Wealth Creation Study 2009-2014
Thematic Study | December 2014
19th ANNUAL WEALTH CREATION STUDY (2009-2014)
100x
The power of growth in Wealth Creation
HIGHLIGHTS
100x stocks are few. Finding them requires "vision to see, courage
to buy, and the patience to hold."
Value migration offers the most predictable 100x opportunities.
The 100x process is captured in SQGLP – Size, Quality, Growth,
Longevity and Price.
"In evaluating a common stock, the management is 90%, industry
is 9%, and all other factors 1%." (Phil Fisher)
Quality does not guarantee growth, and in turn, rapid long-
term Wealth Creation.
"To make money in stocks you must have the vision to see them,
the courage to buy them and the patience to hold them. Patience
is the rarest of the three."
Thomas Phelps in
100 to 1 In The Stock Market
TOP 10 WEALTH CREATORS (2009-2014)
THE BIGGEST
Rank
1
2
3
4
5
6
7
8
9
10
Company
TCS
ITC
HDFC Bank
Infosys
ICICI Bank
Wipro
Sun Pharma
Tata Motors
HDFC
HCL Technologies
Wealth
Created
(INR b)
3,638
2,073
1,307
1,123
1,035
993
958
945
934
898
THE FASTEST
Company
Eicher Motors
Bajaj Finance
Supreme Inds
Amara Raja Batteries
Page Industries
IndusInd Bank
HCL Technologies
Aurobindo Pharma
Havells India
Ipca Labs
5-Year
Price
CAGR (%)
94
93
88
84
78
73
69
68
67
67
THE MOST CONSISTENT
Company
Kotak Mahindra
Asian Paints
Sun Pharma
Hindustan Zinc
ITC
Axis Bank
HDFC Bank
M&M
Bosch
Nestle India
Appeared
in WC
Study (x)
10
10
10
10
10
10
10
10
10
10
2004-14
Price
CAGR (%)
34
34
33
29
26
26
26
24
23
23
13 December 2014 1
(Raamdeo@MotilalOswal.com)
Raamdeo Agrawal
/
Shrinath Mithanthaya
(ShrinathM@MotilalOswal.com)
We thank Mr Dhruv Mehta (Dhruv.Mehta@dhruvmehta.in), Investment Consultant, for his invaluable contribution to this report.

19th Annual Wealth Creation Study (2009-2014)
Motilal Oswal 19th Annual Wealth Creation Study
100x: The power of growth in Wealth Creation
Page
Wealth Creation Study: Objective, Concept & Methodology
....................... 1
Wealth Creation 2009-14: Findings Summary
............................................ 2-3
Theme 2015: 100x – The power of growth in Wealth Creation
.............. 4-23
Market Outlook
....................................................................................... 24-27
Wealth Creation 2009-14: Findings
........................................................ 28-38
Appendix I: MOSL 100 – Biggest Wealth Creators
................................. 39-40
Appendix I: MOSL 100 – Fastest Wealth Creators
................................. 41-42
Appendix III: MOSL 100 – Wealth Creators (alphabetical)
......................... 43
Abbreviations and Terms used in this report
Description
Reference to years for India are financial year ending March, unless otherwise stated
Average
Compound Annual Growth Rate
Loss to Profit / Profit to Loss. In such cases, calculation of PAT CAGR is not possible
Indian Rupees in billion
In the case of aggregates, Price CAGR refers to Market Cap CAGR
Wealth Created
Increase in Market Capitalization over the last 5 years, duly adjusted for corporate
events such as fresh equity issuance, mergers, demergers, share buybacks, etc.
Note:
Capitaline database has been used for this study. Source of all exhibits is MOSL analysis, unless otherwise stated
Abbreviation / Term
2009, 2014, etc
Avg
CAGR
L to P / P to L
INR b
Price CAGR
WC
Wealth Created

19th Annual Wealth Creation Study (2009-2014)
Wealth Creation Study
Objective, Concept & Methodology
Objective
The foundation of Wealth Creation is to buy businesses at a price substantially lower than their
"intrinsic value" or "expected value". The lower the market value compared to the intrinsic
value, the higher is the margin of safety. Every year for the past 19 years, we endeavor to cull
out the characteristics of businesses, which create value for their shareholders.
As Phil Fisher says, "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."
Our Wealth
Creation studies are attempts to study the past as a guide to the future, and gain insights into
the various dynamics of stock market investing.
Concept & Methodology
Wealth Creation is the process by which a company enhances the market value of the capital
entrusted to it by its shareholders. It is a basic measure of success for any commercial venture.
For listed companies, we define Wealth Created as the difference in market capitalization over
a period of last five years, after adjusting for equity dilution.
We rank the top 100 companies in descending order of absolute Wealth Created, subject to the
company's stock price at least outperforming the benchmark index (the BSE Sensex in our case).
These top 100 Wealth Creators are also ranked according to speed (i.e. price CAGR during the
period under study). The biggest Wealth Creators are listed in Appendix I (pages 39-40) and the
fastest in Appendix II (pages 41-42).
Exhibit 1
Market Outperformance Filter (Sensex CAGR over 2009-14 was 18.2%)
Who missed the Wealth Creators list …
WC
Price
(INR b) CAGR (%)
ONGC
1,059
10.3
Reliance Inds
610
4.1
State Bank of India
546
12.5
Cairn India
386
12.6
Hero MotoCorp
240
16.3
IOC
213
7.6
GAIL (India)
167
9.0
Cipla
131
11.8
Tata Steel
112
13.8
Punjab National Bank
98
12.6
Container Corpn
96
15.3
ABB
89
14.7
Jindal Steel
88
7.8
Ranbaxy Labs
88
17.1
IDFC
83
17.7
Sesa Sterlite
72
13.3
* If the stock had outperformed the Sensex
Company
Normal
Rank*
5
14
15
22
34
38
50
58
67
72
74
78
79
80
84
95
… and who made it
Company
Britannia Inds
Berger Paints
Bata India
Exide Inds
Sundaram Finance
Amara Raja Batteries
Supreme Inds
J & K Bank
Federal Bank
Tata Global
Info Edge (India)
Biocon
Bhushan Steel
Kansai Nerolac
Coromandel Inter.
Bayer Crop Science
WC
(INR b)
67
67
66
64
64
64
61
59
58
58
56
56
55
51
50
50
Price
CAGR (%)
24.5
45.8
61.5
23.9
52.0
84.4
88.3
37.7
28.2
20.7
42.0
24.0
42.0
39.2
37.4
43.3
Rank
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
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1

19th Annual Wealth Creation Study (2009-2014)
Wealth Creation 2009-2014
Findings Summary
TCS is the Biggest Wealth Creator again
TCS
has emerged the biggest Wealth Creator for the period 2009-14, retaining the top spot
it held even for the period 2008-13.
The performance in the latest period is better than the previous one with Wealth Created at
INR3.6 trillion v/s INR2.3 trillion over 2008-13. This is the highest ever wealth created in any
5-year period in India’s stock market history.
On the back of 29% PAT CAGR over 2009-14, TCS stock has delivered 51% price CAGR for
the same period, and is currently India’s largest company by market cap.
Exhibit 2
TCS’ Wealth Creation of INR3.6 trillion between 2009-14 is the highest ever in Indian stock markets
Wealth Created in 5 years (INR b)
TCS
Reliance Industries
3,077
2,556
1,678
1,856
1,514
1,742
3,638
ONGC
Hindustan Unilever
(HUL)
91
73
262
341
2,284
Wipro
1,247
HUL
377
Wipro
383
245
1,030 1,065
1,187
ITC
Eicher Motors is the Fastest Wealth Creator
Eicher Motors
has emerged the Fastest Wealth Creator during 2009-14, with Price CAGR of
94%, marginally higher than 93% for
Bajaj Finance.
Eicher, Supreme Industries
and
Page Industries
are among the 10 Fastest Wealth Creators
for the last 3 studies in a row.
HCL Technologies
enjoys the unique distinction of being in the top 10 of both the Biggest
and the Fastest Wealth Creators.
7 of the top 10 Fastest Wealth Creators had single-digit INR billion market cap in 2009
and/or were quoting at single-digit P/Es.
Exhibit 3
Top 10 Fastest Wealth Creators
Rank Company
1
2
3
4
5
6
7
8
9
10
12 December 2014
Eicher Motors
Bajaj Finance
Supreme Inds
Amara Raja Batteries
Page Industries
IndusInd Bank
HCL Technologies
Aurobindo Pharma
Havells India
Ipca Labs
Price Appn.
(x)
27
27
24
21
18
16
14
13
13
13
CAGR (%)
Price
PAT
94
51
93
84
88
24
84
35
78
37
73
57
69
38
68
63
67
L to P
67
38
Mkt Cap (INR b)
2014
2009
161
6
90
3
63
3
67
3
72
4
263
11
973
68
149
10
116
9
107
8
P/E (x)
2014
2009
31
9
12
7
23
3
18
4
47
13
19
8
15
5
13
10
26
NA
22
9
2

19th Annual Wealth Creation Study (2009-2014)
Kotak Mahindra Bank is the Most Consistent Wealth Creator
Kotak Mahindra Bank
is the Most Consistent Wealth Creator over 2004-14, by virtue of: (1)
Appearing among top 100 Wealth Creators in each of the last 10 studies; and (2) Highest
10-year Price CAGR, marginally ahead of
Asian Paints
and
Sun Pharma.
Technology re-emerges as the largest ever Wealth Creating sector
After a 9-year holiday post 2004, Technology has re-emerged as India’s largest Wealth
Creating sector. (It was the largest Wealth Creator for 4 consecutive years 2000 to 2004.)
Ironically, Oil & Gas is one of the lowest Wealth Creating sectors over 2009-14, with its
share of Wealth Created collapsing to 1% v/s 22% in 2009.
PSUs’ decade of decline: Wealth Creation hits rock bottom
The number of PSUs in the top 100 Wealth Creators is at an all-time low of only 5.
The Wealth Created by these 5 PSUs is also at an all-time low of just 2% of total, from as
high as 51% over 2000-05, signaling total value migration to the private sector.
Exhibit 4
PSUs’ decade of decline in Wealth Creation
49
51
No. of PSUs
% Wealth Created
36
25
35
27
30
27
20
28
30
26
18
25
16
22
24
20
9
11
2
5
1999-04 2000-05 2001-06 2002-07 2003-08 2004-09 2005-10 2006-11 2007-12 2008-13 2009-14
Overall level of Wealth Destruction eases; will the tide turn?
Most of the Wealth Destroying companies and sectors are deeply cyclical and/or those affected
by policy paralysis during UPA-2 regime. With a new government at the helm, major policy
reforms coupled with economic recovery, could be hugely positive for many of them.
Exhibit 5
Level of Wealth Destruction significantly eased during 2009-14
43
Wealth destroyed (INR B)
% of Wealth Created by top 100 Wealth Creators
43
33
17,140
18
1
2,586
124
2001-06
1
142
2002-07
2
1,704
2004-09
650
2005-10
15
3,254
5,425
14
4,185
0
59
2003-08
2000-05
2006-11
2007-12
2008-13
2009-14
For detailed findings, please see page 28-38.
12 December 2014
3

