Thematic Study | December 2013
18th ANNUAL WEALTH CREATION STUDY (2008-2013)
Uncommon Profits
Emergence & Endurance
HIGHLIGHTS
Uncommon Profits in companies = Uncommon Wealth Creation in
stock markets.
Successful Emergence of Value Creators is very rare; a strong
corporate-parent in a non-cyclical business significantly increases
the probability.
Endurance of Value Creators is mainly threatened by disruptive
innovation/competition, major regulatory changes, and
capital misallocation.
State-owned companies have become marginalized in Wealth
Creation with their share collapsing from 51% in 2005 to 9% in 2013.
The worst is over for Indian equities; the risk-reward equation is
favorable for long-term investing.
"Over the long term, it's hard for a stock to earn a much better return than the
business which underlies it earns. If the business earns 6% on capital over 40
years and you hold it for that 40 years, you're not going to make much different
than 6% return - even if you originally buy it at a huge discount. Conversely, if a
business earns 18% on capital over 20 or 30 years, even if you pay an expensive
looking price, you'll end up with one hell of a result."
Charlie Munger, Vice-Chairman, Berkshire Hathaway
TOP 10 WEALTH CREATORS (2008-2013)
THE BIGGEST
Rank
1
2
3
4
5
6
7
8
9
10
Wealth
Company
Created
(INR b)
TCS
2,284
ITC
1,635
HDFC Bank
872
Infosys
839
Sun Pharma
592
ONGC
567
HDFC
559
Tata Motors
518
Hindustan Unilever
516
Wipro
469
THE FASTEST
Company
TTK Prestige
Eicher Motors
Page Industries
Wockhardt
Grasim Inds
GRUH Finance
GSK Consumer
Supreme Industries
Lupin
Godrej Consumer
5-Year
Price
CAGR (%)
95
59
51
50
50
47
47
45
45
44
THE MOST CONSISTENT
Appeared
Company
in WC
Study (x)
Asian Paints
10
Kotak Mahindra Bank
10
Sun Pharma
10
Hindustan Zinc
10
ITC
10
Axis Bank
10
HDFC Bank
10
M&M
10
Bosch
10
HDFC
10
2004-13
Price
CAGR (%)
36
36
33
32
27
27
26
25
23
22
Raamdeo Agrawal
(Raamdeo@MotilalOswal.com)
/
Shrinath Mithanthaya
(ShrinathM@MotilalOswal.com)
We thank Mr Dhruv Mehta (Dhruv.Mehta@dhruvmehta.in), Investment Consultant, for his invaluable contribution to this report.

Wealth Creation Study 2008-2013
Contents
Objective, Concept and Methodology
.................................................................
1
Wealth Creation 2008-2013: Findings summary.............................................. 2-3
Theme 2014:Uncommon Profits
....................................................................
4-25
Market Outlook
............................................................................................
26-29
Wealth Creation Study 2008-2013: Findings................................................ 30-40
Appendix I: MOSL 100 – Biggest Wealth Creators
.......................................
42-43
Appendix II: MOSL 100 – Fastest Wealth Creators
......................................
44-45
Appendix III: MOSL 100 – Wealth Creators (alphabetical)
................................
46
Mangalyaan and Uncommon Profits: Mission Mars v/s Mission Enterprise
Emergence of new enterprises in the business space may well be compared with launch of
Mangalyaan
(India's Mission Mars-Craft) into outer space!
Mission Mars:
Mars is 750 million km from Earth!
Mangalyaan
is designed to complete this
journey in 300 days which means a mind-boggling speed of 2.5 million km per day or 30km per
second! This kind of speed creates its own problems, and there are lot of dangers of the
spacecraft's very survival.
Mission Enterprise:
The entrepreneur's journey is also a very long one into the future. The
launch of a business is almost like the launch of
Mangalyaan.
A successful Mission Mars brings tons of rich scientific data back to Earth. A
successful Mission Enterprise brings tons of Uncommon Profits for the company, and
also makes investors rich by Uncommon Wealth Creation.
Abbreviations and Terms used in this report
ABBREVIATION / TERM
2008, 2013, etc
Avg
CAGR
L to P / P to L
Price CAGR
INR b
WC
Wealth Created
DESCRIPTION
Reference to years for India are financial year ending March, unless otherwise stated
Average
Compound Annual Growth Rate; All CAGR calculations are for 2005 to 2010
unless otherwise stated
Loss to Profit / Profit to Loss. In such cases, calculation of PAT CAGR is not possible
In the case of aggregates, Price CAGR refers to Market Cap CAGR
Indian Rupees in billion
Wealth Creation / 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.
Capitaline database has been used for this study

Wealth Creation Study 2008-2013
Findings
Wealth Creation Study 2008-2013
Objective, Concept and Methodology
Objective:
The foundation of Wealth Creation is in buying 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 18 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.
Report structure
Part 1 | Wealth Creation Study findings:
Here, we identify and analyze the top 100 Wealth
Creators in the Indian stock market for the period 2008-13.
Part 2 | Theme - Emergence & Endurance of Uncommon Profits:
We explain the concept
of Uncommon Profits and its effective application for Uncommon Wealth Creation.
Concept:
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. Wealth Creation is achieved by the rational actions of a company in a
sustained manner.
Methodology & change in methodology from this year:
We define Wealth Created as the
difference in market capitalization over this period of five years, after adjusting for equity
dilution. Hitherto, we ranked the top 100 Wealth Creators based on a simple listing of
companies in descending order of absolute Wealth Created. This year, we introduce a
condition that during the study period, the company's stock price should have at least
outperformed the benchmark index (the BSE Sensex in our case). Due to this filter, four
companies dropped off from the Top 100 despite high absolute wealth created. We list
below these drop-outs and also the companies which made it at their expense.
The biggest and fastest Wealth Creators have been listed in Appendix I and II on page 41 and
43, respectively. Ranks have been accorded on the basis of Size and Speed of Wealth Creation
(speed is price CAGR during the period under study).
Market Outperformance Filter
(Sensex CAGR over 2008-13 was 3.8%)
Who missed the Wealth Creators list …
… and who made it
Company
Adjusted
Price
Normal
NWC CAGR (%)
Rank*
Idea Cellular
50.0
2.0
69
Adani Ports
46.5
3.7
74
GAIL (India)
45.6
2.4
79
Power Grid Corp
41.1
1.6
80
* If the stock would have outperformed the Sensex
Adjusted
NWC
Page Inds
32.4
GRUH Finance
32.0
Mcleod Russel
31.1
Britannia Inds
30.4
Company
Price
CAGR (%)
51
47
40
14
Rank
97
98
99
100
13 December 2013 1

Wealth Creation Study 2008-2013
Findings
Part 1
Wealth Creation 2008-2013: Findings summary
TCS is the Biggest Wealth Creator
TCS is the biggest Wealth Creator for the period 2008-13 (financial year ending March).
In effect, it has swapped places with ITC, which was the topper last year (i.e. for the
period 2007-12) and TCS was a close runner-up.
TTK Prestige is the Fastest Wealth Creator again
TTK Prestige has once again emerged as the fastest Wealth Creator between 2008 and
2013, during which period, its stock price multiplied 28x, translating into annualized
return of 95% i.e. almost double every year.
Asian Paints is the Most Consistent Wealth Creator
Asian Paints has emerged as the Most Consistent Wealth Creator, having appeared in
all past 10 Wealth Creation studies, and with the highest price CAGR of 36% (2004-13).
Other key takeaways
#1
The Biggest Wealth Creators:
Seven of the top 10 Wealth Creators during 2008-13
are non-cyclicals - two domestic Consumer companies and five global non-
cyclicals (including Tata Motors which is more of a play on its UK subsidiary, JLR).
Most of these companies have seen re-rating of valuation, whereas that of
stalwarts like HDFC and HDFC Bank slipped. IT, Pharma and Consumer are the key
sectors to bet on in times of general economic slowdown.
The Fastest Wealth Creators:
Nine of the top 10 Fastest Wealth Creators had a
market cap of less than INR50b in 2008. In fact, five of them were below INR10b.
Seven of the top 10 were below 15x P/E in 2008. Thus, mid- and small-cap
companies with the right business model, able management and bought at
reasonable valuation deliver handsome returns irrespective of economic and
stock market conditions.
Most Consistent Wealth Creating Companies:
Consistent Wealth Creators are
also consistent Value Creators i.e. their return on equity is consistently higher
than cost of equity. (In India, cost of equity is ~15% i.e. the long-period return on
benchmark index).
Wealth Creators (Wealthex) v/s BSE Sensex:
Wealth Creators defy the commonly
heard maxim in equity markets - "High return, high risk". At the time of purchase,
Wealth Creators' P/E is lower than benchmark (i.e. lower risk), and yet returns
are higher. As Van Den Berg has said, "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."
#2
#3
#4
13 December 2013 2

