DSIJ 150 Wealth Creators

When the markets are at lifetime highs, speculation about the direction they will take also touches all-time highs. In the present scenario, it is anybody’s guess where the market is headed for the rest of the year. However, if we consider various market indicators, there is still hope for bulls in 2021 to make a fresh high and in the process reward patient investors. Yogesh Supekar talks about the top wealth creators we have seen in the recent past as well as in the time horizon spanning a couple of decades while the DSIJ team shares its market outlook

Here is some simple arithmetic: If you had invested Rs 1,00,000 in PI Industries almost 20 years ago and were still holding your investments in the growth stock, your investment value today would have been a whopping Rs 19 crore and 39 lakhs. That’s difficult to believe, right? But it is true. PI Industries indeed has delivered phenomenal returns over a long period and on an annualised basis the stock has been able to generate returns to the tune of 46 per cent. It is indeed a rare occurrence. Can any stock deliver an annualised return in excess of 40 per cent and that too consistently over a 20-year period?

The table below highlights such superlative performances of stocks over a two-decade period.

Says Nitin Jain, an active portfolio investor; “The sky is the limit when you are able to find the right stock and show the willingness and the ability to hold on to that stock for years together. I have been an equity investor since 1992 and have had some of the best investing experiences. I am holding Infosys, Motherson Sumi, Bata, Bajaj Finance, Mphasis, Sun Pharmaceuticals and Eicher Motors for more than 20 years now. I haven’t sold them yet. Lot of people know that these are the multibagger stocks and that a lot of wealth is created due to these stocks. But very few people may know that these are some of the most profitable stocks and that if we consider profit after tax growth of these companies, they rank amongst the best.”

“For example, Infosy’s PAT has grown by over 33 per cent on an annualised basis over the past 25 years. Motherson Sumi’s profits grew 27 per cent, Bata and Bajaj Finance 26 per cent each, Mphasis 25 per cent and Sun Pharmaceuticals and Eicher Motors 23 per cent each. Not only have these companies reported best-in-class growth in profitability over two decades but also if we consider the sales CAGR over two decades, these companies truly stand out. Infosys has recorded 34 per cent CAGR in sales while Motherson Sumi has been 32 per cent. The point I am trying to make is that it is very important that we track closely the profit and sales growth of the companies we intend to invest in. It is important to observe consistency in profit and sales growth for wealth generation,” he adds.

Global forecasting firm Oxford Economics revised India’s economic growth projection for CY21 to 10.2 per cent YoY from the earlier projection of 8.8 per cent YoY, citing receding corona virus-related risks and the shift in monetary policy outlook. As per Oxford Economics, the FY22 Union Budget will create positive externalities for the private sector, and has therefore forecasted slower fiscal consolidation in FY22 than the government projections.

Indeed, Infosys has been one of the fastest wealth creators over the past couple of decades, backed by extraordinary growth in profitability over 25 odd years. When it comes to wealth creators and the so-called multibaggers, it is worth noting that the consumer or retail sector has been the most successful in shaping multibaggers and wealth creators. According to a leading broker in India, in their annual wealth creation studies it was found that 63 out of 100 wealth creators were from consumer-facing businesses. This accounts for 68 per cent of the total wealth created. Thus, going forward, investors should pay close attention to consumer-facing businesses in order to identify wealth-creating opportunities. It is worth noting here that the consumer-facing businesses are also some of the highest ROE businesses around.

The same study highlights the fact that out of 25 most profitable companies measured by the average RoE, 21 companies were consumer-facing. Just to name a few, HUL reflects an average RoE of 68 per cent, Nestle 62 per cent, Colgate Palmolive 61 per cent and Asian Paints over 30 per cent in a time span of 25 years. These remarkable consumer-facing companies were able to reflect high RoEs while the businesses flourished. This goes to show that investors need to focus on identifying high RoE along with high and consistent sales growth as well as high and consistent profit growth companies in order to create wealth for themselves.

Equity Market Outlook

The market outlook remains steady, albeit it is not a market where you can simply buy and sleep over passively. There are valuation concerns and yes, the rise in bond yield is not something an equity investor would be very pleased with. Per se, rising bond yields is not a big problem for equities. The reason why bond yields rise could be a problem though. The bond yield rises owing to inflation fears and rising inflation may not be great for equity valuations, especially when the markets are trading at historically lofty valuations. The markets are poised for perfection and any detrimental development in the market structure could see prices correcting sharper than what could be expected in the midst of a bull run.

"It seems logical that even before thinking of buying any common stock, the first step is to see how money has been most successfully made in the past."

Phil Fisher, American Investor

While the markets rallied and gathered steam owing to falling corona virus cases and the economy opening up post the lockdown, as of now the increasing number of viral cases in what is seen as a second wave is once again threatening smooth recovery in businesses. This has caused concerns on the supply front. Internationally, data on the economy front is not encouraging either. According to the Office for National Statistics (ONS), UK’s gross domestic product (GDP) declined by 9.9 per cent YoY in CY20 after witnessing a growth of 1.4 per cent YoY in 2019.