19th Annual Wealth Creation Study (2009-2014)
Theme 2015
12 December 2014
4

19th Annual Wealth Creation Study (2009-2014)
100x
The power of growth in Wealth Creation
Acknowledgment
This report would most likely have been titled “Demystifying growth” … and then we came
across this book “100
To 1 In The Stock Market”
by Thomas W Phelps who is described as
having been a private investor, columnist, analyst, author and financial advisor.
Written in 1972, the book makes a strong case for investors to “Buy
right and hold on”.
It
offers examples of how in the US, over 365 stocks appreciated 100x or more over the 40
years ending 1971. We believe “100 to 1” is an excellent concept to apply our understanding
of growth.
The “100
To 1”
book is common sensical, conversational, and chucklesome (Sample this:
“Unlike dogs, not every stock has its day. In fact, in Wall Street, a stock that does not have its
day is called a dog!” And this: “Most deception is bad but self-deception is worse because it is
done to such a nice guy!”)
We dedicate “100x” as a contemporary complement to this classic, and as our
commemorative compliment to the late author (who passed away in November 1992 at the
age of 90.)
1. What is 100x?
Opening the mind to the magic of long-term growth investing
To make money in stocks you must have the vision to see them, the courage to buy them
and the patience to hold them. Patience is the rarest of the three.
– Thomas Phelps in 100 to 1 In The Stock Market
For the purposes of this report,
“100x” refers to stock prices rising 100-fold over time
i.e. “100-baggers” in stock market jargon. Both the short words here are important – “100-fold”
and “over time”.
1.1 “100-fold”: Accumulating massive purchasing power
The precise number of “100” is not as important as the fact that 100x opens the mind to the
concept of long-term power of compounding in equity investing. Warren Buffett describes
investing as the process of gaining higher purchasing power over time (i.e. net of inflation and
taxes). In fixed income investing, the average annual post-tax return works out to about 7%. If
the same is reinvested, over 20 years, the security would be worth about 4x its original value.
Now, if inflation also turns out to be 7%, then at the end of 20 years, there is zero increase in
purchasing power. Even if inflation is somewhat lower at 5%, it erodes 2.7x of the 4x final value,
leaving a net purchasing power of only 1.5x (i.e. 50% higher over 20 years or 2% per annum).
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19th Annual Wealth Creation Study (2009-2014)
In contrast, an equity stock rises 100x, say, in 20 years (in select cases, it takes much less time).
Now, at 7% inflation, this 100x is tantamount to purchasing power of 26x (i.e. 100÷3.9), and at
5% inflation, 38x (i.e. 100÷2.7). Thus, the 100x approach in equity investing is an excellent way
to accumulate massive purchasing power for a very long period of time.
Exhibit 1
100x equity investing: Excellent way to accumulate massive purchasing power
Initial Purchasing Power
Fixed income
(7% post-tax return)
100x Equity
Value after 20 years
100
Purchasing Power after 20 years
38
26
1
Year 0
1
4
Year 20
1
Inflation @ 7%
1.5
Inflation @ 5%
1.2 “Over time”: Earlier the better
Very few investors even conceptualize their equity investment multiplying 100 times. Even
fewer actually experience a 100-fold rise in the price of their stock(s). This is because such 100-
fold rise may take longer than 3, 5, or even 10 years' time. And holding on to stocks beyond that
period requires patience which, as the quote above aptly puts it, “is the rarest of the three”
qualities, the other two being vision and courage.
Irrespective of whether investors think of it or not, stock price rising 100-fold has very little
meaning without bringing in the context of time. This is because equity investors are keen that
they make absolute gain (i.e. “how much”) in the shortest possible time (i.e. “how soon”). The
charts below make this point amply clear.
Exhibit 2
Exhibit 3
100x: Rate of return for various years
Compounded Annual Return (%)
Long-period return of
BSE Sensex is 17%
i.e. Sensex rises 100x
in around 30 years
Years it takes for 100x at different rates
151
94
Time taken for 100x (in years)
93
48
58
33
26
17 20
10 12 14
36
25
21 18
15 14 12
11
50 40 35 30 25 20 15 10
No. of years taken for 100x
7
5
5
10 15 20 25 30 35 40 45 50
Compounding rate in %
12 December 2014
6

19th Annual Wealth Creation Study (2009-2014)
Going by Exhibit 1, if 100x takes 50 years, the effective annual return is only 10%, if 40 years
12%, and so on. In the Indian context, the long-period return of the benchmark indices is ~17%.
Thus, if a stock takes more than 30 years to rise 100-fold, it would most likely end up
underperforming the market. Given this, even those investors with long-term outlook and
patience should reject such slow-growth 100x ideas.
We postulate (and later even prove arithmetically) that the single-most important time
determinant of stock market return is
GROWTH
in all its dimensions – sales, margin and
valuation. And once having gained insightful understanding of growth, especially long-term
growth, 100x is arguably its best application.
As in the US, real-life experience in India also suggests that the task of finding 100x stocks is
indeed difficult but not impossible. Once sensitized to such a possibility and armed with the
right framework, investors may find the challenge of unearthing the next 100-bagger more
joyous than arduous.
2. 100x: The Indian experience
47 enduring 100-baggers during the last 20 years
Transitory multi-baggers attract a lot of crowd and media attention, but they always
give nasty end-results. Deep cyclicals and fad companies broadly fit into this category.
The tragedy with this class of companies is that if you cannot sell in time, you are left with
no gains, and most often, with a permanent capital loss.
Enduring multi-baggers are those companies, whose wealth creation is long-lasting.
Great businesses run by good managements purchased at huge ‘margin of safety’ will create
enduring multi-baggers.
– Motilal Oswal 8th Wealth Creation Study, January 2004
In effect, this 100x study in year 2014 may well be a decadal dusting, digitizing, and detailing of
our own 8th Wealth Creation Study in 2004 which discussed multi-baggers! The digit is the
number 100, while the detail is the S-QGLP framework discussed later.
2.1 Indian market benchmarks rise 100x in 30 years
The BSE Sensex has a base of 100 for the year 1979. The Sensex first touched 10,000 in
February 2006 i.e. 100x in 27 years (almost 19% CAGR). As of March 2014, the Sensex stood at
22,400 levels. It was at 224-levels in 1984 i.e. 100x in 30 years (CAGR of 17%). Given such strong
performance of the benchmark indices itself, smart investors should target to beat the
benchmark and achieve 100x in 20 years at most (i.e. CAGR of 26%). As shown later, data
suggests that 100x stocks take on average 12 years to rise 100-fold.
2.2 Transitory and enduring 100x stocks in India
Our analysis in this study spans a 20-year time window ending March 2014. During this period,
the Indian stock markets have seen at least two distinct “fad” and “cyclical” phases – (1) The ICE
Age (IT, Communication, Entertainment) in the early 2000s, and (2) The 2003-08 global
12 December 2014
7

19th Annual Wealth Creation Study (2009-2014)
liquidity-led boom in commodities and cyclicals. These two phases have created two kinds of
100x stories here:
1. Transitory 100x:
These are stocks which did indeed rise 100-fold sometime during 1994-
2014, only to fizzle out, “most often, with a permanent capital loss”. The ones remembered
to-date by many investors would include several IT companies (Satyam Computer,
Pentafour Software, SSI, NIIT, etc), Unitech, Mercator, Jai Corp, and so on. Our calculations
suggest just over a 100 such transitory 100-baggers.
2. Enduring 100x:
These are companies which – (1) had some meaningful size and operations
during 1994 and 2014, (2) saw their stock prices multiply 100 times or more, and most
importantly (3) managed to retain their 100x status even on March-2014 price levels.
We identified 47 such enduring 100x stocks listed below.
Exhibit 4
India Inc’s enduring 100x stocks between 1994 and 2014
Company
Infosys
Lupin
Wipro
Motherson Sumi
Shree Cement
Kotak Mahindra
Emami
Vakrangee
Eicher Motors
Aurobindo Pharma
Blue Dart Express
Havells India
Amara Raja
Sun Pharma
P I Inds
Balkrishna Inds
Price
Year of
Mult. (x) purchase
2,902
1994
1,170
2002
875
1994
775
1999
644
1998
608
2000
544
1996
525
2000
452
2000
452
1997
417
1999
372
2000
368
1995
347
1997
343
2005
310
1994
Company
Glenmark Pharma
Hindustan Zinc
CMC
KPIT Tech
Symphony
TTK Prestige
Titan Company
Cipla
Hero MotoCorp
GRUH Finance
MphasiS
Sesa Sterlite
Godrej Inds
Jindal Steel
HDFC Bank
Supreme Inds
Price
Mult. (x)
299
298
277
247
245
233
232
222
216
203
199
196
164
158
156
155
Year of
purchase
2000
1997
1997
2002
2009
2005
2002
1994
1994
2002
1995
2001
2002
2002
1996
2002
Company
Ipca Labs
NMDC
Gujarat Fluorochem
Ajanta Pharma
Dr Reddy's Labs
Coromandel Inter
Berger Paints
Shriram Transport
CRISIL
United Breweries
Axis Bank
Crompton Greaves
Pidilite Inds
Alstom T&D India
Asian Paints
Price
Year of
Mult. (x) purchase
150
2002
145
2003
145
1994
142
2004
140
1994
139
1997
137
1997
135
2002
127
1996
125
2003
119
2000
118
1998
109
1994
107
2002
106
1994
Note:
The multiples are based on stocks being purchased at the lowest prices for the respective year, and held on to Mar-2014.
There are 2 interesting observations here –
1. The average 100x period in India is about 12 years i.e. 47% return CAGR; interim period
returns too are very attractive.
2. In a given time-frame, 100x investment opportunities are more than 100x investment ideas.
2.2.1 The average 100x period in India is 12 years
As can be seen from the above table, from the time of purchase to March 2014, each of the 47
100x stocks has delivered different return multiples over different periods of time. The average
multiple is 332x and the average period is 15 years, which implies return CAGR of 47%. At this
rate of compounding, a stock goes 100x in about 12 years.
Further, the even as terminal returns are a high 47% compounded, there is no compromise on
the interim-period returns. The 47-stock 100x portfolio delivered robust post-purchase annual
return of 426% in Year 1, 105% over 3 years, 88% over 5 years and 54% over 10 years.
12 December 2014
8