Wealth Creation Study 2008-2013
Findings
#5
Wealth Creation Classification by Industry:
Technology sector is poised to emerge
as India's largest Wealth Creator in the near future (TCS is already India's largest
market cap company). The current leader, Consumer, enjoys average P/E multiples
of 33x, which is over 2x the market average of 15x. This leaves little room for
further re-rating. In contrast, Technology sector is valued at 19x, which is
reasonable considering its high PAT CAGR coupled with higher-than-average RoE.
Wealth Creation by Ownership – PSU v/s Private:
Wealth migration follows Value
Migration. Over the years, value has migrated from PSUs to private companies
across sectors - Banking, Telecom, Oil & Gas, Metals & Mining, Utilities, Capital
Goods etc. This arguably lends further support to the maxim, "The government
has no business to be in business."
Wealth Creation by Age and Market Cap:
Our theme study this year (see page 5)
also touches on the role of age and size in Wealth Creation. Many young companies
emerge into the Value Creation zone i.e. RoE of 15% or higher. If led by a good
management, these companies are likely to sustain their above-cost-of-equity
performance for several years. In the process, they deliver huge shareholder
returns.
Wealth Creation by earnings growth and RoE:
Sustained Value Creation (i.e.
earning above cost of capital) is the basis of sustained wealth creation. Our theme
study on Emergence & Endurance of uncommon profits (see page 5) suggests
that identifying Value Creators early leads to superior stock market returns.
Wealth Creators by Valuation Parameters:
2008-13 was an unusually tough time,
both for the Indian economy and stock markets. So, most time-tested thumb-
rules of valuation were turned on their head. Given flight to high quality and
extreme safety, the highest P/E and P/B stocks (typically Consumer, Technology
and Healthcare) delivered the highest returns during the period. However, the
Payback Ratio of less than 1x proved itself to be the most reliable indicator for
high stock returns, irrespective of economic and market conditions.
#6
#7
#8
#9
#10 Wealth Destroyers:
The stock market's perception of ineffective management
(including capital mis-allocation, consistent failure to deliver on guidance, low
dividend payout etc) is a major source of Wealth Destruction. When the market
is disappointed, it does not spare even those stocks which were its darlings till
recently.
For detailed findings go to page 31
13 December 2013 3

Wealth Creation Study 2008-2013
Theme 2014: Uncommon Profits
Wealth Creation
2008-2013
The 18
TH
Annual Study
Theme 2014
Uncommon Profits:
Emergence & Endurance
13 December 2013 4

Wealth Creation Study 2008-2013
Theme 2014: Uncommon Profits
Part 2
Emergence & Endurance of Uncommon Profits
Uncommon profits in companies = Uncommon wealth creation in markets
"Over the long term, it's hard for a stock to earn a much better return than the business
which underlies it earns. If the business earns 6% on capital over forty years and you hold
it for that forty years, you're not going to make much different than 6% return - even if
you originally buy it at a huge discount. Conversely, if a business earns 18% on capital
over 20 or 30 years, even if you pay an expensive looking price, you'll end up with one hell
of a result."
- Charlie Munger, Vice-Chairman, Berkshire Hathaway
Preface
Report scope and structure
A key implication of Charlie Munger's quote given above is this: In the long run, investors
earn only as much money on a company's stock as the underlying business itself earns.
Hence, it pays off well to invest in companies which are able to (1) generate return on
capital much higher than cost of capital, and (2) sustain and grow such above-cost-of-capital
returns for several years to come.
Economics commonly holds that over time, in any business, competitive forces drive down
returns to cost of capital. Thus, it may be apt to call sustained above-cost-of-capital returns
as Uncommon Profits, and companies earning such profits as Value Creators. In this report,
we study two major aspects -
(1)
Emergence and endurance
of such uncommon profits, and
(2) How to create sizeable wealth by identifying and investing in
Value Creators.
We have attempted to achieve this in 4 sections in the following pages:
Section 1:
We first introduce the concepts of
Uncommon Profits, Emergence and
Endurance.
Next, we prove how investing in Uncommon Profit generating companies
(i.e.
Value Creators)
results in uncommon Wealth Creation in the stock markets. We
present
4 case studies of Value Creators
which show that early investing in them leads to
handsome investment returns.
Section 2:
We discuss two major points:
(1) Major factors for Emergence
(i.e. companies
entering the Uncommon Profit zone), and
(2) A backtested methodology to identify and
invest in such Emerging Value Creators.
We also present a checklist for investing in
Emerging Value Creators and some of the pitfalls that can be avoided.
Section 3:
Here, we address the frequently asked question in stock markets:
Is it
worthwhile to invest in Enduring Value Creators?
(i.e. companies which indeed generate
high return on capital, but are fully discovered and fairly discounted). We identify factors
which favor Endurance, and also the risks to watch out for even in well-established,
highly profitable companies. We also present a backtested methodology to identify
Enduring Value Creators.
Section 4:
We put together our key conclusions on creating Uncommon Wealth by investing
in Value Creators.
13 December 2013 5

Wealth Creation Study 2008-2013
Theme 2014: Uncommon Profits
1. Introduction
Defining Uncommon Profit, Emergence, Endurance
1.1 What is Uncommon Profit?
It is a commonly accepted economic law that in any business, competitive forces will drive
down return on capital to cost of capital over time. However, empirical evidence suggests
that some companies manage to not only earn return on capital significantly higher than
cost of capital, but also sustain the same over fairly long periods of time. This phenomenon
is called
Economic Value Creation,
or more simply,
Value Creation.
Such above-cost-of-capital return may be aptly termed
"Uncommon Profit",
with the term
"Uncommon" having two implications -
1. It defies the common economic law of returns converging to cost of capital, and
2. Companies earning such profit are not very common. As is clear from the two exhibits
below, (1) In any given year, companies earning higher RoE (Return on Equity) is
progressively lower, and (2) Even if some companies manage to earn healthy RoE in a
particular year, sustaining the same over long period is increasingly difficult.
Truly "Uncommon" Profit: High RoEs and sustained above-cost-of-equity RoEs are both rare
RoE% Frequency
Distribution (FY13)
<15
15-20
20-25
25-30
30-35
35-40
40-45
45-60
>60
Total listed cos.
No. of
cos.
2,697
275
147
76
29
24
20
16
16
3,300
% of
total
82
8
4
2
1
1
1
0
0
100
The Endurance Challenge:
Of the 2,200 companies listed in
2004, 568 earned RoE > 15 %. Of these,
only 86 managed to sustain this for
the next successive 10 years.
568
433
357
305
259
171 143 125
99 86
1.1.1 The numerics of Uncommon Profit
The classical formula for Value Created (i.e. Uncommon Profit) is given below, and considers
total capital deployed in the business i.e. both debt and equity.
Uncommon Profitability (% terms) = RoIC > WACC
Uncommon Profit (absolute) = (RoIC - WACC) x Capital Employed
where RoIC = Return on Invested Capital
WACC = Weighted Average Cost of Capital (both debt and equity)
For the purposes of this report, we focus more on Uncommon Profit for equity shareholders.
Accordingly, we use a simplified interpretation as given below.
Uncommon Profitability (% terms) = RoE > Cost of equity
Uncommon Profit (absolute) = (RoE - CoE) x Equity employed
where RoE = Return on Equity
Cost of equity = Opportunity cost of equity or
Risk free rate + Equity risk premium
13 December 2013 6

