wealth creation study 2010-15
TRANSCRIPT
Mid-to-MegaThe power of industry leadership in Wealth Creation
20th Annual Wealth Creation Study 2010-2015
By Raamdeo Agrawal
11 December 2015
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Discussion Points 20th Wealth Creation Study Findings
Theme: Mid-to-Mega
Market Outlook
Conclusions
IMPORTANT DISCLAIMER• This study is primarily an analysis of economic data, company financials and stock prices.• The companies mentioned here should not be construed as our investment
recommendations or opinions.
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Wealth Creation 2010-15Study Findings
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Concept of Wealth CreationThe process by which a company enhances market value of the capital entrusted to it by its shareholders
Net Wealth CreatedChange in Market Cap over the study period (2010-15),adjusted for corporate actions like dilutions
Study Methodology
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Biggest Wealth CreatorsTop 100 Wealth Creators subject to the condition that stock performance beats the benchmark (Sensex)
Fastest Wealth CreatorsThe top 100 wealth creators are sorted by fastest rise in their adjusted stock price
Most Consistent Wealth CreatorsBased on number of times a company appeared in the last 10 studies and 10-year price CAGR
Study Methodology (contd)
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Top 10 Biggest Wealth Creators
TCS is largest Wealth Creator for 3rd consecutive year ITC & HDFC Bank retain No.2 & 3 for 3rd consecutive
year
Rank Company Rs crores % Share 2015 2010 Price PAT 2015 20101 TCS 345,758 10 498,891 152,818 27 23 25 222 ITC 156,508 5 260,865 100,476 20 18 27 243 HDFC Bank 154,001 4 256,377 88,458 21 29 24 294 Sun Pharma 140,518 4 211,728 37,066 42 27 47 275 Hind. Unilever 137,389 4 188,849 52,075 30 15 43 246 H D F C 124,089 4 206,482 77,889 19 22 24 247 HCL Tech 113,018 3 137,709 24,191 41 42 19 198 Tata Motors 107,068 3 150,506 38,267 29 40 11 159 Infosys 104,755 3 254,570 150,060 11 15 21 24
10 Axis Bank 77,364 2 132,844 47,368 19 25 18 19Total of Top 10 1,460,466 43 2,300,836 770,678 24 24 23 23Total of Top 100 3,423,348 100 5,247,359 1,694,587 25 19 27 21
Mkt Cap (Rs crores)Net Wealth Created P/E (x)CAGR (%)
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Top 10 Fastest Wealth Creators
Eicher and Page in top 10 for last 4 studies in a row Base market cap of all companies < Rs 2,000 crores
Price Rank Company Appn. (x) Price PAT 2015 2010 2015 2010
1 Ajanta Pharma 50 119 56 10,777 213 35 62 Symphony 39 108 26 9,088 234 78 63 Eicher Motors 25 90 49 43,074 1,727 70 214 P I Industries 22 85 42 8,313 299 34 75 Page Industries 17 77 38 15,312 890 78 226 Wockhardt 13 68 L to P 20,529 1,518 51 N.A.7 Bajaj Finance 13 68 59 20,542 1,166 23 138 GRUH Finance 11 62 24 8,834 757 43 119 Blue Dart 10 59 16 17,255 1,687 133 28
10 Amara Raja 10 59 20 14,202 1,398 35 8
Mkt Cap (Rs cr) P/E (x)CAGR (%)
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Most Consistent Wealth Creators
8 of top 10 are consumer-facing companies Consistent Wealth Creation = Sustainable & Profitable
Growth Sustainable & Profitable Growth = Quality (Business X
Mgmt)
Appeared in Rank Company WC Study (x) Price PAT 2015 2005 2015 2005