19th Annual Wealth Creation Study (2009-2014)
Exhibit 5
In India, average 100x period is 12 years; stocks deliver handsome interim-period returns as well
100x portfolio: Avg stock returns from year of purchase (%)
(Stock price multiple in boxes)
5x
426
9x
24x
74x
100x
105
88
54
47
1-year
3-year
5-year
10-year
Post-purchase stock return (%)
12-year
2.2.2 100x opportunities > 100x stocks
Of the total 3,500 listed stocks, the prospect of finding only 47 100x stocks that too over a span
of 15-20 years may sound like finding a needle in a haystack. However, what is interesting is
that over the 16-year period 1994-2009, the number of 100x opportunities was much higher at
163. This is because most 100x stocks offer multi-year windows to buy into them, and still rise
100 times from that level. In fact, the average number of opportunities in the first 11 years is a
high 14. A decent strike rate from this will work wonders for any portfolio.
Exhibit 6
100x investment opportunities: Initial 11-year average is a reasonably high 14 per annum
No. of 100x opportunities (163) > No. of 100x ideas (47)
22
14
9
15
18
14
11
14
14
14
11
5
0
0
0
2
For instance,
Motherson Sumi
and
Shree Cement
offered the highest number of opportunity-
years (11 each). Both these stocks could have been bought anytime from 1994 to 2004, and the
stock prices would have risen 100-fold even thereafter. Likewise,
Lupin
offered a 9-year buying
window from 1995 to 2003.
Even
Infosys,
by far the highest multi-bagger, could have been bought any time over the 5 years
1994 to 1998 for a 100x experience. The only – albeit major – difference would be in the price
appreciation multiple: 2,900x if bought in 1994 and 209x if bought in 1998 (in both cases, held
through to March 2014).
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19th Annual Wealth Creation Study (2009-2014)
Exhibit 7
100x stocks present multi-year window of opportunity to buy and own them
Time window
(years)
11
9
8
7
Stocks
Motherson Sumi, Shree Cement
Lupin
Kotak Mahindra
Godrej Inds, Hind Zinc, Titan
Time window
(years)
6
5
4
3
Stocks
Sun Pharma, Amara Raja
Infosys, Wipro, Sesa, Havells
Aurobindo, Hero MotoCorp, Eicher Motors
CRISIL, Gujarat Fluorochem, Balkrishna Inds,
Jindal Steel, United Breweries, GRUH, Ipca,
Glenmark, Vakrangee
As investors, the key takeaway from this is that we need not worry even if we have missed a
multi-fold price rise in a potential 100x by not buying into it 1, 2 or even 5 years ago. In other
words, when it comes to 100x stocks “it
is dawn when you wake up!”
Or more accurately,
“when
the 100x idea dawns on you, simply wake up and buy the stock!”
Unlike the worm which goes only to the early bird, the 100x stock is likely to feed handsome
returns even to late risers! Only one check is needed before it is finally pecked (read picked!):
Does the stock still carry the essence of 100x?
The next section provides a SQGLP checklist to
help answer this question.
3. The essence of 100x
Alchemy of SQGLP (Size, Quality, Growth, Longevity, Price)
Alchemy — the medieval forerunner of chemistry, concerned with the transmutation of base
metals like lead and copper into gold.
Our analysis of the 100x stocks suggests that their essence lies in the
alchemy of 5 elements
forming the acronym SQGLP – Size
(of company),
Quality
(of business and management),
Growth
(in earnings),
Longevity
(of both quality & growth) and
Price
(favorable valuation).
We discuss each of these 100x essential elements in the following sections.
Exhibit 8
SQGLP: At a glance
Element
S – Size
100x Feature
Company should be small and
relatively unknown
Quality of business
Checklist criteria
Small size, ideally both in terms of sales & market cap
Low analyst coverage & institutional holding
Low traded volumes
Large existing or potential profit pool
Favorable competitive landscape
Potential for above cost-of-capital returns
Unquestionable integrity
Demonstrable competence
Growth mindset
Multiplicative interplay of growth in (1) Sales volume
and/or (2) Selling Price and/or (3) Margin.
Assess the company’s CAP (competitive advantage period)
Check whether growth is reverting to mean or not
Ideally, enough room for valuation re-rating
10
Q – Quality
Quality of management
G – Growth
L – Longevity
P – Price
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Growth in earnings
Longevity of quality & growth
Favorable valuation