Wealth Creation Study 2008-2013
Theme 2014: Uncommon Profits
1.1.2 RoE of 15% is Uncommon Profit threshold in Indian context
Opportunity cost of equity is usually taken as the long-period return on equity benchmark
indices. In the Indian context, long-period return of BSE Sensex is 15-17%. Using the other
approach for Cost of Equity (CoE), risk free rate in India is about 7% (post tax). Adding an
equivalent equity risk premium, one again arrives at CoE around 15%. Thus, for the purposes
of this report,
any profit earned in excess of 15% RoE is Uncommon Profit. Accordingly, all
companies which sustain RoEs over 15% are Value Creators.
Volume of Uncommon Profit = Length x Breadth x Height
The volume of absolute Uncommon Profit generated by a company is 3-dimensional -
1.
Length
i.e. number of years that the company is able to maintain RoE higher than CoE
2.
Breadth
i.e. the amount of capital that the company can successfully deploy with
returns higher than CoE and
3.
Height
of Uncommon Profitability i.e. higher the RoE over CoE, higher the Uncommon
Profit.
This can be mapped to what we call the
QGL formula
for investing in Value Creators -
Q - Quality
of the company's business and management (reflected in Height of
Uncommon Profitability)
G - Growth
of the company's profit, which is a function of the amount of capital
deployed or ploughed back (i.e. Breadth) and the incremental rate of return generated
on the same and
L - Longevity
of the company, which corresponds to number of years (i.e. Length) of
Uncommon Profit.
1.2 Why look for Uncommon Profit in equity investing?
The simple answer to this question is this:
Uncommon profits in companies = Uncommon
wealth creation in markets.
In other words, empirical evidence suggests that companies
generating Uncommon Profit (i.e. Value Creators) invariably outperform benchmark returns
over the medium- and long term. This is probably because no matter how efficient, the
stock markets seem unable to accurately assess the 3-dimensional aspect of Uncommon
Profit (i.e. QGL - Quality, Growth, Longevity).
In this context, there is a widely-held belief that Value Creators are mainly Consumer stocks.
However, as the graphs on page 8 suggest, Value Creators are found across sectors and
significantly outperform the markets irrespective of economy and market conditions.
1.3 What do we mean by Emergence and Endurance of Uncommon Profit?
We define Emergence as "the first entry of a company into the potential Uncommon Profit
zone".
In the previous section, we determined that RoE of 15% is the threshold for
Uncommon Profit. Given this, a company may be said to have emerged when it attains 15%
RoE for the first time ever since inception. Having emerged, the next challenge for a company
is
Endurance i.e. sustaining its profitability above the Cost of Equity threshold for a long
period of time.
Going by the above definitions, Enduring Value Creators are companies which successfully
manage the journey from Emergence to Endurance. This is achieved by a favorable
combination of one or more and industry-level and company specific factors (detailed in
Section 2, page 14). Early identification of such companies enables investors to fully
participate in the company's Uncommon Profit generation through its lifecycle.
13 December 2013 7

Wealth Creation Study 2008-2013
Theme 2014: Uncommon Profits
Uncommon Profits = Uncommon Wealth Creation: Examples across sectors
Stock price performance (INR)
Stock price performance (INR)
Stock price performance (INR)
Stock price performance (INR)
Stock price performance (INR)
13 December 2013 8

Wealth Creation Study 2008-2013
Theme 2014: Uncommon Profits
1.4 Emergence, Endurance and Uncommon Profit lifecycle
Emergence, Endurance and Uncommon Profit can be mapped to the typical lifecycle of a
company as depicted in the diagram below. The key takeaways from this diagram are:
Phase of company
lifecycle
INTRODUCTION
Company focus
In the
initial years
post incorporation,
a company struggles to survive by first
reaching break-even point before
moving on to achieve critical mass.
During the
Growth phase,
the company
achieves a critical level of scale.
It enters into a virtuous growth cycle
of rising revenue and profit, and
significant ploughback of earnings to
achieve further scale.
GROWTH
MATURITY
In the
Maturity phase,
organic growth
is likely to flatten off as is RoE.
The company is likely to explore
several growth options including
backward and/or forward integration,
M&A (both domestic and global),
diversification, etc.
RENEWAL /
DECLINE
If the company successfully renews
itself by new products, innovations,
etc, it re-enters the Growth phase.
If not, the company begins to wind
down, and may even sell itself to a
stronger peer.
Implications for Uncommon Profit
(i.e. Value Creation)
In this phase, return on equity
will be well below the
Uncommon Profit RoE threshold
of 15%.
It is during this phase that the
company typically crosses the
15% RoE threshold for the first
time i.e. it Emerges.
Endurance depends on whether
it continues to earn above-
threshold returns on the
incremental capital deployed for
growth.
Uncommon Profit is at its peak
level during this phase, and may
even start to taper off.
The company may resort to
robust dividend payouts and/or
stock buybacks to help sustain
RoE by trimming the balance
sheet of idle cash.
Slowing growth and competitive
forces will combine to drive
down RoEs towards CoE.
Endurance depends on whether
the company renews itself or
goes into decline.
Mapping Emergence and Endurance to a company's typical lifecycle
PAT
Endurance struggle
(b) Renewal
Maturity
Growth
(a) Decline
POINT OF
EMERGENCE
Pre-emergence
struggle for survival
Introduction
Time
13 December 2013 9

Wealth Creation Study 2008-2013
Theme 2014: Uncommon Profits
1.5 Emergence Case Studies - Titan, Bharti Airtel, GRUH Finance, Manappuram
We briefly present four case studies of classical Emergence of Value Creators in chronological
order of year of Emergence - Titan Industries (2003), GRUH Finance (2003), Bharti Airtel
(2005) and Manappuram Finance (2007). Studying these and other cases like Shriram Transport
Finance and Blue Dart Express achieves two objectives -
1. It reaffirms the fact that identifying Value Creators early leads to significant Wealth
Creation; and
2. It also helps arrive at a possible methodology for early identification of Value Creators.
1.5.1 Emergence Case Study #1: TITAN INDUSTRIES
Company background
Titan Industries was incorporated in 1984 as a joint venture of
Tata Group and TIDCO (Tamil Nadu Indus trial Development
Corporation) for the manufacture of wristwatches. Today, it is
the fifth largest integrated own brand watch manufacturer in
the world. In 1995, Titan entered the large but fragmented Indian
jewelry market with the brand Tanishq. Today, jewelry accounts
for over 80% of Segment Revenue and EBIT.
2003
Value Migration in jewelry sector from unorganized to organized
sector
100% hallmarked jewelry from the house of Tatas
YoE 2003
Revenue (INR b)
7
CAGR (%) post-emergence
PAT (INR b)
0.2
CAGR (%) post-emergence
RoE (%)
23
Delta RoE (%)
Divd Payout Ratio (%)
0
Market Cap (INR b)
2
P/E - Trailing (x)
12
Stock Price (INR)
2
Return CAGR (%)
Sensex CAGR (%) post emergence
Outperformance (%)
2008
31
32
2
53
40
17
23
47
30
53
85
39
46
2013
101
30
7
45
42
3
26
228
31
257
59
20
39
Year of Emergence
Key business driver of Emergence
Company Unique Value Proposition
Post-emergence financial
performance highlights
Post-emergence stock performance
In the first 5 years post emergence (2003-08), Titan's stock
clocked a return CAGR of 85%, compared to 39% for benchmark
BSE Sensex. Post-emergence to date (i.e. 2003-2013), the stock
return CAGR is a high 59% v/s20% for the Sensex.
400
300
200
100
0
Se ns e x - Rebas ed
Ti ta n Inds
13 December 2013 10

Wealth Creation Study 2008-2013
Theme 2014: Uncommon Profits
1.5.2 Emergence Case Study #2: GRUH FINANCE
Company background
Gruh Finance (formerly known as Gujarat Rural Housing Finance
Corporation) was incorporated in 1986 to provide financial
services mainly for rural housing, construction/upgradation of
dwelling units, and to developers. In June 2000, GRUH became
a subsidiary of HDFC Group when the latter acquired 26% stake
held by Gujarat Ambuja Cements (now Ambuja Cements), taking
its total stake to 54%.
2003
Huge opportunity in Indian housing finance, including rural
housing
Takeover by HDFC Group in 2000, bringing in well-established
value system and business principles/practices
YoE 2003
2008
2013
Revenue (INR m)
836
2,025
6,482
CAGR (%) post-emergence
19
23
PAT (INR m)
102
423
1,459
CAGR (%) post-emergence
33
30
RoE (%)
16
24
33
Delta RoE (%)
8
9
Divd Payout Ratio (%)
39
33
31
Market Cap (INR m)
421
5,271
37,530
P/E - Trailing (x)
12
26
Stock Price (INR)
3
30
210
Return CAGR (%)
60
54
Sensex CAGR (%) post emergence
39
20
Outperformance (%)
21
34
In the first 5 years post emergence (2003-08), GRUH's stock
clocked a return CAGR of 60%, compared to 39% for benchmark
BSE Sensex. Post-emergence to date (i.e. 2003-2013), the stock
return CAGR is 54% v/s 20% for the Sensex.
Sens ex - Reba s ed
GRUH Fi nance
Year of Emergence
Key business driver of Emergence
Company Turning Point
Post-emergence financial
performance highlights
Post-emergence stock performance
300
225
150
75
0
13 December 2013 11

