DSIJ 150 Wealth Creators

It is always interesting to know the top wealth creators in any given period as it helps us ascertain the underlying trend of the market. Yogesh Supekar and Karan Bhojwani underlines the stocks that have created maximum wealth in 2019 while market experts comment on the market outlook going ahead. Also, the DSIJ Reasearch Team shares a list of "The Super 50 & Elite 100 companies" based on their historical performance (growth) and fundamentals.

To download the  Super 50 companies data 

To download the  Elite 100 companies data 

The year 2020 has started off with flying colours for equity markets and there is a huge sense of relief and optimism amongst the investors. The broader market participation has been phenomenal so far this year with as many as 1,351 stocks trading positive on an YTD basis and as many as 236 stocks already up by more than 15 per cent on the same basis. What more could any investor expect from the markets? As equity investor Vikrant Akolkar puts it, “I have been extremely glad to see the markets perform they way they have done so far this year. Some of the stocks in my portfolio have jumped by more than 20 per cent on an YTD basis. I only hope this momentum will be sustained for the better part of the year.”

Whether the momentum will continue throughout 2020 or not is something only the forthcoming months will reveal but the signs are that the year may produce lot more wealth creators as compared to 2019 and 2018.

Index YTD Performance

Small-caps and mid-caps have shown an impressive recovery in 2020 with the BSE Small-Cap index gaining nearly 7 per cent while the BSE Mid-Cap index inching up to over 5 per cent. The large-caps as reflected by the BSE Large-Cap index have been flattish in the similar period. 

Sensex: No More the Most Expensive Market

Investors have long been worried about the rich and expensive valuations reflected by the benchmark indices. Sensex was the most expensive index in a similar period the previous year. The Sensex PE stood at 26.98 during February 2019 while NASDAQ traded at a PE multiple of 22.46, which was the second most expensive global index. Nasdaq today trades at a PE mutiple of 32.20 while the German index DAX is trading at a PE multiple of 26.33. Sensex is trading at 25.24 PE multiple and retains the tag of being the most expensive index in the emerging market space. 

Global Market Outlook

The year of 2019 will go down as a year largely dominated by geopolitical tensions and social unrest, be it the US – China trade tensions, souring of US – Iran relations, social unrest in Hong Kong, fears of a hard Brexit or the global slowdown as a whole. However, as the turbulent year drew to a close, clarity developed regarding most of these issues causing the S & P 500 to hit new highs with concerns of geopolitical tail risks easing. This prompted investors around the world to ponder whether the global markets would make a turnaround in 2020. 

The case for a rebound is certainly building with the synchronised easing of 23 central banks since mid-2019, setting the path for a global recovery in 2020. According to the IMF, global growth which is estimated at 2.9 per cent in 2019 is projected to increase to 3.3 per cent in 2020 and further inch up to 3.4 per cent in 2021. There has been a downward revision of 0.1 per cent to 2019 and 2020 and a 0.2 per cent for 2021, largely attributed to the negative surprises in economic activity in a few emerging markets, notably India. Despite the many issues surrounding the markets, global exchanges rebounded from an abysmal 2018 aided by the wave of central bank easing. In particular, US stocks were the ones that created the most wealth for investors. The Nasdaq Composite index led the way with 29.98 per cent return on a one-year basis, outperforming its large-cap brethren, the S & P 500 and the Dow Jones Industrials by 8.38 per cent and 16.44 per cent, respectively. Among the constituents in the technology stocks in the US, Tesla, AMD, MercadoLibre, Copart and Apple were the ones that offered the highest returns. Nasdaq had its best year since 2009, as indicated by the table below:

In a year in which financial markets across the board have surged, commodities haven’t been left out either. Certain individual commodities ETFs have strongly outpaced even equities during 2019. Palladium was the undisputed leader in the commodity space during this time. The Aberdeen Standard Physical Palladium Shares ETF (PALL), with more than USD 330 million in assets under management, surged 81.63 per cent on a one-year basis as palladium prices hit record highs above USD 2,841.54 per oz in February 2020. The metal has seen increasing demand and prices due to its usage in catalytic converters in cars, which are becoming mandatory as the automotive industry looks to clean up its environmental performance.

Prathamesh Mallya

Chief Analyst (Non-Agriculture Commodities and Currencies), Angel Broking Ltd.