19th Annual Wealth Creation Study (2009-2014)
4. 100x Element #1: S – Size
“The company should be small and relatively unknown”
A fast-growing company must be small. Sheer size militates against great growth.
– Thomas Phelps in 100 to 1 In The Stock Market
You've got to think about big things while you're doing small things, so that all the small
things go in the right direction.
– Alvin Toffler, American writer and futurist
4.1 Size is a key driver of the low-base effect
The focus on size is the first and foremost differentiator of the 100x investing approach over
any other. In effect, this approach attempts to take full advantage of what is known in
economics as the “low-base
effect”
i.e. the tendency of a small absolute change from a low
initial amount to be translated into a large percentage change. As can be seen from the
examples below, the low-base effect plays out both in investing and in business.
Low-base effect: Elementary examples
In investing:
Stock A priced at INR100 rising to INR140 (absolute gain INR40) is nowhere close to
Stock B priced at INR20 rising to INR40 (absolute gain only INR20). The percentage gain in the
former is 40%, which is much lower than the latter’s 100%. If indeed the objective is to earn
INR40, all that investors need to do is buy TWO stocks of B. This would earn INR40 by investing
only INR40 compared to the INR100 invested in Stock B.
In business:
If company SmallCo with INR1 million sales wants to grow 100-fold, it needs
additional sales of INR99 million. But for even a high-growth company like Infosys to now grow
100-fold would require additional sales which is 99 times its FY14 sales of INR500 billion i.e.
INR49,500 billion! Of course, this too may happen but is likely to take much longer time than for
SmallCo to reach INR100m.
4.2 Two dimensions of size: Revenue and Market Cap
In common parlance, size of a company is usually associated with the revenue it generates.
However, from the perspective of equity investment, even market cap size is important as the
same low-base effect works here too.
Also, at times, it is possible that a fast-growing company may be smaller than average in terms
of revenue, but may have a bigger-than-average market cap due to widespread investor
attention. This is where the characteristic of “relatively unknown” becomes relevant. The more
unknown the stock the lower the chances of its prospects already being priced in by way of high
market cap, hampering the full play of low-base effect. Size apart, the other key indicators to
determine “relative unknown-ness” include – (1) Low institutional holding, (2) Low number of
brokerage analysts covering the stock, and (3) Relatively low traded volumes.
4.3 “Small & unknown”: 100x stocks findings & takeaway therefrom
The average revenue of 100x companies in the year of purchase was about INR3 billion;
only 3 of the 47 companies (Crompton, Godrej Industries, NMDC) had revenue in double-
digit billion.
11
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19th Annual Wealth Creation Study (2009-2014)
Average market cap was INR2.5 billion; only one company (NMDC) had double-digit billion
market cap.
Average P/E was 6x, confirming no major investor fancy.
KEY TAKEAWAY:
Consider growth in the economy, inflation, stock market levels, etc, the
hunting ground for potential 100x stocks should be companies with market cap not
significantly exceeding USD0.5 billion or INR30 billion.
The relatively small & unknown Infosys grows big in just 5 years!
In 1994, Infosys’ revenue was INR290m, 0.1% of the then largest turnover company, IOC. Even
five years later, Infosys was barely 0.5% the size of IOC. And yet, in the meanwhile, it clocked
revenue CAGR of 73% whereas IOC could manage 25% CAGR.
Likewise, in market cap terms, Infosys in 1994 was 11% of then largest company SAIL. In 5
years, its market cap had expanded to 74% of the then leader (ONGC). In effect, India’s
highest market cap just about doubled in 5 years, while Infosys’ market cap rose 13-fold.
Exhibit 9
For 100x investing, small is beautiful!
INR m
Sales
Largest company
Infosys
% to largest co.
Market Cap
Largest company
Infosys
% to largest co.
1994
1995
1996
1997
1998
1994-98
Mult. (x) CAGR (%)
2.4
8.9
25
73
214,616
290
0.1
19,929
2,178
11
353,923
554
0.2
13,552
3,449
25
428,960
886
0.2
30,230
3,594
12
554,826
1,392
0.3
29,410
7,309
25
523,508
2,577
0.5
39,684
29,281
74
2.0
13.4
19
91
5. 100x Element #2: Q – Quality
“Quality of business + Quality of management”
The quality of an organization can never exceed the quality of the minds that make it up.
– Harold R McAlindon, American author, writer, management speaker
Bet on men and organizations fired by zeal to meet human wants and needs, imbued with
enthusiasm over solving mankind’s problems. Good intentions are not enough, but when
combined with energy and intelligence the results make it unnecessary to seek profits.
They come as a serendipity dividend on a well-managed quest for a better world.
– Thomas Phelps in 100 to 1 In The Stock Market
There are two aspects to Q in SQGLP – (1) Quality of business and (2) Quality of management.
5.1 Quality of business
Quality of business needs to be assessed for factors like existing or potential size of profit pool
for the industry (and hence the company), competitive landscape, potential for sustained above
cost-of-capital return on investment, etc.
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19th Annual Wealth Creation Study (2009-2014)
We analyzed the businesses of the past 100x companies and observed as follows –
All the players are from sectors which enjoy large Profit Pool.
8 of the 47 companies are commodity plays, where typically the key driver of earnings and
valuation growth is a surge in product prices.
The balance 39 non-commodity companies can be classified under 3 buckets -
1. Value migration beneficiaries (19 companies)
2. Dominant players i.e. with leading market shares (10 companies)
3. Niche players i.e. in unique, profitable business segments (10 companies).
Exhibit 10
Value migration is the dominant business theme of 100x stocks
100x STOCKS: BUSINESS ANALYSIS
Non-commodity (39)
Commodity (8)
Value Migration (19)
Global (14)
Healthcare (8)
Technology (4)
Sun Pharma
Infosys
Dr Reddy's
Wipro
Cipla
KPIT Tech
Lupin
MphasiS
Ipca Labs
Others (2)
Glenmark
P I Inds
Aurobindo
Balkrishna Inds
Ajanta Pharma
Dominant (10)
Local (5)
Private banks (3)
HDFC Bank
Kotak Mahindra
Axis Bank
Others (2)
Hero Motocorp
Titan Company
Consumer-facing (6)
Asian Paints
Pidilite Inds
Blue Dart
United Breweries
Amara Raja
Havells India
Others (4)
Motherson Sumi
Crompton Greaves
Supreme Inds
Alstom T&D
Niche (10)
Consumer-facing (6)
Eicher Motors
TTK Prestige
Symphony
Emami
Berger Paints
GRUH Finance
Others (4)
Shriram Transport
CRISIL
CMC
Vakrangee
Hindustan Zinc
NMDC
Sesa Sterlite
Jindal Steel
Shree Cement
Coromandel Inter
Godrej Inds
Guj Fluorochem
With the above backdrop, we briefly cover the following determinants of quality of business:
1. Profit Pool
2. Value Migration
3. Dominant market shares
4. Niche opportunity
5. Low competitive intensity
6. Competitive advantage / Economic Moat
7. Favorable demand-supply dynamics.
5.1.1 Profit Pool
Profit Pool is the aggregate level of absolute profit earned by all players in a sector. The tables
here presented in this section suggest that 10 sectors alone accounted for 94% of India Inc’s
aggregate corporate profits in FY14. Juxtaposing these with the 100x stocks, it is evident that
almost all of them emerge from high Profit Pools.
KEY TAKEAWAY:
Barring the odd sunrise business, most 100x stocks going forward too are
likely to emerge from these very high Profit Pool sectors.
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19th Annual Wealth Creation Study (2009-2014)
Exhibit 11
India Inc Profit Pool FY14: Top 10 profit sectors
Sector
FY14 PAT
INR b
% of total
Financials
1,117
28
Oil & Gas
785
20
Technology - Software
454
11
Metals & Mining
435
11
Automobiles
263
7
Utilities - Power
217
5
Consumer - Non-durables
209
5
Healthcare
155
4
Cement
45
1
Auto Ancillaries
45
1
Total of above
3,726
94
GRAND TOTAL
3,947
Top 10 loss sectors
Sector
Airlines
Alcoholic Beverages
Sugar
Telecom Equipment
Trading
Ship-building
Computer Education
Hotels & Restaurants
Technology - Hardware
Glass & Glass Products
Total of above
GRAND TOTAL
FY14 PAT
INR b
-52
-41
-27
-14
-9
-7
-5
-5
-3
-2
-166
3,947
5.1.2 Value Migration
In his book
Value Migration,
author Adrian J Slywotzky says, “Value migrates from outmoded
business designs to new ones that are better able to satisfy customers' most important
priorities.” Value Migration results in a gradual yet major shift in how the current and future
Profit Pool in an industry is shared.
Value Migration is one of the most potent catalysts of the 100x alchemy as it creates a sizable
and sustained business opportunity for its beneficiaries. It has two broad varieties –
1. Global Value Migration
e.g. global manufacturing value migrating to China; value in IT and
healthcare sectors migrating to India, etc
2. Local Value Migration
e.g. value in telephony migrating from wired networks to wireless
networks; value in Indian banking migrating from public sector banks to private banks.
Exhibit 12
Examples of Value Migration
Sector/Company
IT Services
Healthcare – Pharma
Banking
Telecom
e-tailing
Titan Industries
Hero MotoCorp
Value migration from
Developed world
Developed world
State-owned banks
Fixed line networks
Brick-and-mortar retailing
Unorganized jewelry market
Scooters
Value migration to
Low labor-cost countries
Low-cost chemistry countries
Private banks
Wireless networks
Online retailing
Organized jewelry retailing
Motorcycles
KEY TAKEAWAY:
Rare exceptions excluded, the above-listed cases of Value Migration are
likely to continue into the foreseeable future, and will form the bedrock for a new set of
100x stocks to emerge.
5.1.3 Niche opportunity
A “niche” may be defined as a small and unique or specialized business segment. Small size
favors high growth not only in companies but also in business segments. Once-in-a-while, such
niches and strategic business opportunities emerge, which start small but gain size rapidly (e.g.
Y2K, gold loans, home-delivered pizzas, etc).
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19th Annual Wealth Creation Study (2009-2014)
Pioneers or market leaders in these niche opportunities are potential candidates for 100x. The
table below briefly explains some of the niche companies among the past 100x stocks.
Exhibit 13
Buy niche, get rich!
Company
Eicher Motors
TTK Prestige
Symphony
Emami
Shriram Transport
GRUH Finance
CRISIL
Vakrangee
Niche in brief
Near monopoly in “leisure motorcycles” in India (Royal Enfield brand)
Market leader in pressure cookers; brand extension to other home appliances
Pioneer in branded air-coolers
Niche consumer products like cooling hair-oil, men’s fairness cream, etc
Pioneer in second-hand truck financing
Leading mortgages player in small cities and towns
Pioneer of credit rating in India
Select domestic IT services e.g. e-Governance projects for government of India
KEY TAKEAWAY:
Most of the niche companies seem to go through several rounds of trial
and error (e.g. TTK Prestige is established in 1955, but has been a mediocre company till as
recent as FY09). Hence, it may be prudent to buy into such companies only after they have
secured their business model.
5.1.4 Dominant market shares
Dominant market share (typically No.1 or No.2) in a consolidated business with medium-to-high
growth is a potential source for 100x. Two things work out favorably in such situations –
1. Even in a consolidated market, the leader tends to gradually gain market share, ensuring
that it grows faster than the market; and
2. The dominant player tends to enjoy pricing power which ensures profitability.
The dominant-market-share theme is more likely to play out in consumer-facing businesses e.g.
Asian Paints
in paints,
Pidilite Industries
(“Fevicol” brand) in adhesives, etc. However, it has
worked in select industrials as well e.g.
Motherson Sumi
in auto ancillaries,
Supreme Industries
in plastic products, etc.
5.1.5 Low competitive intensity
Businesses with low competitive intensity are more favorable for 100x stocks. Competitive
intensity is not solely a function of the number of rival players in a business. Thus, in the
Cement sector, competitive intensity is relatively low despite a large number of players. On the
other hand, competitive intensity is high in sectors like wireless telecom and tyres, despite a
handful of players.
5.1.6 Economic Moat / Competitive advantage
Whether competitive intensity is low or high, the 100x alchemy will occur only in companies
which enjoy Economic Moat i.e. sustained competitive advantage over its rivals. As discussed in
our Wealth Creation Study of 2011,
the sure-fire test of whether a company has Economic
Moat or not is whether it enjoys return on capital higher than industry average.
(Please refer our Wealth Creation Study of 2011 for a detailed discussion on Economic Moat.)
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19th Annual Wealth Creation Study (2009-2014)
5.1.7 Favorable demand-supply dynamics
Favorable demand-supply dynamics is a key enabler of 100x, especially in commodity
businesses like metals, cement and chemicals. This factor plays out at two levels –
1. Macro/sector level:
When aggregate demand in any sector exceeds aggregate capacity, it
creates a “supply squeeze”, causing end-product prices to soar. This drives up company
profits which, in turn, causes stock price to rise 100-fold (see Hindustan Zinc and NMDC
charts below).
2. Company level:
In this case, a specific company’s capacity (i.e. ability to supply) increases
significantly faster than the sector, driving up sales volumes, profits and stock prices
(see Jindal Steei and Shree Cement charts below).
Exhibit 14
Exhibit 15
Product price led stock price: Hindustan Zinc …
Zinc - USD/t
Stock Price INR - RHS
… and NMDC
Iron ore - INR/t
Stock Price (INR)
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
160
140
120
100
80
60
40
20
0
5,000
4,000
3,000
2,000
1,000
0
400
320
240
160
80
0
Exhibit 16
Exhibit 17
Volume led stock price: Shree Cement …
Cement (m tons)
Stock Price INR - RHS
… and Jindal Steel
Steel sales (k tons)
Stock Price INR - RHS
16
14
12
10
8
6
4
2
0
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
3,500
3,000
2,500
2,000
1,500
1,000
500
0
800
700
600
500
400
300
200
100
0
No matter how good the quality of business, the magic of 100x in stock markets happens only
when the same is crossed with a high-quality management, the second aspect of Q.
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19th Annual Wealth Creation Study (2009-2014)
5.2 Quality of management
We believe there are 3 key aspects to quality of management: (1) Unquestionable integrity,
(2) Demonstrable competence and (3) Growth mindset. But even these are subjective and non-
quantifiable issues. Thus, assessing quality of management is a true art rather than science.
We list below some indicators which can serve as a broad checklist for this process.
Exhibit 18
Broad indicators to judge quality of management
Management Quality aspect
Indicators
1. Unquestionable integrity
Impeccable track record of corporate governance, fully
respecting the law of the land
Concern for all stakeholders (and not only the majority
shareholders). Other stakeholders include customers,
employees, debt-holders, government, community, and minority
shareholders
Paying full tax and a well-articulated dividend policy are key
favorable indicators of management integrity. Corporate empire-
building to the detriment of minority shareholders is a negative
indicator.
Excellence in strategic planning and execution
The above should mainly reflect in the company enjoying a
sustainable competitive advantage over its peers, reflecting by
way of above-average return on capital (RoE, RoCE)
“Keeping the growth going” is yet another key indicator of
management competence
Long-range profit outlook i.e. ensuring sufficient resources go
into long-term issues like product development, brand building,
capacity creation/expansion, succession planning, etc
Efficient capital allocation including decisions like organic or
inorganic growth, same-franchise or diversified growth, domestic
or overseas growth, etc.
2.
Demonstrable
competence
3.
Growth mindset
6. 100x Element #3: G – Growth
“Growth in earnings via multiplicative interplay of volume, price, margin”
Growth is never by mere chance; it is the result of forces working together.
– James Cash Penney, Founder of JCPenney
6.1 Role of growth in 100x
We draw an analogy of 100x with a 100-storey building. The somewhat invisible yet most
important part of the building is its foundation. It is only upon a strong foundation that a 100-
storey superstructure can be built. Likewise, for 100x, small size and quality of business and
management are the foundation. Upon this foundation comes the superstructure in the form of
100-fold growth in stock price.
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19th Annual Wealth Creation Study (2009-2014)
6.2 Two dimensions of growth – Earnings and Valuation
The end result of 100x is a 100-fold growth in stock price. The two primary dimensions of this
growth are (1) Earnings growth and (2) Valuation growth. The G of SQGLP addresses earnings
growth, whereas the P(rice) takes care of the Valuation growth (covered in Section 8).
6.3 Four dimensions of earnings growth – Volume, Price, Operating & Financial Lever
In the final analysis, G (i.e. earnings growth in a company) is a quantitative reflection of Q
(i.e. its quality of business and management). G has four dimensions (also see picture below):
1. Volume growth
– a function of demand growth matched by company’s capacity to supply;
2. Price growth –
a function of company’s pricing power, which in turn is a function of the
competitive landscape
3. Operating leverage –
a function of the company’s operating cost structure; higher the fixed
cost, lower the unit cost incidence and higher the operating leverage
4. Financial Leverage –
a function of the company’s capital structure; higher the debt-equity,
higher the financial leverage and vice versa.
Exhibit 19
Multiplicative perspective of earnings growth
Sales Volume
Growth
Realization
Growth
Earnings Growth
Operating
Leverage
Financial
Leverage
Earnings Growth: For the arithmetically inclined
∆EPS
=
∆Sales
volume
∆Sales
x
∆EBIT
x
∆EPS
∆Sales
volume
∆Sales
∆EBIT
= Volume growth x Price Lever x Operating Lever x Financial Lever
x
Note:
(read as delta) denotes % change. For more on levers, please refer our
IF (Investment Framework) series report dated 29-Sep-2014.
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19th Annual Wealth Creation Study (2009-2014)
Quality v/s Growth
We believe it is important to clearly distinguish between quality of a company and its
growth prospects.
Quality:
As discussed in section 5, quality of a company is a function of (1) Quality of its
management, and (2) Quality of business (mainly in terms of profitability measured in
terms of return on capital i.e. RoCE and RoE).
Growth:
Growth is not a function of Quality alone, but several other factors discussed
earlier – value migration, demand-supply dynamics, competitive landscape, etc.
In binary terms, for any given company, Quality can be High or Low and Growth can be High
or Low. Accordingly, it is possible to draw up a 2x2 Quality-Growth matrix as under –
Exhibit 20
The Quality-Growth Matrix
GROWTH TRAPS
High
TRUE WEALTH CREATORS
Enduring
Multi-baggers
Transitory
Multi-baggers
GROWTH
WEALTH DESTROYERS
Low
QUALITY TRAPS
Underperformers
Permanent capital loss
Low
High
QUALITY
1. Low-Quality-Low-Growth:
Such companies and their stocks are clearly avoidable.
2. Low-Quality-High-Growth:
Such companies may prove to be
Growth Traps.
The high
growth in these companies is most likely due to cyclical upturns, but gets mistaken for
secular high quality. If bought very cheap, such stocks may still end up as multi-baggers,
but at best transitory.
3. High-Quality-Low-Growth:
Such companies may prove to be
Quality Traps.
The high
quality in these companies blinds investors to the possibility that these companies may
not be able to grow their earnings at a healthy pace due to low underlying base rate (e.g.
Castrol
in lubricants,
Colgate
in oral care,
Hindustan Unilever
in soaps & detergents, etc).
High RoE, high free cash flow and high dividend payouts ensure that these stocks enjoy
(and indeed merit) rich valuations. So, they can be bought only when they trade at
significant discount to their long-period valuations (e.g. during extreme pessimism in the
broader market or in the specific stock).
4. High-Quality-High-Growth:
These are the
Enduring Multi-baggers,
especially if bought at
favorable valuations. Further, the companies here which also happen to be small in terms
of market cap (typically under USD0.5 billion) are potential 100x candidates.
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19th Annual Wealth Creation Study (2009-2014)
7. 100x Element #4: L – Longevity
“Sustaining quality and growth over long term”
There are no great limits to growth because there are no limits of human intelligence,
imagination, and wonder.
– Ronald Reagan, former US President
Having established the quality of the company and the rate of growth, the next challenge in
identifying a 100x stock is assessing how long the company can keep the growing going. In the
context of longevity, competence of management is tested at two levels –
1. Extending CAP (i.e. Competitive Advantage Period); and
2. Delaying mean reversion of growth rate.
7.1 Extending CAP
Competitive advantage period (CAP) is the time during which a company generates returns on
investment that significantly exceed its cost of capital.
Economic laws suggest that if a
company earns supernormal return on its invested capital, it will attract competitors who will
accept lower returns, eventually driving down overall industry returns to economic cost of
capital, and sometimes even below it. However, a company with a great business and great
management sustains its superior rates of return and keeps extending its CAP. This creates
incremental excess return both for the company and in turn for its equity investors. (The idea of
CAP and its extension is depicted below.)
Exhibit 21
Companies usually enjoy a certain CAP …
… but 100x companies tend to extend it
7.2 Delaying mean reversion of growth rate
The other aspect of longevity is about delaying the mean reversion of growth rates. After the
initial hyper- and high growth phases, rates tend to taper off to the mean rate (which is usually
the nominal GDP growth rate). This is due to both competition and also the company’s own
high-base effect. This is when competent managements can delay the reversion to mean either
by (1) new streams of organic growth, and/or (2) inorganic growth via judicious, earnings-
accretive and value-enhancing acquisitions.
Thus,
longevity of quality and growth is the key difference between transitory multi-baggers
and 100x stocks.
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19th Annual Wealth Creation Study (2009-2014)
8. 100x Element #5: P – Price
“Favorable valuation”
There is absolutely no substitute for paying 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. For human beings, there is no substitute for love.
For investing there is no substitute for paying right price – absolutely none.
— Van Den Berg, Outstanding Investor Digest, April 2004
8.1 Favorable valuation must for valuation growth to kick in
As stated earlier, growth in stock price is a multiplicative function of growth in earnings and
growth in valuation. The 100x phenomenon ideally needs both the legs of growth to kick in.
If valuation remains unchanged, earnings will need to grow 100-fold. On the other hand, if
valuation were to actually halve, earnings would need to (1) double for the stock to stay at the
same price, and (2) grow 200-fold for the stock price to grow 100-fold.
The simplest way to improve the odds of valuation growth is by ensuring favorable valuation
at the time of purchase.
A further simple rule of favorable valuation is single-digit P/E.
(Note: In certain situations, low P/E may not be the sole determinant of favorable valuation e.g.
during bottom-of-cycle, earnings of cyclical stocks are depressed leading to high P/Es; likewise,
where companies are expected to turn from loss to profit, current P/E cannot be calculated.)
8.2 “Favorable valuation”: 100x stocks findings & takeaway therefrom
In case of the 100x stocks which we studied, the average P/E at the time of purchase was about
6x, which rose to about 24x in 12 years (4-fold i.e. CAGR of 12%). Given this, earnings would
need to expand 25-fold in 12 years, which is a plausible CAGR of 31%.
Exhibit 22
Purchase P/E distribution of 47 100x stocks: Almost two-thirds were under 5x P/E
30
10
1
Loss-making
<5
5-10
100x stocks P/E in year of purchase
6
> 10
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19th Annual Wealth Creation Study (2009-2014)
The math of 100x: Integrating earnings growth & valuation growth
This section is strictly for the mathematically inclined. The end result of 100x is a 100-fold
growth in stock price. There are 4 dimensions to this growth, which we diagrammatically
represent as a multiplicative sign, and follow it up with explanation and derivation.
Exhibit 23
4-dimensional multiplicative perspective of growth
Sales Volume
Growth
Realization
Growth
Sales Growth
PAT Margin
Growth
Valuation
Growth
Barring exceptional situations, the stock price is a multiplicative function of earnings and its
valuation. This may be reduced to a simple equation as under –
Stock Price
= Earnings Per Share x P/E
Or, Market Cap = Profit After Tax (PAT) x P/E
… Equation 1
… Equation 2
Given the above, 100-fold growth in stock price can arise by any of the following means –
1. A 100-fold growth in earnings, or
2. A 100-fold growth in valuation, or as is typically a case
3. A combination of earnings growth and valuation growth
(e.g. 25-fold earnings growth with 4-fold valuation growth).
Now, earnings itself is a multiplicative function of Sales and Profit margin. Further, Sales in
most cases is a multiplicative function of Sales volume and Price realization. Thus –
PAT
= Sales x PAT margin
i.e. PAT = Sales volume x Realization x PAT margin
Substituting Equation 4 in Equation 2, we get –
… Equation 3
… Equation 4
Market Cap = Sales volume x Realization x PAT margin x P/E
It can be proved further that change in market cap (and also stock price, if there is no change
in equity) is given by the formula –
∆Mkt
Cap = (1+∆Sales volume) x (1+∆Price) x (1+∆PAT margin) x (1+∆PE) – 1
Note:
(read as delta) denotes % change
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19th Annual Wealth Creation Study (2009-2014)
9. Shortlisting potential 100x ideas
Much of SQGLP covered except quality of management
I have but one lamp by which my feet are guided, and that is the lamp of experience.
I know of no way of judging the future but by the past.
– Thomas Phelps in 100 to 1 In The Stock Market
Having understood how the 100x process has worked in the past, we proceed to apply the same
to try and shortlist potential 100x ideas. Before that, we recap the SQGLP conditions favorable
for 100x alchemy to occur –
1. S – Size:
The company is small and relatively unknown
2. Q – Quality:
The company has a high-quality business run by a high-quality management
(i.e. one with integrity, competence and growth mindset)
3. G – Growth:
There is healthy growth in the company via a combination of sales volume
and/or price and/or margins
4.
L – Longevity:
The company is likely to sustain its quality and growth for a long time
5. P – Price:
The stock is favorably valued.
In our analysis thus far, we have made most of these elements fairly objective, except for
quality of management. We table below companies which meet the following 100x criteria –
Market cap less than INR30b
Businesses which offer play on Value migration or Niche opportunity
P/E not over 25x trailing 12-month earnings.
IMPORTANT NOTE: The companies mentioned here should not be construed as our
investment recommendations. Assessing integrity, competence and
growth mindset of the management in company is an exercise which is
subjective, requires a high level of due diligence, and not included in the
scope of this study.
Exhibit 24
Companies which meet key 100x criteria, subject to management assessment
Company
Small & unknown
Value Migration /
(Mkt Cap, INR b)
Niche opportunity
Aarti Drugs
10
Pharma exports
Suven Lifescience
22
Pharma exports
Granules India
16
Pharma exports
DCB Bank
29
Private banking
Tata Elxsi
19
Specialized software exports
Shilpa Medicare
20
Oncology drugs research
Atul Auto
10
Niche 3-wheeler player
Favorable valuation
(TTM P/E, x)*
13
17
17
18
21
24
25
* Valuation based on price of 25 November 2014
In his book
Path To Wealth Through Common Stocks,
Phil Fisher says, “in
evaluating a common
stock, the management is 90%, industry is 9% and all other factors are 1%.”
In the ultimate
analysis, it is the management alone which is the 100x alchemist. And it is to those who have
mastered the art of evaluating the alchemist that the stock market rewards with gold … by way
of 100x Wealth Creation!
12 December 2014
23