Wealth Creation Study 2008-2013
Theme 2014: Uncommon Profits
1.5.3 Emergence Case Study #3: BHARTI AIRTEL
Company background
Bharti Airtel was incorporated in the year 1995 as Bharti Tele-
Ventures Ltd. In FY96, it launched mobile ser vices under the
brand name 'Airtel' for the first time in Delhi and Himachal
Pradesh. Since then, through a series of organic and inorganic
initiatives, it has emerged India's largest mobile service
provider. In June 2010, it made a major acquisition of Zain in
Africa for an EV (enterprise value) of USD10.7b. Today, it has
operations in 20 countries across Asia and Africa. In India,
besides mobile telephony, it also provides broadband services
and digital TV.
2005
Emergence of a whole new industry, wireless telephony, which
led to huge value migration from the fixed line telephony
industr y.
Largest player in a high-growth, high fixed-cost business, leading
to exponential increase in profitability above breakeven
operating level.
YoE 2005
2008
2013
Revenue (INR b)
81
270
804
CAGR (%) post-emergence
49
33
PAT (INR b)
12
64
21
CAGR (%) post-emergence
75
8
RoE (%)
27
38
** 4
Delta RoE (%)
11
** -22
Divd Payout Ratio (%)
0
0
18
Market Cap (INR b)
383
1,568
1,108
P/E - Trailing (x)
32
25
52
Stock Price (INR)
103
413
292
Return CAGR (%)
59
14
Sensex CAGR (%) post emergence
34
14
Outperformance (%)
25
0
** sharp dip in RoE post Zain acquisition
In the first 3 years post emergence (2005-2008), Bharti's stock
clocked a return CAGR of 59%, compared to 34% for benchmark
BSE Sensex. Subsequent performance was muted due to two
reasons: (1) Entry of several new players, and (2) Its mega
acquisition of Zain in Africa. Post-emergence to date (i.e. 2005-
2013) too, the stock is a market performer.
600
450
300
150
0
Se ns e x - Rebas ed
Bha rti Ai rtel
Year of Emergence
Key business driver of Emergence
Company Unique Value Proposition
Post-emergence financial
performance highlights
Post-emergence stock performance
13 December 2013 7
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Wealth Creation Study 2008-2013
Theme 2014: Uncommon Profits
1.5.4 Emergence Case Study #4: MANAPPURAM FINANCE
Company background
Incorporated in 1992, Manappuram Finance is an NBFC providing
range of services including gold loans, vehicle finance, forex
services, distribution of mutual funds, etc.
2007
Sharp rise in gold prices globally, coupled with a strong customer
need to monetize the gold without necessarily having to sell it.
Second largest player in gold loans.
YoE 2007
2012
2013
Revenue (INR b)
44
2,645
2,256
CAGR (%) post-emergence
127
-3
PAT (INR b)
11
591
208
CAGR (%) post-emergence
123
-19
RoE (%)
53
27
9
Delta RoE (%)
-25
-19
Divd Payout Ratio (%)
18
21
61
Market Cap (INR b)
47
2,557
1,825
P/E - Trailing (x)
4
4
9
Stock Price (INR)
2
30
22
Return CAGR (%)
70
47
Sensex CAGR (%) post emergence
6
6
Outperformance (%)
64
41
In the 5 years post emergence (2007-12), Manappuram's stock
clocked a return CAGR of 70%, compared to 6% for benchmark
BSE Sensex.
Sens ex - Reba s ed
Ma na ppuram Fi na nce
Year of Emergence
Key business driver of Emergence
Company Unique Value Proposition
Post-emergence financial
performance highlights
Post-emergence stock performance
80
60
40
20
0
Based on learnings from the above case studies, we proceed to -
(1) Analyze what it takes for a company to emerge as a Value Creator; and
(2) Suggest one possible methodology for early-stage identification and investment in
such Value Creators
13 December 2013 13

Wealth Creation Study 2008-2013
Theme 2014: Uncommon Profits
2. Framework to identify Emerging Value Creators
Combination of industry-level and company-specific factors
We discuss the process of identifying and investing in Emerging Value Creators, which can
be surmised as under -
1. Creating a checklist of what it takes to be a Value Creator and
2. Avoid the pitfalls.
3. Based on the above, we present a specific methodology to identify such companies.
2.1 Checklist of what it takes to be a Value Creator
To recap, a Value Creator is a company which -
(1)
Emerges
into the Uncommon Profit zone (i.e. above cost-of-capital) at some point in its
lifetime, and then
(2)
Endures
this generation of Uncommon Profit for a very long period of time.
The rare companies which manage this highly demanding
journey of Emergence to Endurance
are those that are favorably placed vis-à-vis several key success factors. Anita McGahan and
Michael Porter, in a paper titled "The emergence and sustainability of abnormal profits"
have quantified the average contribution of 4 factors to abnormal profits. Their findings are
summarized in the table below.
Contribution of various factors to abnormal profits (%)
High Performers
Low Performers
Emergence
Sustainability
Emergence
Sustainability
Year (or Economic Cycle)
2
3
-7
-5
Industry
37
44
12
13
Corporate-parent *
18
19
-4
2
Segment-specific **
43
34
99
90
* Corporate-parent can be equated to the promoter or majority shareholder in a company
** Segment specific refers to a company's unique characteristics which drive its performance vis-à-vis
rivals, viz, strategy, execution, resources, etc.
Source: Anita M McGahan and Michael E Porter, "The emergence and sustainability of abnormal profits";
Strategic Organization, Vol. 1, No. 1, February 2003,
Contributing factor
The above table clearly suggests that economic cycles do not play a significant role in
Emergence and Endurance. For the sake of simplicity, we may combine Corporate-parent
and Segment-specific factors under one head "Company-specific". Accordingly, we compile
a checklist comprising Industry-level and Company-specific factors for an Emerging Value
Creator. Clearly, more the number of positive ticks against these points, higher the probability
of the company emerging as a Value Creator.
13 December 2013 14

Wealth Creation Study 2008-2013
Theme 2014: Uncommon Profits
Emerging Value Creator Checklist: More the positive ticks, greater the confirmation
Industry-level factors
Competitive landscape and bargaining power
Is the industry's competitive landscape favorable?
Do players enjoy superior bargaining power / terms of
trade with customers and/or suppliers? (2.1.1.1)
Size of opportunity and profit pool
Does the industry enjoy a large profit pool which can be
effectively tapped into by a company with a unique value
proposition or strategy? (2.1.1.2)
Value migration
Is the industry showing trends of value migration? Or
does it offer opportunity for the same in future? (2.1.1.3)
Stability of industry
Is the industry fairly stable i.e. less prone to
destabilizing factors like business cyclicality, high
production innovation, and regulatory controls? (2.1.1.4)
New industry or strategic opportunity
Is it a new industry or strategic opportunity with huge
potential? (2.1.1.5)
Company-specific factors
Quality of corporate-parent /
management
Does the company have a solid
corporate-parent and
management team? (2.1.2.1)
Unique value proposition or strategy
Does the company have a unique
value proposition or strategy to
overcome competitive forces?
(2.1.2.2)
Nature of business
Does the company enjoy
Consumer Advantage or
Production Advantage? How
strong is the advantage? (2.1.2.3)
Market leader or pioneer
Is the company a market leader
or a pioneer? (2.1.2.3)
2.1.1 Industry-level key success factors for a Value Creator
Several industry-level factors have a major say in determining the level and longevity of
Uncommon Profits generated by its constituent companies. Some of these factors are:
(1) Competitive landscape and bargaining power, (2) Size of opportunity and profit pool,
(3) Value migration, (4) Stability of industry, and (5) Emergence of a new industry/strategic
opportunity.
2.1.1.1 Competitive landscape and bargaining power
The competitive landscape of the industry is a major determinant of incumbent companies'
ability to sustain Uncommon Profits. Clearly, lower the competitive intensity, higher the
chances of Value Creators emerging and vice versa.
From a broader perspective, companies do not just compete with rivals for profit. As Joan
Magretta says in her book
Understanding Michael Porter -
"Companies are also engaged in a struggle for profits with their customers, who would
always be happier to pay less and get more.
They compete with their suppliers, who would always be happier to be paid more and
deliver less.
They compete with producers who make products that could, in a pinch, be substituted
for their own.
And they compete with potential rivals as well as existing ones, because even the
threat of new entrants places limits on how much they can charge their customers."
Thus, apart from competitive intensity, it is also important to understand the forces which
influence an industry's bargaining power (i.e. terms of trade) with its customers and
suppliers. Michael Porter's 5 Force Analysis offers an excellent framework to assess an
industry's bargaining power. Higher the bargaining power, higher the chances of Uncommon
Profits and vice versa.
13 December 2013 15