"We forecast gold prices to trade higher, moving towards USD 1,650 per oz in 2020 while USD 1,450 will act as a stronger base, the psychological barrier. MCX Gold prices are a combination of two factors, international price movement and rupee movement. For investors in India, Rs. 38,000 will act as an entry base point for a target at Rs. 42,500 per 10 gm. "

Rahul Singh CIO (Equities),

Tata Mutual Fund 

What asset allocation is essential for any investor?

For the first time equity investor with moderate risk-taking ability, core allocation should be towards hybrid and balanced advantage fund category. For a normal investor with average risk appetite, the asset allocation should be well-diversified and include multi-cap, large and mid-cap and small-caps as well. As the economic recovery picks up over the next 12 months, markets are likely to be become broad-based and hence systematic investing into mid and small-caps is advisable for investors with higher risk appetite.

What is your outlook on equity versus gold versus commodities?

Gold is a hedge against a prolonged global or domestic slowdown or recession. While the world economy is definitely slowing down, easy liquidity and fiscal stimulus is unlikely to result in a recession unless there is an external or geopolitical shock. Commodities, apart from gold, makes for new emerging asset class and the risk-adjusted returns from commodity arbitrage are efficient versus AAA debt and equity arbitrage.

Equity market valuation at 18x forward PER is not cheap but compares favourably with the last 10-year average and hence likely to react to core earnings’ growth. We expect core earnings growth of 10-12% for the headline indices in FY21 in line with the moderate improvement in the nominal GDP growth rate from the present lows. Despite moderate return expectations from the headline indices, broad market participation calibrated with economic recovery can generate higher returns for investors.

How is India placed in comparison with other emerging markets?

India’s linkage to world economy, including China, is lower, thus making it almost a pure ‘domestic’ play. Assuming no external shocks to crude prices, India’s macro-economic performance is more dependent on domestic consumption. While the domestic consumption and economic growth is going through a slowdown, we expect gradual recovery over the next 6-12 months driven by monetary stimulus, effective rate transmission, recovery in farm incomes (good Rabi crop, food inflation) and slow reversion to normal credit markets. India’s valuation premium relative to other emerging markets is at long-term average levels, reflecting the present economic scenario. Any economic recovery, even if gradual, can expand the premiums, especially given the relative insulation from global economy, availability of quality managements and higher return on equity.

George Alexander Muthoot

Managing Director, Muthoot Finance.

"Due to the slowdown, the overall demand in the economy was a little weak last quarter but we see slight signs of recovery going forward. The government should take quick measures for banks to provide sufficient funds to small industries which would encourage local consumption. After the NBFC crisis that began in October 2018, there were lots of challenges to NBFCs for funding. However, in the last 12 months we have raised Rs. 3,000 crore through four NCDs. Apart from NCD issues, we have also raised funds through our maiden offshore bonds. These bonds were rated by three international rating agencies: BB+ by FITCH ratings, BB by S & P and BA2 by Moody’s. The international bond was issued at 6.125% and is now trading at almost 40-50% premium at around 4.38%. We don’t have any liquidity concerns as the availability of funds is good with our major requirements being met through ECB funding and NCDs "

Top Sensex Wealth Creators

Technical Perspective 

Manav Chopra CMT, Head

(Research, Equity), Indiabulls Ventures Ltd. 

Nifty FMCG : The Nifty FMCG index has been in a broader uptrend and recently has formed a higher bottom formation with multiple bullish candlestick patterns. The support for the FMCG index is around the 29,700-29,800 levels which are likely to act as a cushion in case of decline. There will be a bullish breakout and strong momentum once the index exceeds the level of 31,000 on a closing basis with the expectation of a target of 32,250.

HUL and United spirits from this sector look well as the trend and momentum are favouring the bulls. And as the prices are trading above the short-term averages, the oscillators continue to remain in the bullish zone. Expect underperformance to continue by ITC in a broader trend while some short-term bounce will not be ruled out as the prices are in the oversold levels. 

Ajit Mishra VP (Research),

Religare Broking Ltd. 