1 Titan Company 10 43 44 34,802 980 42 452 Sun Pharma 10 36 28 211,728 8,745 46 223 Asian Paints 10 35 23 77,575 3,751 56 224 Kotak Mahindra 10 34 34 101,421 4,199 33 255 Dabur India 10 31 21 46,627 3,179 44 216 Bosch 10 29 13 79,704 6,137 63 177 Axis Bank 10 28 36 132,844 6,627 18 208 Cummins India 10 27 18 24,322 2,209 36 179 Nestle India 10 27 17 61,514 5,638 52 22
10 M & M 10 25 17 73,733 5,767 25 9
P/E (x)Market Cap (Rs cr)10-year CAGR (%)
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Wealth Creators v/s Sensex
Wealth Creators’ outperformance is explained by – 1. Superior earnings growth over Sensex 2. Which also drove P/E re-rating higher than Sensex
Mar-10 Mar-15 5 YearCAGR (%)
BSE Sensex 17,528 27,957 10Wealthex - re-based to Sensex 17,528 54,275 25
Sensex EPS (Rs) 834 1,353 10Wealthex EPS (Rs) 839 2,044 19
Sensex PE (x) 21 21 0Wealthex PE (x) 21 27 5
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Wealth Creation by Industry
Significant re-rating in Consumer sector 3 of top 5 Wealth Creating sectors seeing Value
Migration No Wealth Created by Metals/Mining; highest in 2005-
10
Industry Wealth (No. of companies) Rs crores 2015 2010 Price PAT 2015 2010Consumer & Retail (25) 751,850 22 7 28 16 44 28Banking & Finance (17) 671,162 20 15 23 21 21 20Technology (6) 616,973 18 10 23 23 23 22Auto (14) 491,449 14 5 29 21 23 17Healthcare (14) 448,121 13 4 31 29 33 30Cement (5) 133,725 4 2 21 -2 32 11Capital Goods (5) 68,103 2 10 19 8 51 31Telecom & Media (2) 61,349 2 3 24 21 24 21Oil & Gas (3) 57,998 2 17 22 15 13 10Metals / Mining 0 0 19Utilities 0 0 6Others (9) 122,618 4 3 23 18 33 27Total 3,423,349 100 100 25 19 27 21
Not applicable
Share of WC % 2010-15 CAGR % P/E x)
Not applicable
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Wealth Creation by PSUs hit the floor
Over the years, value has migrated from PSUs to private companies across sectors – Telecom, Mining, Utilities, Capital Goods, Banking, Oil & Gas, etc.
28 30 26 18
25 16
22 24 20 11 5 5
49 51
36
25
35 27 30
27
20
9 2 2
1999
-04
2000
-05
2001
-06
2002
-07
2003
-08
2004
-09
2005
-10
2006
-11
2007
-12
2008
-13
2009
-14
2010
-15
No. of PSUs % of Wealth Created
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Wealth Creation & Valuation Metrics
Turnaround (Bharat Forge, Wockhardt) and expected turnaround (United Spirits, SPARC) can lead to rapid Wealth Creation
P/E in2010
No. of Cos.
% Wealth Created
Price CAGR %
PAT CAGR %
Loss-making 4 3 35 L to L <10 12 5 28 110-20 33 29 28 2120-30 35 55 24 20 >30 16 9 24 25Total 100 100 25 19
P/E
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Wealth Creation & Valuation Metrics (contd)
As a rule, P/B up to 2x may be considered attractive
P/B in 2010
No. of Cos.
% Wealth Created
Price CAGR %
PAT CAGR %
< 2 11 6 31 172-3 22 12 20 153-4 16 16 31 184-5 12 21 28 25 > 5 39 44 24 20
Total 100 100 25 19
Price/Book
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Wealth Creation & Valuation Metrics (contd)
Price/Sales < 1x stocks will likely prove to be huge Wealth Creators
P/S in 2010
No. of Cos.
% Wealth Created
Price CAGR %
PAT CAGR %
<1 20 12 36 321-2 21 16 29 162-3 23 19 28 143-4 11 13 21 22 >4 25 40 23 19
Total 100 100 25 19
Price/Sales
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Payback ratio = Mkt Cap / 5-years forward PAT Payback < 1 remains the most reliable indicator of
superior Wealth Creation across market cycles.
Payback ratio 2010
No. ofCos.