Wealth Creation Study 2008-2013
Theme 2014: Uncommon Profits
Porter's Five Force framework helps assess industry bargaining power (i.e. terms of trade)
Higher the bargaining power of an industry, higher the chances of an Emerging Value Creator
Threat of new
entrants
Bargaining power
of suppliers
Rivalry
among
existing
competitors
Bargaining power
of buyers
Threat of
substitute
products or
services
2.1.1.2 Size of opportunity and profit pool
Industries with a huge opportunity are more likely to throw up Emerging Value Creators.
One metric of an industry's opportunity size is
Profit Pool
i.e. the absolute level of profit of
all players in an industry put together. If an industry has a high profit pool, a company with
the right value proposition/strategy can claim a rising share of this pool and emerge a Value
Creator over time. In contrast, Value Creators are unlikely to emerge from industries that
have a small profit pool in the first place.
India Inc's Profit Pool breakdown by sector
10 highest profit generating sectors
Sector
Financials – Banks
Energy – Oil & Cas
IT - Software
Financials – NBFCs
Mining & Mineral products
Energy – Refineries
Utilities
Automobile
Healthcare
Metals – Non-Ferrous
Total of above
Total Corporate PAT
2013 PAT
(INR b)
842
400
347
324
273
228
223
219
165
105
3,125
3,948
%
share
21
10
9
8
7
6
6
6
4
3
79
100
10 lowest profit generating sectors
Sector
Aviation
Telecom - Service & Eqpmt.
Shipbuilding
Sugar
Shipping
Glass & Glass Products
Ceramic Products
Paper
Printing & Stationery
Electronics
Total of above
Total Corporate PAT
2013 PAT
(INR b)
-57
-40
-4
-2
-2
-2
-2
-0.2
-0.1
0
-109
3,948
13 December 2013 16

Wealth Creation Study 2008-2013
Theme 2014: Uncommon Profits
Sectors with highest PAT CAGR over 2003-13 (with minimum PAT of INR20b in 2013)
Sector
PAT
CAGR
(%)
L to P
L to P
L to P
57
54
46
46
46
39
29
PAT
Delta
(INR b)
57
38
28
78
342
32
316
266
211
31
Sector
PAT
CAGR
(%)
28
28
27
20
19
18
18
17
20
PAT
Delta
(INR b)
62
30
96
138
54
63
680
29
3,317
Textiles
Realty
Fertilizers
Cement
IT - Software
Gems & Jewelry
Finance
Mining & Minerals
Automobile
Chemicals
Infra Developers
Steel
Non Ferrous Metals
Pharmaceuticals
Capital Goods
Tobacco Products
Banks
Auto Ancillaries
TOTAL CORP. SECTOR
5 biggest profit share gain in last 10 years
Sector
IT - Software
Finance
Mining & Minerals
Automobile
Textiles
Share of PAT (%)
2003
2013
1
9
1
8
1
7
1
6
-1
1
Gain in
share (%)
8
7
6
4
2
5 biggest profit share loss in last 10 years
Share of PAT (%) Loss in
2003
2013 share (%)
Refineries
22
6
-16
Oil & Gas
18
10
-8
Power Gen & Distbn 10
6
-5
Banks
26
21
-4
Telecom - Service
1
-1
-2
Sector
2.1.1.3 Value migration
In his book on
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." In effect, Value Migration results in a gradual yet major shift in the
way the profit pool in an industry is shared. Seen this way, Value Migration is one of the
most potent sources of Emergent Value Creators. For instance, many Value Creators emerged
from India's Banking & Finance sector because of a Value Migration from state-owned players
to private players. The table below lists more cases of Emerging Value Creators on the back
of value migration.
Examples of Value Creators due to value migration
Company / Sector
Titan Industries
Bharti Airtel
Hero MotoCorp
Private banks
Indian IT
Value migration from
Unorganized jewelry market
Fixed line telephony
Scooters
State-owned organizations
Developed world
Value migration to
Organized jewelry retailing
Wireless telephony
Motorcycles
Private sector
Developing countries
2.1.1.4 Stability of industry
Another common feature across most Value Creators is that they come from industries
which are stable. An industry may be deemed to be stable if it is less prone to de-stabilizing
factors -
1.
High cyclicality
of demand and/or supply, leading to volatility in product pricing e.g.
global commodities;
2.
High level of product innovation,
resulting in rapid changes in player market shares e.g.
new-economy businesses such as e-commerce, tech gadgets, gaming, etc;
13 December 2013 17

