The most special feature of MOSt Research is the Wealth Creation Report. It is work of the foremost value investor in India and the joint MD and promoter– Mr. Raamdeo Agrawal. An equity research stalwart, Mr. Agrawal analyses the most consistent, the fastest and the biggest value creators in the Indian equity universe every year. Though the study is done every year, the report is timeless in its use. The report is unveiled at a special annual function, where the best are felicitated. The Wealth Creation Report is available on request as soft copy or printed format
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Annual Wealth Creation Study 3
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Annual Wealth Creation Study
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
adjusted for corporate actions
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Annual Wealth Creation Study 4
Wealth Creation Study - Methodology
Wealth Creators:
Though Rs 100 crores of net wealth created is the
qualifying criteria, the top 100th
wealth creating
company managed Rs 4,000 crores.
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Annual Wealth Creation Study 5
The 10 Biggest Wealth Creators
Rank Company Net Wealth Created Price Price PAT
Rs crores % Share Apprec. (x) CAGR(%) CAGR(%)
1 Reliance Inds 307,727 12.1 10.1 58.7 36.5
2 ONGC 159,336 6.3 4.1 32.8 9.7
3 Bharti Airtel 150,478 5.9 29.2 96.4 L to P
4 NMDC 135,554 5.3 115.0 158.3 59.8
5 MMTC 108,409 4.3 193.9 186.8 51.6
6 BHEL 95,204 3.7 18.4 79.1 45.1
7 L&T 81,259 3.2 32.8 100.9 38.1
8 SAIL 72,674 2.9 21.0 83.8 L to P
9 State Bank 70,064 2.8 6.3 44.4 16.7
10 ITC 61,682 2.4 4.9 37.5 17.9
Total of above 1,242,387 48.9
Total of top 100 2,539,047 Dominance of commodities
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Annual Wealth Creation Study 6
The 10 Fastest Wealth Creators
Rank Company Price Price Mkt Cap (Rs crores)
Apprec. (x) CAGR(%) 2008 2003
1 Unitech 837 284 44,830 54
2 Jai Corp 316 216 9,186 28
3 MMTC 194 187 108,971 562
4 Financial Tech 164 177 7,359 36
5 BF Utilities 152 173 4,001 26
6 Aban Offshore 118 160 11,433 94
7 NMDC 115 158 136,743 1,189
8 Godrej Inds 108 155 8,294 70
9 Sesa Goa 102 152 12,321 121
10 REI Agro 99 150 7,078 44
Nothing is more profitable than investing in an early stage bubble
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Annual Wealth Creation Study 7
The Most Consistent Wealth Creators
Rank Company
Appeared in last 10
WC Studies (x)
10 Yr Price
CAGR (%)
1 Infosys Tech. 10 25.7
2 Hero Honda Motor 10 16.5
3 Ranbaxy Labs 10 8.7
4 Sun Pharma 9 46.0
5 Reliance Inds 9 40.5
6 HDFC 9 40.2
7 Cipla 9 21.8
8 Satyam Computer 9 19.2
9 Piramal Healthcare 9 16.6
10 ITC 9 13.9
Non-cyclicality of business is key for consistent wealth creation
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Annual Wealth Creation Study 9
Wealth Creation by Industry
Industry (No of cos.) Wealth Created (Rs cr) Share (%)
Oil & Gas (8) 582,623 22.9
Metals (13) 441,617 17.4
Banking & Finance (15) 328,235 12.9
Engineering (10) 260,328 10.3
Telecom (2) 163,638 6.4
IT (5) 123,365 4.9
FMCG (6) 118,049 4.6
Pharma (8) 73,292 2.9
Auto (7) 68,033 2.7
Ultility (4) 63,519 2.5
Cement (4) 52,733 2.1
Construction / Real Estate
(2) 49,076 1.9
Media (2) 14,657 0.6
Retail (2) 9,580 0.4
Others (12) 190,301 7.5
Total 2,539,047 100.0
Commodities
may give way to
users of
commodities
going forward
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Annual Wealth Creation Study 10
165
103 99
74
51 57
3333
< 200 200-500 500-1,000 1,000-
2,000
2,000-
5,000
5,000-
10,000
10,000-
20,000
> 20,000
Avg Price CAGR: 50%
Wealth Creation by Mcap (Base Year)
Price CAGRby Base YearMCap
2003 Market Cap Range (Rs crores)
Rapidly growing and deregulating Indian
economy will produce many young and
fast-growing enterprises
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Annual Wealth Creation Study 11