19th Annual Wealth Creation Study (2009-2014)
Market Outlook
12 December 2014
24

19th Annual Wealth Creation Study (2009-2014)
Market Outlook
A macro perspective
Corporate Profit to GDP
For FY15, Corporate Profit to GDP is likely to stabilize at 4.4%. Only in FY16, is corporate profit
growth likely to accelerate beyond nominal GDP growth rate.
Exhibit 1
Corporate Profit to GDP is bottoming out
Corporate Profit to GDP (%)
6.3
5.4
4.7
5.6
7.3
7.8
6.5
6.2
Average of 5.0%
4.9
4.6
4.3
4.4
3.0
2.0
2.2
Sensex Earnings
Expect FY15 earnings growth to be subdued at 14%. The ongoing upmove in the market can
sustain only if earnings growth momentum picks up from FY16.
Exhibit 2
Sensex earnings growth still muted; expect pickup only from FY16
Sensex EPS & growth
trend
FY01-15: 15% CAGR
FY01-08:
21% CAGR
216 236 272
523
348 450
718
FY08-14:
8% CAGR
1024
1124 1183
FY14-17E:
18.5%
14%
20%
22%
2230
1866
1340
1529
833
820
834
12 December 2014
25

19th Annual Wealth Creation Study (2009-2014)
Interest Rates
10-year G-Sec yield is still high. RBI held rates in its recent credit policy. But yields have already
started to ease on the back of a sharp fall in oil prices and inflation, and interest rates are surely
headed further south.
Exhibit 3
Interest rates are still high, and are surely headed south
10
10-year G-Sec Yield (%)
8
8.1
6
4
Sensex Earnings Yield to Bond Yield
Prevailing high interest rates, muted earnings growth and buoyant market sentiment has kept
earnings to bond yield at 0.76x, marginally below the 10-year average of 0.85x.
Thus, a significant reduction in interest rate is a key trigger to fuel further rally in equities.
Exhibit 4
Sensex Earnings Yield to Bond Yield marginally below LPA
1.8
1.5
1.2
0.9
0.6
0.3
10-Year Avg:
0.85x
0.76
12 December 2014
26