Wealth Creation Study 2008-2013
Theme 2014: Uncommon Profits
3.
Rapid and unexpected changes in government regulation
e.g. Indian sugar industry with
government controls on sugarcane procurement price, quantity/pricing of sugar sales,
import and export of sugar, etc.
2.1.1.5 Emergence of new industry/strategic opportunity
Rarely, some businesses emerge as a whole new industry or strategic opportunity e.g. Indian
IT emerged on the back of the Y2K opportunity. Likewise, radio has made a comeback, riding
the FM wave. In such situations, there is no existing profit pool, and yet, new players will
create a whole new profit pool and turn Value Creators in the process.
2.1.2 Company-specific key success factors for a Value Creator
Some of the company-specific key success factors include: (1) Quality of corporate-parent /
management, (2) Unique value proposition or strategy, (3) Nature of business (e.g.
Consumer-facing or Industry-facing), and (4) Market leadership/pioneering.
2.1.2.1 Quality of corporate-parent / management
This is arguably THE most non-negotiable key success factor for a Value Creator. The term
"corporate-parent" refers to the company owner whereas the management refers to the
operating team. In many companies, especially in India, the corporate-parent has a major
role in management as well, and hence, this factor becomes even more important.
The corporate-parent/management is responsible for several key decisions concerning the
company, viz, governance and compliance, strategy or unique value proposition, lines of
business, capital allocation, dividend payout, concern for minority shareholders, succession
planning, etc. These decisions go a long way in determining whether the outcomes favor
long-term generation of Uncommon Profit or not.
2.1.2.2 Unique value proposition or strategy
This is a corollary to the previous point on Quality of management. Without a unique value
proposition or strategy, it is virtually impossible for any company to endure Uncommon
Profits and prove to be a Value Creator.
Strategy is all about ensuring that a company creates and/or maintains its competitive edge
over rivals, and ideally strengthens it further. Without a unique strategy, a company's fortunes
are subject to the tide and ebb of industry tailwinds, which is an unsuitable situation for
enduring Uncommon Profits.
Examples of unique value proposition of recently emerged Value Creators
Company
Jubilant Foodworks
Titan Industries
Page Industries
Bajaj FinServ
Manappuram Finance
Business / Sector
Quick Service Restaurants
Watches, jewelry
Readymade apparel
NBFC, Insurance
NBFC
Unique value proposition
Hot pizzas at your doorstep in 30 minutes
100% hallmarked jewelry from the house of Tatas
Innerwear too can be a fashion statement
"EMI-zation" of consumer durables purchases
Monetization of idle gold
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Wealth Creation Study 2008-2013
Theme 2014: Uncommon Profits
2.1.2.3 Nature of business
There are broadly two kinds of business:
1.
Consumer-facing (also called B2C, Business-to-Consumer)
i.e. businesses catering to
individual users of products and services, and
2.
Client-facing (or B2B, Business-to-Business)
i.e. businesses catering to other businesses
(e.g. material suppliers, capital goods vendors, IT service providers, etc).
In order to succeed, consumer-facing businesses need to create
Consumer Advantages
such as brand loyalty, buying habits, and high switching costs, all translating into higher
pricing power. Likewise, client-facing businesses need to create
Production Advantages
such as patents, distribution network, lowest cost on the back of access to resources and/or
scale, etc.
While it is tough to establish either kind of advantage, corporate experience across the
world suggests that Consumer Advantage or pricing power once established is far more
difficult to be dislodged compared to Production Advantage.
Examples of Consumer Advantages holding up and Production Advantages folding up
Consumer Advantage which held up
Nestle's Maggi brand of noodles
survived competitive attacks from
Unilever (Top Ramen), GSK
Consumer (Foodles) and several
other smaller brands.
GSK Consumer's own Horlicks
brand withstood entry by world's
No.1 malt drink, Nestle's Milo.
Production Advantages which folded up
State-owned banks had a huge production advantage
in terms of their reach. However, they could not match
the technological prowess of new private sector
banks, and lost significant market share.
Colgate suffered a minor setback
on Unilever's aggressive launch of
Pepsodent, but subsequently
recovered much of the lost ground,
partly by launching Colgate Total
Several mining companies (like Sesa Goa) had huge
production advantage by way of access to resources.
However, this folded up virtually overnight by way of a
government ban on mining on environmental grounds.
Many brick-and-mortar retailers (e.g. book chains)
enjoyed multiple production advantages - proximity to
customer, bulk purchases from distributors leading to
pricing discounts, etc. However, migration of book
sales to online has nullified these advantages.
2.1.2.4 Market leadership/pioneering
Across the case studies on Emerging Value Creators, a widely prevalent theme was that of
market leadership or pioneering initiatives. Market leaders and pioneers enjoy a significant
first mover advantage in their product/service category which competitors may find difficult
to overthrow.
Examples of Market leadership/pioneering among Emerging Value Creators
Company
Shriram Transport Finance
Blue Dart Express
Titan Industries
Page Industries
Manappuram Finance
Business / Sector
NBFC
Logistics
Watches, Jewelry
Readymade apparel
NBFC
Market leadership / Pioneering initiative
Pioneer in financing of second-hand trucks,
especially for single-truck owners and operators
Market leader in express courier and cargo
Was market leader in watches, before pioneering
organized jewelry retailing
The first global innerwear brand company in India
Second largest player in gold financing
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Wealth Creation Study 2008-2013
Theme 2014: Uncommon Profits
2.2 Pitfalls to avoid while investing in Emerging Value Creators
Apart from the above positive checklist, there is also a list of pitfalls which need to be
avoided while investing in Emerging Value Creators - (1) Pre-empting emergence, and (2)
Emergence of companies in good times.
2.2.1 Pre-empting emergence
Many companies in their initial years show steady improvement in their profitability and
profits, suggesting they are most likely to breach the CoE threshold in the next couple of
years. Investors are prone to invest in such companies early, expecting to earn superlative
returns. However, actual data suggests that in most cases, there is no significant gain in
pre-empting emergence. At the same time, there is a risk that the company may actually
never emerge due to change in business dynamics post-investing.
2.2.2 Emergence during peak of good times
Many business and companies emerge only on the back of a favorable tailwind of
macroeconomic and business conditions. After a 4-5 year run on the rising leg of an economic
cycle, many companies may look to be entering the Value Creation zone. Investing in such
companies even post emergence is fraught with risk of wealth destruction.
As Benjamin Graham says in his book
The Intelligent Investor,
"…the risk of paying too high
a price for good-quality stocks – while a real one – is not the chief hazard confronting the
average buyer of securities. Observation over many years has taught us that the chief
losses to investors come from the purchase of low-quality securities at times of favorable
business conditions."
2.3 Our methodology to shortlist Emerging Value Creators
In the normal course, the search for Emerging Value Creators would be on a case-to-case
basis. To help create a shortlist of potential ones, we have incorporated our understandings
of Emerging Value Creators into a step-by-step methodology as discussed below.
A suggested methodology to identify Emerging Value Creators
Step
#1
#2
Aspect covered
Determine age of the company
Identify companies with
meaningful first-time
Emergence
Methodology
From among the listed companies, select companies
less than 25 years old from date of incorporation.
Calculate RoEs of the past 10-15 years, and see which of
these under-25-year companies crossed 15% for the first
time in the last year.
To ensure that the Emergence in meaningful, consider
companies with a certain minimum PAT level, say,
INR100m.
Of the above companies, shortlist those where you
have a favorable opinion of the corporate-parent /
management. Some of the evaluation criteria include:
1. Whether the corporate-parent is a multinational
company or a large domestic corporate house with a
reputation for good governance
2. Performance track record of other group companies,
if any
3. Management statements made in investor
communications (Annual Reports, results releases)
#3
Filter companies for corporate-
parent/management
13 December 2013 20

Wealth Creation Study 2008-2013
Theme 2014: Uncommon Profits
A suggested methodology to identify Emerging Value Creators (contd)
Step
#3
Aspect covered
Filter companies for corporate-
parent/management (contd.)
Methodology
4. Broadbased nature of the company's Board of
Directors
5. Dividend history and payout policy, etc.
Companies on which you have no knowledge of the
management need further investigation.
From the short-list of companies post the management
filter, avoid cyclical businesses as far as possible.
Cyclicals may yield healthy returns over 3-5 years post
emergence, but may not sustain their performance
across cycles.
As the company is still emerging, risks of failing to
endure Uncommon Profits is fairly high. Hence, it is
important to buy into Emerging Value Creators at
reasonable valuations.
We applied a P/E limit of not more than 20x last
reported earnings.
The residual companies are most likely to be Emerging
Value Creators.
The list can be optimized by applying elements of the
Value Creation checklist to further amplify portfolio
performance as suggested in Section 2.3.1
#4
Avoid cyclicality
#5
Reasonable valuation
#6
List of likely Emerging Value
Creators
We applied the above methodology to identify 17 Emerging Value Creators over the 8 years
2001 to 2008. Their post Emergence financial and stock market performance is summarized
in the table below. In essence, the 2001-08 Emerging Value Creators' portfolio performed
well both in terms of financial and stock market performance -
Average PAT CAGR was 24% over 5 years post-emergence; average 5-year RoE was 32%.
In terms of market performance, average stock return CAGR was 41% over the 5 years
post-emergence, outperforming the benchmark by an average 24%.
2001 to 2008 Emerging Value Creators' financial and stock market performance highlights
Co_Name
Shriram Transport
Accelya Kale
Shriram City Union
GRUH Finance
Plastiblends (I)
Manappuram Finance
Havells India
Cera Sanitaryware
KPIT Tech
Blue Dart Express
Titan Industries
Hitachi Home
Tata Elxsi
Emami
Suprajit Engg.
IL&FS Invt Managers
Asahi India Glass
AVERAGE
P to L: Profit to Loss
Year of
Emergence
2001
2008
2004
2003
2004
2007
2004
2008
2004
2001
2003
2006
2001
2007
2006
2007
2002
Age in
YoE
22
22
18
17
13
15
21
10
14
10
19
22
12
24
21
21
18
P/E in
YoE
1
3
3
4
4
4
7
7
8
9
12
12
16
18
18
18
19
10
5-year post emergence (%)
PAT CAGR
Avg RoE Price CAGR
56
28
85
36
31
60
45
24
70
33
24
60
1
20
4
123
28
70
P to L
34
39
36
24
29
36
30
4
22
23
45
53
33
85
14
41
22
20
43
23
31
35
33
21
28
0
32
57
9
25
43
51
24
32
41
Rel Perf.
60
56
58
22
-8
64
27
17
-7
20
46
11
-3
27
-12
3
21
24
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Wealth Creation Study 2008-2013
Theme 2014: Uncommon Profits
2.3.1 Further optimizing the Emerging Value Creator methodology
The 24% outperformance of the Emerging Value Creators portfolio is in itself high. Still,
there is room for optimization of such a list based on the Emerging Value Creator checklist.
We found meaningful increase in return profile from 3 checklist items, which we may call
"Amplifiers" -
Profit pool size:
Companies emerging from high profit pools (10 of above 17) delivered
37% outperformance v/s 4% for the others (7).
Nature of business:
Consumer Advantage companies (9 of 17) delivered 31%
outperformance v/s 16% outperformance of Production Advantage companies (8).
Leadership:
Companies which were among top 3 players in their market (10 of 17)
delivered 28% outperformance v/s 18% for non market leaders (7).
Further optimizing the Emerging Value Creator methodology with amplifiers
Checklist criteria
Number
of cos
10
7
9
8
10
7
17
PAT CAGR
26
21
21
27
19
31
24
5 years post-emergence (%)
Avg RoE
Price CAGR
29
37
34
30
32
32
32
55
20
46
34
45
34
41
Rel. Perf.
37
4
31
16
28
18
24
Profit Pool
High
Low
Nature of business advantage
Consumer
Production
Leadership i.e. among top 3 players
Yes
No
Portfolio avg
Combining all the 3 criteria leads to a portfolio with an average 5-year return CAGR of 65%
and benchmark outperformance of 43%. The optimized portfolio is presented below.
2001 to 2008 Emerging Value Creators' portfolio with amplifiers: 43% outperformance over 5 years
Company
Manappuram Finance
Shriram Transport
Titan Industries
Havells India
Blue Dart Express
AVERAGE
P/E (x)
in YoE
4
1
12
7
9
7
PAT CAGR
123
56
53
P to L
22
-
5 years post-emergence (%)
Avg RoE
Price CAGR
28
70
28
85
33
85
34
39
23
45
29
65
Rel. Perf.
64
60
46
27
20
43
2.4 Emerging Value Creators to bet on now
Having backtested the above methodology with good outcomes, we applied the same
methodology during 2009 to 2013 to identify more recent Emerging Value Creators. The 5
names which we believe have potential are tabled below.
Emerging Value Creators to bet on now
(INR b)
PAT
With amplifiers
Bajaj Finserv
Bajaj Corp
Zydus Wellness
Symphony
Others
Cairn India
15.7
1.6
1.0
0.6
118.8
FY13
RoE %
24
35
44
29
25
PAT Gr. %
18
38
43
11
49
1HFY14 Growth
Sales % PAT %
33
20
9
19
-2
36
15
29
27
6
Price (INR)
739
231
544
408
324
Nov-13
Mkt Cap
118
34
21
14
619
P/E (x)
7
19
20
23
5
13 December 2013 22