Nifty 50 : I am looking at the Nifty 50 chart and the first thing which I observe is that the benchmark is currently trading closer to the June 2019 level i.e. 12,100. However, it’s been a rollercoaster ride for the index during this period as it made a low at 10,637.15 in August 2019 and also reached a new record high at 12,430.50. Technically, the weekly chart is showing a clear picture wherein we can see the Nifty index trading in an uptrend channel. It tested the upper band of the channel in January 2020 at around 12,400 and is currently hovering in a range. On the daily chart, it has recently tested the critical support zone of 200 EMA around 11,600 and witnessed a sharp rebound thereafter.

Going ahead, indications are in favour of further consolidation in the index wherein the 11,700-11,500 zone would be of major support. In the case of a rebound, the zone of 12,300-12,500 will continue to act as a hurdle. In short, a decisive breakout above 12,500 will trigger the next directional move or else the index would continue to hover in a range. Since we are seeing a mixed trend on the sectoral front, it’s advisable to maintain a stockspecific trading approach and focus more on the risk management aspects. 

The US Scenario 

Economic expansion in the US entered its 11th year in 2019, becoming the longest on record as it grew at a moderate 2.3 per cent supported by strong consumer and government spending. The falloff in growth from 2.9 per cent in 2018 to a more typical pace in 2019 suggests the stimulus from the tax cuts are wearing off and the trade war is cancelling out many of its benefits. Even though strength in consumer spending and services persists, at best, only stabilisation of growth is expected in 2020.

According to the most recent forecast released at the Federal Open Market Committee meeting on December 11, 2019, the US’ GDP growth will slow to 2.0 per cent in 2020. It is estimated to fall further to 1.9 per cent in 2021 and 1.8 per cent in 2022. This projected slowdown is attributed to the aftereffects of the trade war. While US’ equities will likely keep moving up in absolute terms, J P Morgan Research does not expect the outperformance that characterised the past two years to continue. 

Europe and Japan 

Growth in the Euro area is projected to pick up from 1.2 per cent in 2019 to 1.3 per cent in 2020 as a result of projected improvements in external demand. Projections have been marked down for 2020 in Germany, where manufacturing activity has remained in the contraction territory since late 2019 and for Spain due to carryover from the stronger-thanexpected deceleration in domestic demand and exports in 2019. With the UK leaving the European Union on January 31, 2020, it enters into a transition period till December 31, 2020 to secure a new deal, including a new trade agreement which will come into force in 2021. The risk of no-deal Brexit has significantly decreased since the December election when Boris Johnson’s victory gave a clear path to Brexit.

This has resulted in higher business activity and more spending by clients. Here, growth is expected to stabilise at 1.4 per cent in 2020 post-Brexit and firm up to 1.5 per cent in 2021 assuming a gradual transition to a new economic relationship with the European Union. In Japan, the Tokyo Olympics in 2020 is expected to provide a boost to the economy due to an increase in inbound and domestic tourist consumption. However, the recent corona virus crisis threatens to derail efforts with some in Japan calling for the games to be postponed. Assuming the games carry on as planned, the stock market in Japan should benefit as historic data shows that markets of countries hosting the games tend to rise and any risk factors or government counter-measures are already priced in during this period. 

Emerging Markets 

China’s economic growth slowed to its lowest levels in three decades in 2019 to 6.1 per cent, fuelled by the biting impact of tariffs from the US-China trade war and weaker domestic demand. Furthermore, the world’s second-largest economy is widely estimated to suffer a decline of around a few percentage points in the first quarter of 2020 as the new virus (Covid 19) sweeps through the country. This has forced the vast majority of Chinese business activities to a standstill, shut down production lines and weakened domestic consumption. The Shanghai Composite has tumbled 3.29 per cent on an YTD basis during this time. With the death toll recently surpassing 2,000, the government has been scrambling with efforts to contain the spread.

According to Morgan Stanley Research, Chinese economic growth during the first quarter could fall as low as 3.5 per cent if the spread of the virus outbreak is not contained fast enough for factory production to resume to normal levels. The research firm further estimated yearly growth to be 5.6 per cent should the virus peak in April 2020. India was the only Asian economy that did not witness a decline in GDP growth due to the SARS impact in 2003 and many experts expect a similar trend to play out this time. This is because, among other Asian economies, India has the least economic exposure to China. There certainly are exceptions: the Indian agrochemical and pharmaceutical sectors, for example, have a direct dependence on supplies from China and any impact in the supply over a long term could have a far-reaching impact on these sectors.