% Wealth Created
Price CAGR %
PAT CAGR %
<1 21 14 38 341-2 28 30 28 182-3 34 45 23 18>3 17 11 21 8
Total 100 100 25 19
Wealth Creation & Valuation Metrics (contd)
Payback ratio
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Wealth Destruction
8 of top 10 Wealth Destroyers are in global commodities
6 of top 10 Wealth Destroyers are PSUs
Company Wealth Destroyed Price Rs
crores % Share CAGR (%)MMTC 152,206 10 -50Reliance Industries 81,969 6 -5S A I L 75,772 5 -23NMDC 65,061 4 -15B H E L 59,266 4 -13Jindal Steel 50,474 3 -26NTPC 49,184 3 -7Hindustan Copper 43,508 3 -35Vedanta 42,663 3 -17Tata Steel 29,260 2 -13Total of Above 649,365 44 Total Wealth Destroyed 1,463,226 100
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Mid-to-MegaThe power of industry leadership in Wealth Creation
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Theme Discussion Points Key challenge of investing Importance of growth Some Growth characteristics 100x v/s Mid-to-Mega What is Mid-to-Mega Why Mid-to-Mega What it takes to achieve Mid-to-Mega How to shortlist potential Mid-to-Mega ideas
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Key challenge of equity investingFinding stocks with - Moat Growth Right valuation
Moat is now almost a science … – competitive advantage reflected in RoE above cost of equity
… but growth and valuation are complete art– little or no literature on growth– some investors treat growth as mere amplifier of returns,
having bought a stock cheap in the first place
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Importance of growth
Basic mathematics of making money in equities –
Long-term profit growth = Long-term price growth2005-15 PAT CAGR Price CAGRSensex 12% 16%TCS 24% 22%Reliance Industries 11% 14%O N G C 3% 8%HDFC Bank 32% 25%Sun Pharma 28% 36%H D F C 26% 25%Tata Motors 26% 21%Lupin 39% 43%Hindustan Zinc 26% 25%Marico 23% 32%Godrej Consumer 27% 30%
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Two key growth challenges
1. Search for and calibration of future growth
2. Knowing how much growth is already priced in
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Some Growth characteristics
Nothing grows to the sky
High growth is not everywhere
Growth is always probabilistic
All growth is not profitable
Growth can be found in any size of company
There can be growth even in adverse environment
Growth is uniquely company specific
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Growth implication
Since growth is uniquely company specific, look for high-growth approaches & situations
We covered one approach last year - 100x
This year we do Mid-to-Mega
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100x v/s Mid-to-Mega
“100x” refers to stock prices rising 100-fold over time(theme of our last year’s Wealth Creation Study)
100x: Highly aspirational, somewhat theoretical Ideas few & far between (47 stocks in 20 years) Requires high level of patience (average 12 years)
Mid-to-Mega: A more practical alternative 9-12 stocks every year High returns within realistic time-window of 5
years
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Defining the terms
Rank approach rather than market cap approach
Mega : Top 100 stocks by market cap rank
Mid : Stocks ranked next 200 i.e. 101 to 300
Mini : Stocks ranked below 300
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Why ranks Roadmap for the futureGDP, Market Cap & Market Cap Ranks Trend
Rs crores 2000 2005 2010 2015 CAGR 00-15 2020GDP 1,972,509 3,178,259 6,350,057 12,653,762 13% 23,719,042
Total Mkt Cap 738,883 1,581,721 5,933,582 9,808,765 19% 19,728,931MC % of GDP 37% 50% 93% 78% 83%
Top 100 stocks 655,214 1,276,728 4,546,192 7,421,559 18% 14,796,698% of MC 89% 81% 77% 76% 75%
THE MEGA STOCKSTop stock 125,876 125,874 351,450 498,891 10% 986,447
% of MC 17.0% 8.0% 5.9% 5.1% 5.0%100th stock 778 2,391 10,440 20,529 24% 39,458
% of MC 0.1% 0.2% 0.2% 0.2% 0.2%
THE ASPIRANTS300th stock (Mid) 120 455 2,159 3,823 26% 7,892
% of 100th stock 15% 19% 21% 19% 20%500th stock (Mini) 39 160 757 1,405 27% 2,762
% of 100th stock 5% 7% 7% 7% 7%
Mid-to-Mega 10x, 58% CAGR
Mini-to-Mid 5.6x, 41% CAGR
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What is Mid-to-Mega
Crossover by a company from Mid to Mega
category
Achievement of critical mass & scale
Recognition by markets of the same
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Why Mega
Bedrock of India’s corporate sector & markets Top 100 stocks – 75% of market cap, 88% of profits 88 of 100 stocks – industry leaders i.e. No.1, 2 or 3 by
sales
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Why Mega
Increasingly difficult to dislodge Megas from their category