19th Annual Wealth Creation Study (2009-2014)
Market Valuation
Market Cap/FY15E GDP is at 77% (v/s 10-year average 73%) and Sensex 1-year forward P/E is at
16.4x (v/s 10-year average of 15.6x).
Considering the far-reaching political change at the Center, the sharp fall in oil price, and its
likely positive impact on inflation and interest rates, valuations are reasonable.
Exhibit 5
Market Cap to FY15E GDP at 77% is marginally higher than LPA but still well below peak levels
Market Cap to GDP (%)
Average of 73%
for the period
52
42
82
83
69
55
63
65
103
95
88
77
Exhibit 6
Sensex P/E at 16.4x is also closer to LPA, suggesting reasonable valuations
28
24
20
16
12
8
10-year
avg: 15.6x
Sensex P/E (x)
Sensex (RHS)
32,000
26,000
20,000
16.4
14,000
8,000
2,000
Conclusions
12 December 2014
Corporate profit is bottoming out at 4.3%.
Interest rates are definitely headed south.
Acceleration in earnings growth is elusive so far, but is a must from FY16 if the current
market upmove is to sustain.
Market Cap/GDP of 77% leaves room for about 50% upside over the next 2 years as market
cap heads towards parity with GDP.
Market performance over this period will also be meaningfully impacted by global factors.
27

19th Annual Wealth Creation Study (2009-2014)
2009-14 Wealth
Creation Study:
Detailed findings
12 December 2014
28

19th Annual Wealth Creation Study (2009-2014)
#1
The Biggest Wealth Creators
TCS is the Biggest Wealth Creator again
TCS
has emerged the biggest Wealth Creator for the period 2009-14, retaining the top spot
it held even for the period 2008-13.
The performance in the latest period is better than the previous one with Wealth Created at
INR3.6 trillion v/s INR2.3 trillion over 2008-13. This is the highest ever wealth created in any
5-year period in India’s stock market history, topping the INR3.1 trillion created by Reliance
during 2003-08.
On the back of 29% PAT CAGR over 2009-14, TCS stock has delivered 51% price CAGR for
the same period, and is currently India’s largest company by market cap.
ITC, HDFC Bank
and
Infosys
have retained their previous year ranks of 2-4. 8 of the top 10
are the same as last year;
ONGC
(6th last year) and
Hindustan Unilever
(9th last year) have
made way for
ICICI Bank
and
HCL Technologies.
Exhibit 1
Top 10 Biggest Wealth Creators
Rank Company
Wealth Created
INR B % Share
1
TCS
3,638
12
2
ITC
2,073
7
3
HDFC Bank
1,307
4
4
Infosys
1,123
4
5
ICICI Bank
1,035
4
6
Wipro
993
3
7
Sun Pharma
958
3
8
Tata Motors
945
3
9
HDFC
934
3
10 HCL Technologies
898
3
Total Top 10
13,905
47
Total of Top 100
29,381
100
CAGR (%)
Price
PAT
51
29
31
22
31
31
20
12
30
28
30
16
39
16
62
L to P
26
29
69
38
36
30
34
24
P/E (x)
2014
2009
22
10
31
21
20
18
18
13
12
11
17
9
31
12
8
NA
21
22
15
5
18
15
19
13
RoE (%)
2014
2009
39
34
33
24
20
15
24
33
15
7
25
28
21
27
22
-42
17
12
33
27
24
17
19
17
Exhibit 2
TCS’ Wealth Creation of INR3.6 trillion between 2009-14 is the highest ever in India
Wealth Created in 5 years (INR b)
TCS
Reliance Industries
3,077
2,556
1,678
1,856
1,514
1,742
3,638
ONGC
Hindustan Unilever
(HUL)
91
73
262
341
2,284
Wipro
1,247
HUL
377
Wipro
383
245
1,030 1,065
1,187
ITC
Key Takeaway
Market folly is one of the biggest sources of multi-baggers
In end-2008, global stock markets crashed given the US sub-prime crisis. In India, businesses
like IT and Healthcare (where India enjoys competitive advantage) were also hammered –
a great opportunity to pick up stocks like TCS, Wipro and HCL Tech at P/Es of 10x or less.
12 December 2014
29

19th Annual Wealth Creation Study (2009-2014)
#2
The Fastest Wealth Creators
Eicher Motors is the Fastest Wealth Creator
Eicher Motors
has emerged the Fastest Wealth Creator during 2009-14, with Price CAGR of
94%, marginally higher than 93% for
Bajaj Finance.
Eicher’s PAT CAGR at 51% is much lower
than Bajaj Finance’s 84%, but its P/E re-rated much sharper from 9x to 31x, whereas Bajaj
Finance P/E expanded from 7x to only 12x.
Eicher, Supreme Industries
and
Page Industries
are among the 10 Fastest Wealth Creators
for the last 3 studies in a row.
HCL Technologies
enjoys the unique distinction of being in the top 10 of both the Biggest
and the Fastest Wealth Creators.
7 of the top 10 Fastest Wealth Creators had single-digit INR billion market cap in 2009
and/or were quoting at single-digit P/Es.
Exhibit 3
Top 10 Fastest Wealth Creators
Rank Company
Price Appn.
(x)
1
Eicher Motors
27
2
Bajaj Finance
27
3
Supreme Inds
24
4
Amara Raja Batteries
21
5
Page Industries
18
6
IndusInd Bank
16
7
HCL Technologies
14
8
Aurobindo Pharma
13
9
Havells India
13
10 Ipca Labs
13
CAGR (%)
Price
PAT
94
51
93
84
88
24
84
35
78
37
73
57
69
38
68
63
67
L to P
67
38
Mkt Cap (INR b)
2014
2009
161
6
90
3
63
3
67
3
72
4
263
11
973
68
149
10
116
9
107
8
P/E (x)
2014
2009
31
9
12
7
23
3
18
4
47
13
19
8
15
5
13
10
26
NA
22
9
Exhibit 4
History of Fastest Wealth Creators (5-year Price multiplier, x)
837
665
223
136
75
30
7
23
66
69
50
75
54
28
50
24
28
27
182
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Key Takeaway
High-quality midcaps bought at low valuations are potential multibaggers
Despite their small size, many midcap companies enjoy competitive advantage in their
respective business, a key factor for high earnings growth (e.g. Eicher is a market leader in
leisure motorcycles, and has Volvo as a partner for its commercial vehicles franchise).
Combination of high earnings growth, low valuation and small market cap, leads to high
Wealth Creation at a rapid pace.
12 December 2014
30

19th Annual Wealth Creation Study (2009-2014)
#3
The Most Consistent Wealth Creators
Kotak Mahindra Bank is the Most Consistent Wealth Creator
Kotak Mahindra Bank
is the Most Consistent Wealth Creator over the last 10-year period
2004-14, by virtue of –
1. Appearing among top 100 Wealth Creators in each of the last 10 studies; and
2. Highest 10-year Price CAGR, marginally ahead of
Asian Paints
and
Sun Pharma.
8 of the top 10 Most Consistent Wealth Creators are consumer-facing companies, with
Hindustan Zinc
and
Bosch
the only exceptions.
Interestingly, the list of top 10 is the same as last year except
Nestle
replacing
HDFC.
In fact,
HDFC has appeared among the top 10 Consistent Wealth Creators 9 of last 10 times,
followed by
Asian Paints
which has appeared 8 times.
Exhibit 5
Top 10 Most Consistent Wealth Creators
Appeared in 10-yr Price
Rank Company
WC Study (x) CAGR (%)
1
Kotak Mahindra
10
34
2
Asian Paints
10
34
3
Sun Pharma
10
33
4
Hindustan Zinc
10
29
5
ITC
10
26
6
Axis Bank
10
26
7
HDFC Bank
10
26
8
M&M
10
24
9
Bosch
10
23
10
Nestle India
10
23
10-yr PAT
CAGR (%)
30
24
32
28
18
37
33
27
14
16
P/E (x)
2014
2004
24
15
42
18
31
12
8
7
31
21
11
8
20
18
14
6
39
15
43
28
RoE (%)
2014 2004
13
14
31
26
21
48
18
39
33
27
16
27
20
21
19
21
14
29
47
84
Exhibit 6
Consumer-facing companies more likely to be Consistent Wealth Creators
Consistent Wealth Creators based on last 5 Studies
Consumer-facing
Non Consumer-facing
Consumer &
Healthcare
Asian Paints (5)
ITC (2)
Nestle (1)
Sun Pharma (5)
Auto
Hero Moto (2)
M & M (2)
Financials
Axis Bank (2)
HDFC (4)
HDFC Bank (5)
Kotak Mah. (5)
ACC (2)
Ambuja (2)
Bosch (2)
Hind. Zinc (3)
Infosys (3)
ONGC (2)
Reliance (2)
Siemens (1)
NOTE:
Bracket indicates number of times appeared within top 10 in last 5 Wealth Creation Studies
Key Takeaway
Consistent Wealth Creation = Sustainable & Profitable Growth in companies
Sustainable and Profitable growth in companies is a function of (1) Quality of business, and
(2) Quality of management. Our theme section covers this and various other aspects of
growth, and its role in Wealth Creation (see page 5 onwards).
12 December 2014
31

19th Annual Wealth Creation Study (2009-2014)
#4
Wealth Creators Index (Wealthex) v/s BSE Sensex
Superior earnings and price performance over benchmark
We have compared the performance of Wealthex (top 100 Wealth Creators index) with the BSE
Sensex on 3 parameters - (1) market performance, (2) earnings growth and (3) valuation.
Market performance:
Over the 5 years 2009-14, Wealth Creating companies have delivered
point-to-point return CAGR of 34% v/s 18% for the BSE Sensex. March 2014 over March
2009, Sensex is up 131% whereas the Wealthex is up 335% i.e. 204% outperformance over
5 years.
Earnings growth:
Wealthex clocked 5-year earnings CAGR of 24% v/s 10% for BSE Sensex.
Further, YoY earnings growth for Wealthex is higher for every year except 2012.
Valuation:
Wealthex P/E has broadly tracked the Sensex. Thus, the 16pp outperformance of
Wealthex is almost fully explained by the 14pp higher earnings growth performance.
Exhibit 7
Wealthex invariably outperforms benchmark indices handsomely
45,000
Wealthex - Rebased
36,000
27,000
18,000
9,000
0
Sensex
204%
Outperformance
Exhibit 8
Wealthex v/s Sensex: Superior market performance on the back of higher earnings growth
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
5-year
CAGR (%)
BSE Sensex
9,709
17,528
19,445
17,404
18,836
22,386
18
YoY (%)
81
11
(10)
8
19
Wealthex - based to Sensex
9,709
21,849
27,322
28,430
33,434
42,226
34
YoY (%)
125
25
4
18
26
Sensex EPS (INR)
820
834
1,024
1,124
1,183
1,340
10
YoY (%)
2
23
10
5
13
Wealthex EPS (INR)
753
1,144
1,574
1,655
1,923
2,197
24
YoY (%)
52
38
5
16
14
Sensex PE (x)
12
21
19
15
16
17
7
Wealthex PE (x)
13
19
17
17
17
19
8
Key Takeaway
Superior earnings growth = Superior Wealth Creation
Major change in valuations is rare and even unsustainable (e.g. global IT sector valuations
during dotcom era in early 2000s). Hence, in the ultimate analysis, it is superior earnings
growth which drives superior Wealth Creation.
12 December 2014
32