The IMF estimated India’s growth at 4.8 per cent in 2019, which is further projected to improve to 5.8 per cent in 2020 and 6.5 per cent in 2021, supported by the monetary and fiscal stimulus as well as subdued oil prices. The growth projections have been lowered by 1.2 in 2020 and 0.9 in 2021 due to more than expected slowdown in domestic demand amidst stress in the non-banking financial sector and a decline in credit growth. 

Currencies 

J P Morgan Research expects broad but modest US dollar weakness in early 2020. However, this is not expected to last for multiple quarters. Instead, a weakening of the US economy from an emerging fiscal drag and a dovish Federal Reserve should only narrowly weaken the dollar versus other reserve and low-yielding, current-account surplus currencies. A sharp deceleration in economic growth and surge in inflation have weighed on the rupee exchange rate in 2019 which was down by nearly 2 per cent against the dollar. It further experienced a rocky start to 2020 with the increased tensions between the US and Iran. 

Since the Indian import basket is heavily oil-related, the rupee has a disadvantage when such events put upward pressure on oils. However, the tensions have subsided for now and the rupee has recovered from elevated levels of Rs. 72 seen in January 2020. Driven by a positive investor sentiment towards EMs and relative calm on the US-China trade front, the rupee is expected to keep a steady course with the US dollar in the coming months. Renewed tensions on the US-China trade front and US recessionary risks are some of the external factors that could put additional strain on the rupee in 2020. 

Luis Oganes

Head of Currencies, Commodities and Emerging Markets Research J.P. Morgan

Although the Fed has signalled a pause in its easing cycle, EM central banks have continued to cut policy rates in the final quarter of 2019 and are expected to continue doing so during the first half of 2020, as growth remains subpar and inflation pressures remain modest. 

Interest Rates

While US markets shone in 2019, much of the stock market’s gains in 2019 are attributed to a dramatic policy shift at the Federal Reserve (FR). The FR raised rates four times in 2018, including a December 2018 hike that took its key rate to 2.5 per cent. However, it was a very different story in 2019 when after a change of heart the FR lowered rates three times. The falling interest rates sent investors on a quest for yield, forcing more money into stocks. In 2020, US Treasury yields are set to retrace to higher levels as the US growth returns above trend. On the other hand, EM central banks have been cutting policy rates since the second quarter of 2019 and are expected to ease rates further in the first half of 2020, as growth remains subpar. Inflation in emerging market economies is also expected to remain benign, despite a modest pickup in core inflation, particularly in China. 

Crude Oil 

Crude oil prices continue to remain volatile. Several geopolitical events provided upward pressure on crude oil prices towards the end of 2019. These events include attacks on oil tankers transiting the Persian Gulf and the Red Sea, the September 2019 attack on Saudi Arabia’s energy infrastructure, and recent tensions between the United States and Iran. However, the corona virus outbreak caused crude benchmarks such as the Brent Crude and the West Texas Intermediate (WTI) to fall by around 20 per cent since climbing to a peak in early January 2020, dragged lower by concern over demand in China.

As a result, the global oil demand is set to fall in the first three months of the year, the first quarterly drop in more than a decade. It is clear enough that oil prices will remain subdued until the worst of the outbreak is over. Moreover, the growth of non-OPEC oil production – largely in the US, Norway Brazil and Canada – is likely to offset the upward pressure on prices of oil supply cuts by OPEC and growing demand in 2020.

Conclusion

The situation has become too fluid right now across the world to precisely predict the outcome of the global economy, thanks primarily to corona virus. It is now feared that the virus has spread to Europe, Iran and South Korea. The key risk for the global equities is that the virus may spread to different geographies, thus leading to slowdown in global economic activity. Brexit hard-landing, risk of further trade tensions between US and Iran and a possibility of US entering into recession are the events that investors will have to keep an eye on for the remaining part of the year.

For Indian markets there are several things going in their favour. Sensex is no more the most expensive index globally and its PE multiple is lower today than it was one year ago. 

Even though exports are increasing in India, the Indian economy still continues to be predominantly a ‘pure domestic consumption economy’. This keeps India immune from several global risks. Meanwhile, the unfortunate event of the corona virus breakout in China is expected to benefit several countries like India, Thailand, Malaysia, Vietnam and Taiwan. The benefit may be accrued in the form of inward FDI due to relocation of production activities which previously took place in China. That apart, investors may take note of the fact that the emerging markets are expected to relatively do better than the developed markets and within the emerging market space the earnings outlook is most promising for Indian equities.