"Over 1995 to 2020, the Sensex shot up from the level of 3,200 levels in March 1995 to 29,500 by March 2020 i.e. a CAGR of 9.2 per cent. Interestingly, exactly 100 companies delivered returns higher than 9.2 per cent."

25th Annual Wealth Report, Motilal Oswal

That apart, Eurozone’s industrial production fell by 1.6 per cent MoM in December after rising 2.6 per cent MoM in November 2020. The decline is attributable mainly to the decrease in capital goods’ output and fall in non-durable consumer goods production. Eurozone’s GDP declined 0.6 per cent QoQ in Q4CY20 after rising by 12.4 per cent QoQ in Q3CY20. Having mentioned the key concerns, an additional risk remains with rising commodity prices. If rising commodity prices continue their northward march, soon we may see some margin pressures getting reflected in the quarterly results.

Also, along with rising commodity prices we are seeing a spike in crude oil. A combination of rise in commodity prices, spike in crude oil and rising bond yield may not augur well for sentiments while investing in equity markets. These factors are keeping pressure on equity prices and are the reasons behind the market correction in recent sessions. In spite of these concerns, it is expected that the FPIs will continue pumping in fresh monies into the emerging world where India stands to be one of the biggest beneficiaries. As far as the FPI money keeps flowing to Indian shores any market correction could be a short-lived phenomenon. 

Conclusion

Investors have been upbeat on markets and the robust earnings’ guidance has only added to the optimism. Several big companies such as Maruti Suzuki, Mahindra and Mahindra, TVS Motor, ABB, Asian Paints, GAIL and Hero MotoCorp are amongst the companies that have guided for better earnings. The earnings’ guidance upgrade along with historical low interest and increasing appetite of FPIs will ensure that the stock prices remain healthy going forward. The market worry some investors as it does indicate overbought situation in the market, at least in the short to medium term.

Unless there is a meaningful correction in the equity prices or GDP accelerates by double digits, the market capitalisation to GDP ratio will keep reminding investors of its expensiveness. That said, what is also interesting to note is the fact that corporate profits to GDP ratio is at all-time low. The ratio of corporate profits to GDP is at similar levels as were in 2003. Corporate profits climbed substantially for the next five years till 2008 until the time the global financial crisis hit us. With a favourable growth environment and expansionary fiscal policy in place aided by lower interest rate environment, chances are that corporate profitability may flourish across the board for corporate India in the coming several years.

While several aspects look promising from equity investors’ standpoint, one may exercise caution about economic growth. Even though the economy (nominal GDP) is expected to grow by 13.5 per cent YoY in FY22, the contraction in investments and private consumption growth is likely to provide some headwinds. Investments and private consumption are likely to be the biggest drag on the growth curve going forward. Gross fixed capital formation (GFCF) is also expected to contract by 14.5 per cent while private expenditure is expected to contract by 9.5 per cent YoY. Investors will have to keenly watch the economic data and development as a lot will depend on how well the economy recovers and starts delivering growth.

On the global front, the biggest threat for the equity bull run will be the strengthening of USD. Investors will have to keep a close tab on USD levels along with the bond yields. Recently, the bond yields increased sharply, both in the Indian and US markets. Rising bond yields are always detrimental to equity valuation. Barring these two negative probable events, things look optimal for equity as an asset class to create a few more multibaggers and wealth creators. The thing with identifying wealth creators is that you do not know if it is a wealth creator until the wealth creation has happened.

One has to have tremendous amount of faith in the company, management and the asset class beyond basic equity research. One way to improve your chances of identifying wealth creators for your portfolio is to look at historical data and understand exactly where and how the wealth has been created. A detailed look at the past performance of the wealth creators does help to get a good perspective of where wealth can be created in the coming years. The current market condition of abundant liquidity is just what a doctor could order to create healthy multibaggers.

Research Methodology:

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 eighth year 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 this study, we began with all the listed companies in India. Since our objective was to focus on companies that have been superachievers, a ‘short period’ study would not have been justified. Therefore, we spread our period of study over the past five years. A long-term study evens out any aberration in the results of any particular year and helps in providing a fair idea of 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.

Efficiency: It is not only the growth that matters but also how effectively and efficiently this is achieved. 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) and 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. ROCE is a good indicator of a company's efficiency because it measures the company's profitability after factoring in the capital used to achieve that profitability. These parameters are evaluated on a 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. Hence, this had to be one of the criteria for our study. To evaluate companies on this front, we have looked at the movement in share prices in the last five years after adjusting for splits and bonuses. We have considered a total return given by these companies and not just a simple price return. This is because total return captures both the capital gains and the income generated from dividends. The latter provides a much more complete picture of performance — especially for stocks that have high dividends.

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 over Rs 10,000 crore and another, where we considered companies with a market capitalisation of less than Rs 10,000 crore but exceeding Rs 1,000 crore. Accordingly, a higher weight has been assigned to the growth factor in the 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 that 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 the case of companies with a market cap of less than Rs 10,000 crore but over Rs 1,000 crore. Shareholder returns have been given due consideration for both categories.

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

To download  'Super 50 Club' Click Here 

To download 'Elite 100 Group' Click Here