Cover Story- DSIJ 150 Wealth Creators - Ranking & Methodology
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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 fifth year of ranking of India Inc. and presenting the DSIJ 150. Ranking provides a universally accepted benchmark of performance with an objective analysis. What is also important is that with time, experience and changing conditions, the way one ranks should also undergo modification. These years have made us a little wiser and we have tweaked the methodology to make it more robust, as will be explained in the following paragraphs.
The study has culminated in the selection of the top 150 corporates of India Inc. and is a result of a meticulously laid out process. What follows is a detailed description of the various steps that have been followed in order to arrive at this most coveted list of toppers. 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 super-achievers, a ‘short period' study would not have been justified. Therefore, we spread our period of study over the past six years; we then narrowed down the list to include only those companies which have been listed for more than six years.
THE RATIONALE
A long-term study of six years tends to even out any aberration in the results of any particular year and helps in providing a fair idea of the long-term performance. A long-term study weeds out ups and downs which are a natural part of any business. Another reason why a six-year period or long-term study makes more sense is that many infrastructure companies such as power and road construction, and even the strategies of the service sector and manufacturing companies, get executed over a longer period before they begin to reflect on the financials of the company.
THE EXCLUSIONS
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. Moreover, we will come out with a special issue on banking in the coming month wherein these companies will be comprehensively ranked.
THE PARAMETERS
Broadly speaking we have sought to analyse and rank companies based on the following parameters:
1. Growth
2.Efficiency
3.Safety
4.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. It could include anything and everything that goes to define a corporation as a whole. The most important and critical among these is the topline 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. In other words, the P&L pointers capture the financial health of the company at three different levels, while the capital employed reflects the correct picture of growth in the balance sheet.
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:
Debt for a company is like a double-edged sword; if raised and utilised in an efficient manner it can increase the shareholders' return or else can turn into a burden. 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-to-equity ratio to measure the safety of capital of the company's shareholders. It actually reflects on how much of your money in terms of shareholder equity could come back to you in case of an eventuality after paying out the entire debt on the balance sheet.
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 between FY11 to H1 after adjusting for splits and bonuses. The impact that this has had on market capitalisation is what has determined wealth creation by these companies for their shareholders.
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. Although all the parameters described above play an important role for a company to excel, they differ by way of the importance of the quantum. We have carefully measured this requirement and accordingly 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.
As mentioned at the outset of this exercise, it has been our perpetual endeavour to research and provide the best of the best to our readers and patrons. We at DSIJ are committed to continue improving upon our methodology and research metrics to further strengthen the quality of the results. In the pages that follow we bring to you the DSIJ list of ‘Super 50' and ‘Elite 100' companies. We hope this compilation helps you put a finger on the truly ‘valuable' shining stars of India Inc. Although these companies have performed superbly over the last six years and rightly deserve a place in DSIJ 150, these are not our recommendation. Nonetheless, these companies can be looked at for investment after applying your own judgement. ( by Neerja Agarwal )
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