

Part 3: Market Outlook

• Corporate profit to GDP has bottomed out and should hit new highs in the next 4-5 years on the back of sustained economic performance.
• Sensex EPS: Expect 15-20% growth beyond FY11; but no significant P/E re-rating from current levels.
• Despite expected Sensex EPS growth of 25%+ in FY11, markets are unlikely to cross earlier peak of 21,000 in next 12 months.
• Inflation concerns, strong pipeline of issuances and current rich valuation will cap significant market upmove, despite fairly healthy earnings outlook.