19th Annual Wealth Creation Study (2009-2014)
#5
Wealth Creation: Sectoral analysis
Technology re-emerges as the largest ever Wealth Creating sector
After a 9-year holiday post 2004,
Technology
has re-emerged as India’s largest Wealth
Creating sector. (It was the largest Wealth Creator for 4 consecutive years 2000 to 2004.)
Technology
sector created INR7.1 trillion Wealth between 2009 and 214, the highest ever
by any sector – 22% higher than INR5.8 trillion by
Oil & Gas
sector during the peak of global
equity boom of 2003-08.
Ironically,
Oil & Gas
is one of the lowest Wealth Creating sectors over 2009-14, with its
share of Wealth Created collapsing to 1% v/s 22% in 2009.
Auto, Technology
and
Healthcare
were the only 3 sectors whose Price CAGR was higher
than average of 34%.
Exhibit 9
Technology is the leading Wealth Creating sector by a wide margin
Industry
(No. of companies)
Technology (6)
Consumer & Retail (23)
Banking & Finance (20)
Auto (13)
Healthcare (13)
Capital Goods (5)
Cement (5)
Metals / Mining (4)
Telecom & Media (3)
Oil & Gas (2)
Others (6)
Total
WC
(INR b)
7,103
5,961
5,679
3,364
2,738
1,226
1,183
707
608
268
544
29,381
Share of WC %
2014 2009
24
5
20
11
19
9
11
4
9
4
4
12
4
2
2
15
2
11
1
22
2
4
100
100
CAGR 09-14 %
Price
PAT
38
22
32
17
34
28
41
60
37
27
27
5
29
4
29
20
27
16
21
31
33
17
34
24
PE (x)
2014 2009
18
10
41
23
14
11
14
26
27
19
29
11
20
7
13
9
24
15
9
13
25
13
19
13
ROE (%)
2014
2009
30
32
24
23
16
12
21
8
19
16
13
25
14
25
9
9
16
9
20
8
19
23
19
17
Exhibit 10
Technology: All-time high in Wealth Creation
Top Wealth Creating Sector Trend (INR b)
5,826
3,891
1,839
2,723
2,126
4,949
5,194
3,672
4,456
7,103
Oil & Gas Oil & Gas Oil & Gas Oil & Gas Oil & Gas
Metals/
Mining
2010
Financials Financials Consumer Technology
& Retail
2011
2012
2013
2014
2005
2006
2007
2008
2009
Key Takeaway
Auto – Highest Price CAGR on the back of highest PAT CAGR
Over 2009-14, Auto sector clocked the highest Price CAGR of 41% on the back of robust PAT
CAGR of 60%, led by major profit turnaround in Tata Motors’ overseas subsidiary, JLR. Thus,
the phenomenon of earnings growth driving Wealth Creation holds true both at the individual
company and at the aggregate sector level.
12 December 2014
33

19th Annual Wealth Creation Study (2009-2014)
#6
Wealth Creation: Ownership – Private v/s PSU
PSUs’ decade of decline: Wealth Creation hits rock bottom
PSUs’ (public sector undertakings) Wealth Creation performance during 2009-14 hits the
final nail on Indian PSUs’ inglorious decade of decline:
– The number of PSUs in the top 100 Wealth Creators is at an all-time low of only 5.
– The Wealth Created by these 5 PSUs is also at an all-time low of just 2% of total, from as
high as 51% over 2000-05, signaling total value migration to the private sector.
As in last year’s study, PSUs from only two sectors featured in the top Wealth Creators list –
Oil & Gas (BPCL,
Petronet LNG)
and Financials (Bank
of Baroda, REC, J&K Bank).
Even these 5 companies managed to make it to the list mainly because they matched their
private sector counterparts on key metrics – 5-year Sales CAGR 17% (v/s 18% for private),
5-year PAT CAGR 24% (same as private) and 2014 exit RoE at 18% (v/s 19% for private).
Exhibit 11
PSUs’ decade of decline in Wealth Creation
49
51
No. of PSUs
% Wealth Created
36
25
35
27
30
27
20
28
30
26
18
25
16
22
24
20
9
11
2
5
1999-04 2000-05 2001-06 2002-07 2003-08 2004-09 2005-10 2006-11 2007-12 2008-13 2009-14
Exhibit 12
Only 5 PSUs which matched private sector
Exhibit 13
PSUs not creating wealth in erstwhile
performance are among Wealth Creators
2009-2014
PSU
Private
5
95
2
98
17
18
24
24
25
35
7
13
7
20
14
17
18
19
dominant sectors (Utilities, Mining, Cap Goods)
Oil & Gas
44%
No. of Wealth Creators in Top 100
Share of Wealth Created (%)
5-year Sales CAGR (%)
5-year PAT CAGR (%)
5-year Price CAGR (%)
P/E - 2009 (x)
P/E - 2014 (x)
RoE - 2009 (%)
RoE - 2014 (%)
Financials
56%
Key Takeaway
PSUs today – The classic dilemma: Value buys or value traps?
Many PSUs are market leaders (some even monopolies) in their sector – SBI (banking), Coal
India (coal mining), NTPC (power generation), Power Grid (power distribution), BHEL (power
equipment), ONGC (crude extraction), IOC (refining & marketing), Concor (container freight),
etc. Business is under stress but valuations are beaten down. How the new government
manages PSUs holds the key to whether they prove to be Value buys or mere Value traps.
12 December 2014
34

19th Annual Wealth Creation Study (2009-2014)
#7
Wealth Creation: Age & Size (market cap)
Catch ’em young! …
52 of the top 100 Wealth Creators are not more than 30 years old.
These companies account for a high 59% of the Wealth Created, at a pace faster than the
average of 34%. This is on the back of healthy PAT growth, accompanied with rising or at
least stable RoE, triggering re-rating.
Exhibit 14
Younger companies have created more wealth and at a faster pace
2009 Age
Range
1-15
16-30
31-45
46-60
Above 61
Total
No. of
Cos.
18
34
10
15
23
100
WC
(INR b)
9,062
8,185
2,159
1,934
8,041
29,381
% Share
of WC
31
28
7
7
27
100
CAGR (%)
Price
PAT
41
28
35
22
28
26
29
25
30
21
34
24
PE (x)
2014
22
19
14
19
19
19
2009
13
12
13
16
13
13
RoE (%)
2014
2009
18
13
20
21
20
17
13
9
19
21
19
17
… and small!
Small/mid-caps continue to outperform large-caps in terms of speed of Wealth Creation.
(Of course, large caps dominate absolute quantum of Wealth Created – 21 companies
greater than INR 100 billion market cap in 2009 account for 58% of total Wealth Created.)
In terms of earnings growth, there may not be much to choose from between small-caps
and large-caps. Thus, for instance, PAT growth of companies with INR50-100 billion market
cap (40% CAGR) is actually higher than their smaller counterparts.
However, the small-caps’ relative “unknown-ness” leaves room for significant P/E re-rating,
driving their Price CAGR much higher than the well-known large-caps.
Exhibit 15
Small caps continue to create big wealth!
51
37
29
19
Avg PAT
CAGR: 24%
40
PAT CAGR (%)
Price CAGR (%)
40
Avg Price
CAGR: 34%
30
20
1-25
25-50
50-100
Base Market Cap Range (INR b)
>100
Key Takeaway
Small is big in Wealth Creation!
Two broad themes of above-average Wealth Creation in stock markets are: (1) Large but
unpopular, and (2) Small but high-growth. The former is rare, and typically found in a
prolonged bear market, or due to temporary downturn in earnings. However, the latter is
more common and hence a happy hunting ground for growth investors.
12 December 2014
35

19th Annual Wealth Creation Study (2009-2014)
#8
Wealth Creation: Earnings growth & RoE
Earnings growth is non-negotiable for Wealth Creation
The analysis of Wealth Creation by earnings growth re-confirms its near-direct correlation
with earnings growth.
Over 2009-14, Price CAGR was lowest in companies where PAT de-grew, whereas it was the
highest in the case of turnaround (e.g. Tata Motors/JLR).
Exhibit 16
Higher the earnings growth, higher the Price CAGR
2009-14
No. of
WC
% Share
CAGR (%)
PAT CAGR %
Cos.
(INR b)
of WC
Price
PAT
<10
21
4,010
14
25
-3
10-20
21
6,162
21
28
15
20-30
26
11,376
39
38
26
30-40
17
4,584
16
42
33
>40
15
3,249
11
46
L to P
Total
100
29,381
100
34
24
PE (x)
2014
40
20
19
18
11
19
2009
11
12
12
13
N.A.
13
RoE (%)
2014
2009
9
23
19
23
22
17
22
17
18
-3
19
17
Mere high RoE does not guarantee high Wealth Creation
Over 2009-14, companies with RoE > 35% in base year 2009 include Hindustan Unilever,
Nestle, Colgate, Castrol and GSK Pharma.
These companies have undeniable competitive strength (i.e. earning power, reflected in
significantly above-average RoE); yet, given the high market penetration of their products,
earnings CAGR at 14% was below the average of 24%. Hence, their Price CAGR at 29% was
also below the average of 34%.
In contrast, companies with base RoE < 15% grew earnings at a robust 47%; so, despite
some P/E de-rating, Price CAGR was higher than the average 34%.
Exhibit 17
Low RoE companies also perform well on the markets if they sustain earnings growth
47
35
35
PAT CAGR %
Price CAGR %
37
30
Average PAT CAGR: 24%
Average Price CAGR: 34%
37
29
21
14
22
13
<15
15-20
18
20-25
25-30
2009 RoE Range
30-35
>35
Key Takeaway
The quality v/s growth conundrum
Should one buy companies with high earnings growth or high RoE? This is the typical quality
v/s growth conundrum which investors face (see our Theme Study, page 19). The short
answer here: Quality alone does not guarantee growth and, in turn, Wealth Creation. But
quality accompanied by growth gets very handsomely rewarded in the markets.
12 December 2014
36

19th Annual Wealth Creation Study (2009-2014)
#9
Wealth Creation: Valuation parameters analysis
Purchase price – a key driver of Wealth Creation
Barring very rare periods of extreme flight to safety (e.g. as in 2013), the key purchase price
criteria for superior Wealth Creation continue to be time-tested – (1) P/E of less than 10x,
(2) Price/Book of less than 2x, (3) Price/Sales < 1x, and (4) Payback < 1x.
(Payback is a proprietary ratio of Motilal Oswal, defined as current market cap divided by
estimated profits over the next five years. For 2009, we calculate this ratio based on the
actual profits reported over the next five years).
Barring the above 4 tests, there is one stray group of stocks with Price/Book of 3-4x which
has delivered above-average Price CAGR, almost single-handedly led by TCS.
Exhibit 18
Higher the earnings growth, higher the Price CAGR
Range
No. of
WC
% Share
CAGR (%)
in 2009
Cos.
(INR b)
of WC
Price
PAT
P/E
<10
45
12,776
43
42
27
30
17
10-15
20
5,606
19
15-20
18
5,177
18
32
25
20-25
9
4,581
16
28
21
>25
8
1,241
4
30
39
Total
P/B
<1
1-2
2-3
3-4
>4
Total
Price/Sales
<1
1-2
2-3
>3
Total
Payback ratio
<1
1-2
>2
Total
100
29,381
100
34
24
PE (x)
2014
15
20
23
29
21
19
2009
9
12
17
21
30
13
RoE (%)
2014
2009
19
18
17
29
12
19
18
18
12
25
6
17
22
28
17
11
22
100
3,126
6,768
6,036
5,790
7,660
29,381
11
23
21
20
26
100
39
38
31
44
28
34
30
30
18
24
17
24
12
13
26
25
27
19
9
9
15
12
17
13
12
19
16
28
30
19
8
15
17
29
34
17
43
33
7
17
100
6,690
12,152
3,452
7,087
29,381
23
41
12
24
100
43
36
31
27
34
33
22
21
19
24
13
21
25
22
19
9
12
17
16
13
16
19
22
22
19
12
17
22
23
17
46
40
14
100
12,851
11,627
4,904
29,381
44
40
17
100
45
30
27
34
32
18
16
24
15
21
33
19
9
13
21
13
18
19
29
19
14
18
25
17
Key Takeaway
Low price alone is no guarantee for Wealth Creation; earnings growth a must
An interesting observation is that in each of the above-average price outperformance
categories, earnings growth has also been above average. In fact, more often than not, it is
sustained, high earnings growth which triggers valuation re-rating, creating a multiplier effect
for Wealth Creation.
12 December 2014
37