Wealth Creation Study 2008-2013
Theme 2014: Uncommon Profits
3. Why Enduring Value Creators?
Low-risk strategy to outperform market over the long term
3.1 Opportunities to invest in Emerging Value Creators are rare
Our methodology to identify Emerging Value Creators (discussed in previous section) clearly
suggested that successful Emergence is a rare phenomenon. During the 8 years 2001 to
2008, only 17 companies qualified as successful Emergence i.e. less than 2 every year. As a
result, despite the huge Wealth Creation potential of Emerging Value Creators, it would be
difficult to build a full-fledged investing strategy based on them alone. Hence, the need to
consider investing in Enduring Value Creators which are far more in number.
As indicated at the outset, Enduring Value Creators indeed create significant wealth over
medium- to long term despite being fully discovered and fairly discounted.
3.2 Investing in Enduring Value Creators too could go wrong
As in the case of Emerging Value Creators, here too, investors need to be wary of 5 major
events which could cause investing in Enduring Value Creators to go wrong - (1) Sharp/
sudden increase in competitive intensity, (2) Disruptive innovation, (3) Governance lapse
and/or capital misallocation, (4) Major regulatory changes, and (5) Excessive valuations.
Examples of investing in Enduring Value Creators going wrong
Event
Sharp/sudden increase in
competitive intensity
Examples
BHEL
Bharti Airtel
Disruptive innovation
Bajaj Auto
(in late 1990s)
Satyam Computer
Brief description
4-5 new players entered the BTG market, even
as the market itself shifted to ultra mega projects
A flurry of new 2G licenses led to a major price
war, badly hurting sector profitability
Launch of 100cc, highly fuel-efficient motorcycles
virtually extinguished the market for scooters,
Bajaj Auto's then bread-and-butter product
Exposure of fraudulent accounting eroded almost
98% of the stock's market capitalization from its
peak valuation
These mega global acquisitions were widely
deemed by the market as capital misallocation,
leading to a sharp fall in stock price.
In fact, post acquisitions, the Uncommon Profit
levels of Tata Steel and Hindalco are sharply
lower
The profitability of oil refining and marketing
companies is severely hit by regulatory product
pricing. Profitability of upstream player ONGC too
is affected due to high level of subsidy sharing.
In March 2000, Infosys' stock was valued at
INR590b with P/E of 200x earnings. It took 7 years
for the stock to reach those price levels again.
Governance lapse and/or
capital misallocation
Mega global
acquisitions -
Corus by Tata Steel,
Novelis by Hindalco
Major regulatory changes
IOC, BPCL, HPCL,
ONGC
Excessive valuation
Infosys
13 December 2013 23

Wealth Creation Study 2008-2013
Theme 2014: Uncommon Profits
3.3 Our methodology to identify Enduring Value Creators
To identify investment-worthy Enduring Value Creators from the universe of listed
companies, we applied a methodology which incorporates key aspects of our QGL formula
(Quality, Growth, Longevity).
A suggested methodology to identify Enduring Value Creators
Step Aspect covered
#1
Quality, Longevity
#2
Filter for quality of
corporate-parent/
management
Methodology
Select companies which reported RoE > 15% for the last 10
consecutive years.
Shortlist companies where you have a favorable opinion of the
corporate-parent / management. Some of the evaluation criteria
would include:
1. Whether the corporate-parent is a multinational company
or a large domestic corporate house with a reputation for
good governance
2. Performance track record of other group companies, if any
3. Management statements made in investor communications
(Annual Reports, results releases, etc)
4. Broadbased nature of the company's Board of Directors
5. Dividend history and payout policy
From the above list, filter companies with last 3-year PAT CAGR
of over 15%
Next, filter companies with positive RoE delta over the last 5
years
F inally, of the shortlist arrived at based on above, invest in
stocks with valuations not more than 50% premium to market
i.e. P/Es typically not exceeding 30x
#3
#4
#5
Filter for growth
Filter for value-
enhancing growth
Valuation filter
We backtested the above methodology for the 10-year period 1999 to 2008. 11 stocks
qualified in 2008, and their financial and stock market performance is tabled below.
In essence -
Average portfolio return CAGR over FY08-13 works out to 24% i.e. a 20% outperformance
over the market which returned only 4% over this period.
FY08-13 average earnings CAGR is a robust 16% (7% for Sensex EPS), and average RoE for
terminal year FY13 is a healthy 26%.
2008 Enduring Value Creators' financial and stock market performance highlights
Company
PAT (INR m)
2008
2013
0.9
1.3
4.1
2.2
2.4
1.6
1.0
27.1
32.1
6.3
79.1
2.2
4.6
10.9
4.5
5.0
3.7
3.2
66.4
59.7
6.1
166.3
PAT
CAGR
19
28
22
15
16
18
26
20
13
-1
16
2008-13
Avg
Price
RoE
CAGR
24
40
31
38
42
33
73
27
124
27
41
26
22
25
23
12
27
11
25
-1
24
24
Rel.
Perf.
36
34
29
23
23
22
21
8
7
-5
20
P/E (x)
2008
2013
12
9
28
20
22
26
7
25
19
19
21
31
13
43
33
34
37
8
19
18
20
20
Berger Paints
Torrent Pharma
Asian Paints
Castrol India
Colgate-Palmolive
Marico
City Union Bank
HDFC
Wipro
Glenmark Pharma
TOTAL / AVERAGE
13 December 2013 24