40 companies have stayed in this club since 1995
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Why Mid-to-Mega
Mega dropouts getting replaced by Mid-to-Mega stocks
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Why Mid-to-Mega
Most profitable & plausible of the 3 buy crossovers – Mini-to-Mega Mini-to-Mid Mid-to-Mega
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Why Mid-to-Mega
Two evidences for above conclusion1. Performance track record of Mid-to-Mega portfolios2. Returns and associated probability of crossovers
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Why Mid-to-Mega
Performance track record of Mid-to-Mega portfolios
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Why Mid-to-Mega
Performance of 2010-15 Mid-to-Mega companies
KEY FINDINGS:— Every single company has outperformed the Sensex
— 18 out of 24 are industry leaders
— Of the 6 non-leaders, 5 are Value Migration beneficiaries
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Why Mid-to-Mega
Returns & associated probabilities of crossovers
Eicher, Bajaj Finance, Wockhardt
JP Power Ventures, Lanco Infratech, D B Realty
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Why Mid-to-Mega
Mid-to-Mega has highest probability of the 3 crossovers
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Why Mid-to-Mega
Rank crossovers : Returns & probability matrix
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What it takes for Mid-to-Mega
… a lollapalooza effect !!
What is this thing called lollapalooza effect?A term popularized by Charlie Munger, denoting several factors acting together
“I’ve been searching for lollapalooza results all my life, so I’m very
interested in models that explain their occurrence … Really big
effects, lollapalooza effects, will often come only from large
combinations of factors.”
– Charlie Munger
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What it takes for Mid-to-MegaA lollapalooza of MQGLP M – Midsize Q – Quality of business & management G – Growth in earnings L – Longevity P – Price
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What it takes for Mid-to-Mega
M of MQGLP – Midsize 200 companies with market cap rank between 101 and
300(currently between Rs 4,000-20,000 crores)
Benefit of low-base effect compared to Mega
companies
Well-established track record for informed decision-
making
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What it takes for Mid-to-Mega
Q of MQGLP – Quality
Quality of business
Quality of management
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What it takes for Mid-to-Mega
Quality of business
Industry Leadership
Economic Moat
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What it takes for Mid-to-Mega
Industry Leadership
88% of Mega companies are industry leaders; trend
rising
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What it takes for Mid-to-Mega
Industry Leadership (continued)
Avg 70% of Mid-to-Mega crossovers are leaders; trend
rising
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What it takes for Mid-to-Mega
Economic Moat
Distinct value proposition
RoE consistently higher than Cost of Equity (15% in
India)73 of the Mega companies have 5-year average > 15%
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What it takes for Mid-to-Mega
Quality of management Unquestionable integrity
– Impeccable track record of corporate governance– Concern for all stakeholders– Preferably paying full tax and a well-articulated dividend policy
Demonstrable competence– Excellence in strategic planning and execution– Sustainable competitive advantage over its peers
Growth mindset– Long-range profit outlook– Efficient capital allocation– Persisting with growth plans despite temporary setbacks
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What it takes for Mid-to-Mega
Quality is necessary but not sufficientRisk of Quality Trap
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What it takes for Mid-to-Mega
G of MQGLP – Growth in earnings Value Migration Sustained industry tailwind Small base with large opportunity New large investment getting commissioned Inorganic growth through M&A Consolidation of competition Operating & Financial leverage Turnaround from loss to profit
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What it takes for Mid-to-Mega
Value MigrationPrivate banks’ PAT now exceeds PSU Banks
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,00020
00
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
PAT trend (Rs crores)
PSU Banks
Private banks
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What it takes for Mid-to-Mega
Sector tailwindHousing Finance offers long-term tailwind