Wealth Creation by Earnings Growth
2003-08 Earnings Growth Range (%)
Price CAGRby Earnings Growth Range : Hig he r the be tte r
27
49
67
108
98
43 45
0-10 10-20 20-30 30-40 40-50 50-70 >70
Avg Price CAGR: 50%
Markets are unable to fully price in hypergrowth
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Annual Wealth Creation Study 12
Wealth Creation based on ROE
Price CAGRby ROE in 2003
92
56
32
15
39
36
77
61
<5 5-10 10-15 15-20 20-25 25-30 30-40 >40
Avg Price CAGR: 50%
Bargains
Risk-reward balance
Bargains are found when
markets are blind to change
2003 ROE Range (%)
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Annual Wealth Creation Study 13
Wealth Creation by Valuation Parameters
P/E
(x) No. of companies
% Wealth
Created
Price CAGR
%
<5 36 41 55
5-10 27 26 57
10-15 18 18 59
15-20 7 5 25
>20 12 11 37
Total 100 100 50
High margin of safety in single digit P/Es
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Annual Wealth Creation Study 14
Wealth Creation by Valuation Parameters
Price/Book
(x)
No. of
companies
% Wealth
Created
Price CAGR
%
<1 47 34 67
1-2 32 49 54
>2 21 17 30
Total 100 100 50
Price /Bookof less than 2x – 83% of wealth created
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Annual Wealth Creation Study 15
Wealth Creation by Valuation Parameters
Watch out forPrice /Sales < 1
Price/Sales
(x)
No. of
companies
% Wealth
Created
Price CAGR
%
<0.25 19 15 66
0.25-0.5 19 13 63
0.5-1.0 28 37 62
1-2 14 18 47
>2 20 17 30
Total 100 100 50
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Annual Wealth Creation Study 16
Wealth Creation by Valuation Parameters
Paybackof less than 1x – 84% of wealth created
Payback
Ratio
No. of
companies
% Wealth
Created
Price CAGR
%
<0.25 22 18 116
0.25-0.5 28 19 59
0.5-1.0 32 48 50
1-2 9 10 38
>2 9 6 22
Total 100 100 50
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Annual Wealth Creation Study 17
“There is absolutely no substitute forpaying 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.
Forhuman beings, there is no substitute forlove.
Forinvesting there is no substitute forpaying
right price – absolutely none.”
— VanDenBerg, OID, April 2004
Wealth Creation by Valuation Parameters
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Annual Wealth Creation Study 19
Warren Buffett says –
“Think of three types of savings accounts.
• The Great one pays an extraordinarily high interest
rate that will rise as the years pass.
• The Good one pays an attractive rate of interest that
will be earned also on deposits that are added.
• Finally, the Gruesome account both pays an
inadequate interest rate and requires you to
keep adding money at those disappointing
returns.”
Great, Good, Gruesome – Definition
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Annual Wealth Creation Study 21
Great companies –
• Require very little incremental capital for growth
• High and steadily rising RoE
Good companies –
• “Put up more to earn more” phenomenon
Gruesome companies
• Consume lot of capital
• Earn little or no money
Great, Good, Gruesome – Key difference
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Annual Wealth Creation Study 22
Great, Good, Gruesome – Characteristics
Criteria Great Good Gruesome
Competitive
advantage
High and rising long-
term competitive
advantage from
brand / low-cost
production
Steady competitive
advantage
Low or no competitive
advantage
Nature of
business
Stable business i.e.
no rapid or
continuous change
Subject to moderate
change
Business likely to
have rapid changes
Pricing power High Moderate Absent
Management Low dependence on
greatness of
management
Management, key
success factor
High dependence on
management
Growth Typically moderate
growth; high growth
rates a rarity
Moderate-to-high
growth rate
High growth rates
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Annual Wealth Creation Study 23
Great, Good, Gruesome – Characteristics (contd.)