19th Annual Wealth Creation Study (2009-2014)
#10
Wealth Destruction: Companies & Sectors
Overall level of Wealth Destruction eases
Over 2009-14, Wealth Destroyed was about INR 4.2 trillion. This is significantly lower than
the figure for the past two years, both in term of absolute Wealth Destroyed and as
percentage of Wealth Created by top 100 companies.
Among individual companies, 5 of the top 10 Wealth Destroyers are PSUs – MMTC, NTPC,
BHEL, SAIL and NMDC. These along with Reliance Communications and Reliance Power
feature among the top 10 list for the second time running. In fact, Reliance
Communications is in the top 10 Wealth Destroyers list for the fourth study in succession.
Exhibit 19
Exhibit 20
7 companies out of 10 for the second time running
Company
MMTC
NTPC
BHEL
JP Power Ventures
Reliance Power
SAIL
GMR Infrastructure
Reliance Communication
Unitech
NMDC
Total of above
Total Wealth Destroyed
Wealth Destroyed
INR b
% Share
654
16
497
12
255
6
126
3
121
3
103
2
100
2
79
2
75
2
68
2
2,078
50
4,185
100
Price
CAGR (%)
-40
-8
-8
-13
-7
-6
-14
-6
-17
-2
The usual suspects at the sector level too!
Sector
Utilities
Capital Goods
Constn. / Real Estate
Metals / Mining
Telecom
Technology
Banking & Finance
Textiles
Chem. & Fert.
Sugar
Oil & Gas
Airlines
Media
Healthcare
Consumer
Others
Total
Wealth Dest.
(INR b)
893
471
346
343
312
214
162
132
87
64
52
42
39
34
31
963
4,185
%
Share
21
11
8
8
7
5
4
3
2
2
1
1
1
1
1
23
100
Exhibit 21
Level of Wealth Destruction significantly eased during 2009-14
43
Wealth destroyed (INR B)
% of Wealth Created by top 100 Wealth Creators
43
33
17,140
18
1
2,586
124
2001-06
1
142
2002-07
2
1,704
2004-09
650
2005-10
15
3,254
5,425
14
4,185
0
59
2003-08
2000-05
2006-11
2007-12
2008-13
2009-14
Key Takeaway
Will the tide turn for some of them?
As
. can be seen from the above exhibits, most of the Wealth Destroying companies and
sectors are deeply cyclical and/or those affected by policy paralysis during UPA-2 regime.
With a new government at the helm, major policy reforms coupled with economic recovery,
could be hugely positive for many of these Wealth Destroyers.
12 December 2014
38

19th Annual Wealth Creation Study (2009-2014)
Appendix 1: MOSL 100: Biggest Wealth Creators (2009-2014)
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
Company
TCS
ITC
HDFC Bank
Infosys
ICICI Bank
Wipro
Sun Pharma
Tata Motors
HDFC
HCL Technologies
Hind. Unilever
Larsen & Toubro
Bajaj Auto
M&M
Kotak Mahindra Bank
Asian Paints
Axis Bank
UltraTech Cement
Lupin
Maruti Suzuki
Hindustan Zinc
Dr Reddy's Labs
Nestle India
Idea Cellular
United Spirits
Grasim Inds
Tech Mahindra
Adani Ports
Bosch
Godrej Consumer
Dabur India
IndusInd Bank
Zee Entertainment
Ambuja Cements
Titan Company
Motherson Sumi
Oracle Fin.Services
BPCL
United Breweries
Cadila Healthcare
Shree Cement
Bank of Baroda
Siemens
Eicher Motors
Hindalco Inds
ACC
GSK Consumer
JSW Steel
Aurobindo Pharma
Pidilite Inds
Wealth Created
INR b
Share (%)
3,638
12.4
2,073
7.1
1,307
4.4
1,123
3.8
1,035
3.5
993
3.4
958
3.3
945
3.2
934
3.2
898
3.1
792
2.7
750
2.6
512
1.7
479
1.6
467
1.6
449
1.5
422
1.4
392
1.3
359
1.2
355
1.2
353
1.2
352
1.2
333
1.1
303
1.0
268
0.9
266
0.9
254
0.9
249
0.8
246
0.8
230
0.8
227
0.8
215
0.7
213
0.7
200
0.7
198
0.7
198
0.7
197
0.7
194
0.7
184
0.6
173
0.6
172
0.6
171
0.6
170
0.6
156
0.5
155
0.5
153
0.5
152
0.5
144
0.5
136
0.5
135
0.5
CAGR (2009-14, %)
Price
PAT
Sales
51
29
24
31
22
16
31
31
21
20
12
18
30
28
6
30
16
11
39
16
30
62
LP
27
26
29
28
69
38
26
20
10
7
23
6
16
46
43
19
39
20
25
41
31
22
47
25
19
29
28
23
32
18
27
47
30
24
21
18
17
23
20
19
39
LP
14
26
16
16
22
17
21
32
Loss
14
13
2
10
47
25
33
24
32
32
29
7
14
45
36
40
29
19
20
73
57
29
39
11
15
23
-2
8
46
35
23
54
38
64
33
13
5
20
41
14
56
38
17
41
22
20
51
6
17
25
16
21
23
-20
3
94
51
32
22
44
6
19
0
8
44
29
26
35
10
26
68
63
22
49
32
17
RoE (%)
2014
2009
39
34
33
24
20
15
24
33
15
7
25
28
21
27
22
-42
17
12
33
27
112
117
13
27
32
30
19
24
13
10
31
35
16
18
13
27
27
36
13
13
18
19
25
-26
47
113
12
7
-148
-17
13
23
33
52
20
15
14
20
22
30
35
48
16
10
33
15
14
25
29
29
37
28
15
21
21
5
14
6
25
25
17
48
13
18
5
26
26
6
5
2
14
23
37
25
2
3
31
8
23
16
P/E (x)
2014
2009
22
10
31
21
20
18
18
13
12
11
17
9
31
12
8
-3
21
22
15
5
33
21
24
11
19
17
14
6
24
15
42
18
11
8
27
7
22
11
21
18
8
7
22
-9
43
28
23
18
-9
-16
9
6
14
3
22
30
39
15
35
20
34
22
19
8
29
9
24
8
32
21
21
11
19
8
8
19
96
47
25
12
25
4
6
4
142
15
31
9
14
25
24
10
27
16
65
18
13
10
35
19
39
12 December 2014

19th Annual Wealth Creation Study (2009-2014)
Appendix 1: MOSL 100: Biggest Wealth Creators (2009-2014) … continued
Rank
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
Company
Cummins India
Shriram Transport
GSK Pharma
Colgate-Palmolive
Yes Bank
Divi's Labs
Rural Elec. Corpn.
Castrol India
M & M Financial
Havells India
Glenmark Pharma
Ipca Labs
Marico
Apollo Hospitals
Sun TV Network
Bajaj Finserv
Godrej Industries
LIC Housing Finance
MRF
Emami
P & G Hygiene
Blue Dart Express
Bajaj Holdings
Piramal Enterprises
Torrent Pharma
Bharat Forge
Bajaj Finance
Aditya Birla Nuvo
Petronet LNG
Apollo Tyres
ING Vysya Bank
CRISIL
Page Industries
Thermax
Britannia Inds
Berger Paints
Bata India
Exide Inds
Sundaram Finance
Amara Raja Batteries
Supreme Inds
J & K Bank
Federal Bank
Tata Global
Info Edge (India)
Biocon
Bhushan Steel
Kansai Nerolac
Coromandel Inter
Bayer Crop Science
TOTAL
Wealth Created
INR b
Share (%)
128
0.4
127
0.4
126
0.4
123
0.4
121
0.4
120
0.4
117
0.4
113
0.4
110
0.4
110
0.4
110
0.4
98
0.3
96
0.3
95
0.3
93
0.3
92
0.3
86
0.3
85
0.3
85
0.3
82
0.3
79
0.3
78
0.3
78
0.3
78
0.3
77
0.3
76
0.3
76
0.3
75
0.3
74
0.3
71
0.2
70
0.2
69
0.2
68
0.2
68
0.2
67
0.2
67
0.2
66
0.2
64
0.2
64
0.2
64
0.2
61
0.2
59
0.2
58
0.2
58
0.2
56
0.2
56
0.2
55
0.2
51
0.2
50
0.2
50
0.2
29,381
100
CAGR (2009-14, %)
Price
PAT
Sales
35
6
2
33
17
18
19
-4
9
24
13
16
53
40
38
23
13
16
19
30
29
31
14
7
43
34
31
67
LP
10
29
23
24
67
38
20
28
22
14
35
29
22
19
17
16
37
103
91
43
25
19
39
20
26
65
41
19
45
34
19
34
11
22
55
9
15
28
1
24
23
PL
7
51
29
21
34
64
7
93
84
47
20
LP
14
29
7
35
54
49
22
37
28
18
35
16
17
78
37
36
33
-5
9
25
23
15
46
25
19
61
26
16
24
13
17
52
27
19
84
35
21
88
24
19
38
24
18
28
12
16
21
-9
10
42
1
18
24
34
12
42
-33
14
39
16
18
37
-8
1
43
25
18
34
24
18
RoE (%)
2014
2009
23
30
16
26
24
38
90
134
23
19
26
34
23
21
68
55
18
15
27
-26
18
12
24
15
37
42
10
6
24
20
24
2
11
7
17
23
22
13
43
31
30
41
19
20
3
7
-5
24
35
28
18
2
18
3
11
-11
14
26
22
10
9
12
44
39
53
36
11
29
50
20
22
21
24
23
16
31
19
14
27
20
26
31
21
16
12
11
9
23
9
18
14
7
1
21
15
15
16
46
17
21
19
17
P/E (x)
2014
2009
28
8
13
6
45
16
35
22
9
5
23
15
5
6
30
15
15
9
26
-5
28
20
22
9
27
19
42
29
21
19
6
38
36
17
9
4
11
5
25
14
34
14
73
13
35
10
-19
13
13
6
20
53
12
7
12
-7
14
6