1,133
11,304
2005 2015
Housing Finance Sector PAT (Rs cr)
26% CAGR for last 10 years
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What it takes for Mid-to-Mega
Small base with large opportunity
2005-15 Ajanta Pharma PAT up from Rs 10 cr to Rs 315 cr
10 12 15 22 25 34 51
77
112
234
315
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Ajanta Pharma 2005-15 PAT CAGR: 41% (Figures in Rs crores)
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What it takes for Mid-to-Mega
Inorganic growth through M&A
Motherson Sumi’s highly successful inorganic strategy
-200
0
200
400
600
800
1,000
1,200
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Motherson Sumi Consolidated PAT trend
Subsidiary PAT : 36% CAGR
Standalone PAT : 23% CAGR
Consol PAT : 28% CAGR
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What it takes for Mid-to-Mega
Operating & Financial Leverage
High operating & financial leverage in Bharti InfratelRs crores Mar-11 Mar-15 CAGRSales 8,508 11,668 8%Total Expenditure 5,379 6,664 6%EBITDA 3,129 5,004 12% EBITDA Margin 36.8% 42.9%Interest cost 433 290 -10% % of sales 5.1% 2.5%Adjusted PAT 539 1,771 35% % of sales 6.3% 15.2%
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What it takes for Mid-to-Mega
Turnaround in profit
Tata Motors turns around JLR
2,127 1,937
-2,796
1,526
9,064
14,115
10,271
14,642 14,028
Mar
-07
Mar
-08
Mar
-09
Mar
-10
Mar
-11
Mar
-12
Mar
-13
Mar
-14
Mar
-15
Tata Motors PAT trend (Rs crores)
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What it takes for Mid-to-Mega
L of MQGLP – Longevity of quality & growth Extending CAP (Competitive Advantage Period) Delaying mean reversion of growth rateCompanies typically enjoy a certain CAP … … successful company continuously extend it
56
What it takes for Mid-to-Mega
P of MQGLP – favourable price Typically low P/E Very low P/E for Mid-to-Mega stocks unlikely due to track
record
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Shortlisting potential Mid-to-Mega
Applying MQGLP through a 6-step process1. Start with 200 Mids (M of MQGLP)2. Filter for year of purchase RoE at least 20% (Q of
MQGLP)3. Of the above list, select Industry Leaders and
beneficiaries of Value Migration / Industry tailwind (Q of MQGLP)
4. Post step 3, select companies with 2-year PAT CAGR of 20% as growth momentum (G of MQGLP)
5. Next, prefer seculars over cyclicals (for L of MQGLP) 6. Finally, decide a suitable purchase P/E for the stock
based on a call on management competence, integrity & growth mindset (P of MQGLP)
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Shortlisting potential Mid-to-Mega
Investors may adapt these 6 steps to increase the probability of the Mid-to-Mega lollapalooza.
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Mega-to-Mid Reverse of Mid-to-Mega i.e. companies which drop out of top 100
Findings of Mega-to-Mid from 2005 to 2015
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Mega-to-Mid
Findings of Mega-to-Mid from 2005 to 2015
In Mid-to-Mega, 2 in every 3 companies are industry leaders;in Mega-to-Mid, 3 in 4 companies are non-leaders
Reinforces our case: Mid-to-Mega – the power of industry leadership in Wealth Creation
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Market OutlookA macro perspective
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Corporate Profit to GDP is bottoming out
Market Outlook
Corporate Profit to GDP (%)
63
Commodity prices hurting Sensex earnings; expect recovery in FY17
Market Outlook
64
Downward journey in interest rates has started
Market Outlook
65
Earnings Yield to Bond Yield at LPA; lower interest rates to help
Market Outlook
66
Market Cap to GDP below LPA for much of the last 5 years
Market Outlook
67
Sensex P/E at 16x in line with long-period average
Market Outlook
68
Value Migration is increasingly becoming the key driverof rapid Wealth Creation.
Industry leadership is a necessary pre-requisite to bea megacorp.
Market cap rank is a powerful tool to assess a company's current standing and the roadmap ahead.
Mid-to-Mega marks a big change in ranks, driven by the lollapalooza effect of MQGLP (Mid-size, Quality, Growth, Longevity and Price).
Acceleration in earnings coupled with softening interest
rates will likely usher in the next round of market expansion, albeit a few quarters later.
In Conclusion
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Thank You !&
Happy Investing for
Mid-to-Mega !
IMPORTANT DISCLAIMER• This study is primarily an analysis of economic data, company financials and stock prices.• The companies mentioned here should not be construed as our investment
recommendations or opinions.