DSIJ 150 : The Method and The Logic

Extensive research has led to the selection of India’s top 150 companies which have created wealth for their promoters, shareholders and the society at large. We have applied a professional approach and method in this selection process as explained below- This year’s list marks Dalal Street Investment Journal’s seventh year of ranking of India Inc. and presenting the DSIJ 150. This is a result of a meticulously laid out process. What follows is a detailed description of the various steps that have been followed. For the purpose of this study, we began with all the listed companies of India. Since our objective was to focus on companies which have been superachievers, a ‘short period’ study would not have been justified. Therefore, we spread our period of study over the past six years. A long-term study evens out any aberration in the results of any particular year and helps in providing a fair idea of the long-term performance. We have deliberately left out certain categories and companies from our study of Elite 100. These include- - Banking and Non-Banking Finance Companies: The reason for excluding banking and NBFCs from our study is due to the difference in the nature of their business and the way they should be evaluated.

THE PARAMETERS

Broadly speaking we have sought to analyse and rank companies based on the following parameters:

• Growth • Efficiency • Safety • Wealth creation

Growth : The most important criterion for determining a company’s success is, naturally, the growth that it achieves over a period of time and also its capacity for growth in the future. Growth for a company can be defined in many ways. The most important and critical among these is the top-line which is defined by the sales or revenues of the company. The next growth factor is the operating profit which defines the operational performance of the company. Then comes the net profit which defines the eventual benefit to stakeholders either to be used this year in the form of dividend or can be invested to reap its benefit in the coming years. The capital employed by a company is an important ingredient that helps it to grow. Of the above, three reflect the profit and loss (P&L) side and one captures the balance-sheet character.

Efficiency: It is not only the growth that matters but also how effectively and efficiently this is achieved. In fact, the more efficiently an organisation uses its resources, the higher the value that it creates for its stakeholders. Having said that, we have measured efficiency based on the following factors. 

Operating profit margins (OPM)

Net profit margins (NPM)

Return on capital employed (RoCE)

The OPM and the NPM together capture the efficiency of a company at the operating and the net levels, respectively. The RoCE, on the other hand, indicates how good a company is in utilising its funds. This is evaluated on relative basis for the current year.

Safety : Our recent experience shows that debt has become a big pain for many companies with the servicing cost escalating over a period of time. Therefore, we have used the debt-toequity ratio to measure the safety of capital of the company’s shareholders.

Wealth Creation : The ultimate objective of any organisation is maximising the shareholder’s return. Obviously, then, this had to be one of the criteria for our study. In order to evaluate companies on this front, we have looked at the movement in share prices in last one year after adjusting for splits and bonuses.

THE RANKING METHOD

After having laid out the data according to the various parameters as discussed above, we then embarked on the final step of ranking these companies. We have carefully assigned weights to each of the parameters. Even within that, companies in different stages of their evolution have been assigned weights according to the requirement. This led us to the creation of two broad categories. One, where we considered companies with a market capitalisation in excess of RS. 10,000 crore and second, where we considered companies with a market capitalisation of less than Rs. 10,000 crore but exceeding Rs. 1,000 crore. As table is self-explanatory for the weightage that we have assigned to arrive at our final list and the rankings done thereafter. Accordingly, a higher weight has been assigned to the growth factor in case of companies with a market capitalisation of more than Rs. 10,000 crore, the reason being that these companies are far ahead on the safety curve. They have been in the business for a greater duration and have achieved critical mass by now. What is important in their case is the growth factor which will propel them into the next orbit. Safety and efficiency have been assigned an equal weightage for the same reasons as mentioned above. On the other hand, growth and safety have been weighted at an equal level in case of companies with a market cap of less than Rs. 10,000 crore but over Rs. 1,000 crore. Shareholder returns carry the same weightage in both the categories.

Based on all these factors, a final composite ranking of companies in both the categories was arrived at. This gave us a list of the top 50 companies in the first category (market capitalisation in excess of Rs. 10,000 crore), which is our ‘Super 50’ club. The top 100 companies in the second category make up our ‘Elite 100’ group.