Criteria Great Good Gruesome
Capital
intensity
Low capital
intensity; high level
of intangible assets
Moderate-to-high
capital intensity
Very high capital
intensity
RoE Very high and rising
RoE
Stable and
attractive RoE
Low / falling RoE
Dividend
payout
Typically high Moderate Low or no payout
Examples Hero Honda,
Nestle, GSK
Pharma, Infosys
HDFC Bank, L&T,
BHEL, Tata Steel
Tata Tele (Mah),
Jet Airways, Arvind
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Annual Wealth Creation Study 24
Great, Good, Gruesome – Typical Financial Profile
Nestle HDFC Bank Tata Tele
(Great) (Good) (Gruesome)
10-yearCAGR(%) -
Sales 10.0 44.0 101.0
PAT 19.0 39.0 Loss to Loss
Capital Empd (Rs cr) -109 * 11,158 1,742
RoE (%) -
Latest 102.5 17.7 NWeroded
10 years ago 36.4 26.4 -10.3
10-yearincr. RoE 230.0 14.0 Not calculable
In last 10 years -
Cumulative PAT (Rs cr) 2,231 5,875 -2,670
Total Dividend (Rs cr) 1,818 1,205 0.0
Average Payout (%) 81.0 21.0 0.0
* Net worth
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Annual Wealth Creation Study 26
Key takeaways -
• Great companies are fountains of dividends
• Good companies are fountains of earnings
• Gruesome companies are bottomless pits
of capital consumption
Great, Good, Gruesome – Typical Financial Profile
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Annual Wealth Creation Study 28
Key takeaways -
• Both have deployed very little incremental capital
• Incremental PAT / Capital Employed is high for both
• Both are proving to be huge cash machines
• At 21.4%, Nestle’s return is same as 21.7% for See’s
• Main difference:
In Nestle’s case, much of the return is by way of
earnings growth, whereas in See’s it is by way
of earnings yield (i.e. higher margin of safety)
Two Greats – See’s Candy vs Nestle India
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Annual Wealth Creation Study 29
Great investments are the result of huge
margin of safety at the time of purchase
Benjamin Grahamon margin of safety
• “It is a favorable difference between price [paid]
and indicated or appraised value.”
• “The function of margin of safety is, in essence, that of rendering
unnecessary an accurate estimate of the future.”
• “Margin of safety lies in an expected earning power
considerably above the going rate for bonds.”
Great companies need not be great investments
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Annual Wealth Creation Study 31
Great, Good, Gruesome – Investment Payoff Matrix
Best investment strategy
• Buy good companies at great price, or
• Buy great companies at good price
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Annual Wealth Creation Study 32
Great, Good, Gruesome – Investment Payoff Matrix
Benjamin Graham on good- and low-quality stocks
• The risk of paying too high a price for good-quality
stocks is not the chief hazard …
• … chief losses to investors come from the purchase of
low-quality securities at times of favorable business
conditions.
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Annual Wealth Creation Study 33
Great, Good, Gruesome – Investment Payoff Matrix
CharlierMungeron high- and low-quality businesses
• 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 40 years and you hold it for
that 40 years, you’re not going to make much different than a 6%
return – even if you originally buy it at a huge discount.
• Conversely, if a business earnings 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.
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Annual Wealth Creation Study 41
• Understanding of Great, Good and Gruesome companies is
critical to investment success.
• Great time to buy Great companies (perpetual bonds) at
reasonable prices, as interest rates are likely to remain low
for quite some time.
• Gruesome companies are best avoided.
• Market is likely to see a sector churn – dominance of
commodities will probably give way to users of commodities.
• Corporate profit boom of last five years is unlikely to
continue. However, we have probably seen the market
bottom at Sensex levels of 7,700.
In Conclusion