Wealth Creation Study 2008-2013
Theme 2014: Uncommon Profits
3.4 Enduring Value Creators to bet on now
We applied the backtested methodology to identify Enduring Value Creators to currently
bet on based on 10 years ending 2013. The shortlist is heavy on Financial & Banking names
due to their beaten down valuations. A diversified set would be - Torrent
Pharma, HCL
Technologies, M&M Financial Services, Zydus Wellness
and
HDFC Bank.
Enduring Value Creators: Current investment consideration list; our preferred bets highlighted (%)
2010-13 2003-13 2008-13
PAT CAGR Avg RoE Delta RoE
City Union Bank
28
23
1
Axis Bank
28
20
1
Suprajit Engg
24
31
12
Shriram City Union
32
24
0
Torrent Pharma
27
26
6
HCL Technologies
47
26
12
M & M Financial
36
22
6
Zydus Wellness
28
37
23
VST Industries
25
31
16
HDFC Bank
32
18
3
Astral Poly Technik
29
30
5
GRUH Finance
28
27
9
ITC
21
29
7
Hindustan Unilever
16
77
16
Page Industries
42
62
27
Note: Current Price and Market Cap as of end Nov-2013;
Company
P/E
Price
Mkt Cap
Return CAGR
(x)
(INR)
(INR b)
08-13
03-13
7
49
25
25
33
10
1,155
542
11
42
11
39
5
34
36
14
1,073
63
25
NA
15
462
78
38
33
16
1,087
759
25
26
17
296
168
28
NA
20
544
21
38
NA
20
1,664
26
37
33
23
661
1,582
19
30
24
250
14
35
NA
26
233
42
47
54
34
320
2,539
25
31
40
594
1,286
17
10
44
5,265
59
51
NA
P/E based on trailing 12-month earnings
4. Conclusions
Value Creators are a potent source of Wealth Creation
Uncommon Profits in companies = Uncommon Wealth Creation in stock markets.
Successful Emergence of Value Creators is very rare; a strong corporate-parent in a non-
cyclical business significantly increases the probability.
Large profit-pool industries, Consumer Advantage and Market leadership are major
amplifiers of Value Creators' stock market performance.
Endurance of Value Creators is mainly threatened by disruptive innovation/competition,
major regulatory changes and capital misallocation.
13 December 2013 8
25

Wealth Creation Study 2008-2013
Theme 2014: Uncommon Profits
Wealth Creation
2008-2013
The 18
TH
Annual Study
Market Outlook
13 December 2013 26

Wealth Creation Study 2008-2013
Theme 2014: Uncommon Profits
Market Outlook
Corporate Profit to GDP
Corporate Profit in 2013-14 is likely to grow lower than the normal GDP growth rate of
about 13-14%. It means Corporate Profit to GDP ratio will fall below 4.5% which is the last
10-year bottom.
Corporate Profit to GDP (%)
Market Cap to GDP
Market Cap to GDP after hitting a peak of over 100% in 2008 and crashing to 55% in 2009, it
is now trading at about 61% of current GDP (INR110 trillion). By this measure valuations are
not stretched.
Market Cap to GDP (%)
13 December 2013 27

Wealth Creation Study 2008-2013
Theme 2014: Uncommon Profits
Interest Rates
On the back of high inflationary pressure, interest rates have reached a recent high of
about 9%. It is observed that typically correction is sharp.
10-year G-Sec Yield (%)
Sensex Earnings to Bond Yield
Prevailing high interest rate is depressing the Sensex Earnings to Bond Yield to below
parity at about 0.8x. It means that change in interest rates will have decisive impact on
already recovering corporate earnings and market valuations. Thus, significant rise in the
market will depend on the behaviour of interest rate.
Sensex Earning Yield to Bond Yield (x)
13 December 2013 28

Wealth Creation Study 2008-2013
Theme 2014: Uncommon Profits
Sensex Earnings
There is some pick-up in Sensex earnings growth from 5% in FY13 to about 10% in FY14 on
the back of INR depreciation. In 2015, Sensex EPS is expected to grow upwards of 15%.
Sensex EPS
Sensex valuation
Current PE multiple is exactly at 10-year average of about 16x. This also indicates that
broadly market is not overvalued.
Sensex P/E (x)
Conclusion
Corporate profit to GDP is bottoming out at 4.5%.
Interest rates are at high and earnings-to-bond yield at 0.8x.
Corporate earnings growth has started to recover.
Market cap to GDP at ~60% makes markets reasonably priced. Any drop in interest rates
will have dramatic effect on equity returns.
This presents favorable risk reward equation for long-term investing in Indian equities.
13 December 2013 29

Wealth Creation Study 2008-2013
Findings
Wealth Creation
2008-2013
The 18
TH
Annual Study
Findings
13 December 2013 30

Wealth Creation Study 2008-2013
Findings
#1 The Biggest Wealth Creators
TCS is the Biggest Wealth Creator
TCS is the biggest Wealth Creator for the period 2008-13 (financial year ending March). In
effect, it has swapped places with ITC, which was the topper last year (i.e. for the period
2007-12) and TCS was a close runner-up.
HDFC Bank has maintained its third rank, and Infosys has climbed up three notches to
the fourth rank. Of the top 10 this year, 7 are the same as that of last year. Sun Pharma,
ONGC and Wipro are new entrants at the expense of MMTC, SBI and Jindal Steel.
In a startling development, Reliance, which was the biggest Wealth Creator for five
consecutive years till as recent as 2011, has turned out to be the biggest Wealth Destroyer
during the period 2008-13 (see page 40).
Top 10 Biggest Wealth Creators (2008-2013)
Rank Company
1
2
3
4
5
6
7
8
9
10
TCS
ITC
HDFC Bank
Infosys
Sun Pharma.Inds.
ONGC
HDFC
Tata Motors
Hind. Unilever
Wipro
Total/Avg of above
Total of Top 100
Wealth Created
(INR b) % Share
2,284
12.4
1,635
8.9
872
4.7
839
4.6
592
3.2
567
3.1
559
3.0
518
2.8
516
2.8
469
2.5
8,851
48
18,413
100
CAGR (%)
Price
PAT
31
23
25
19
19
34
15
15
27
17
5
3
12
18
17
35
15
15
11
14
18
15
17
16
P/E (x)
FY13
FY08
22
16
32
24
22
29
18
18
24
16
11
10
23
29
9
11
26
26
17
19
18
16
15
14
RoE (%)
FY13
FY08
37
41
33
26
19
14
25
34
23
31
16
26
17
19
26
26
134
127
23
28
23
27
19
21
Biggest wealth creators and wealth created (INR b):
TCS brings IT back to the fore after 9 years
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
2,284 TCS
1,187 ITC
1,742 Reliance Inds
2,556 Reliance Inds
1,514 Reliance Inds
3,077 Reliance Inds
1,856 ONGC
1,678 ONGC
1,065 ONGC
1,030 Wipro
245 Wipro
383 Hind. Lever
377 Wipro
1,247 Hind. Lever
341 Hind. Lever
262
Hind. Lever
73 Hind. Lever
91 Hind. Lever
Share of wealth creation by top 10 higher,
suggesting market was selective in 2008-13
(%)
76
59
50
45
51 49
41 42 41
48
53
Key Takeaway #1
Seven of the top 10 Wealth Creators during 2008-13 are non-cyclicals - two domestic
Consumer companies and five global non-cyclicals (including Tata Motors which is more
of a play on its UK subsidiary, JLR). Most of these companies have seen re-rating of
valuation, whereas that of stalwarts like HDFC and HDFC Bank slipped. IT, Pharma and
Consumer are the key sectors to bet on in times of general economic slowdown.
13 December 2013 31

Wealth Creation Study 2008-2013
Findings
#2 The Fastest Wealth Creators
TTK Prestige is the Fastest Wealth Creator again
TTK Prestige has once again emerged as the fastest Wealth Creator between 2008 and
2013, during which period, its stock price multiplied 28x, translating into annualized
return of 95% i.e. almost double every year.
Besides TTK Prestige, Eicher Motors and GSK Consumer are the only companies from the
previous study which have managed to retain their position among the top 10 Fastest
Wealth Creators.
If only these 10 stocks were held as a portfolio in 2008, the average price CAGR for the
next 5 years would have been an astronomical 53% compared to 4% CAGR of BSE Sensex.
Top 10 Fastest Wealth Creators
Price
CAGR (%)
Wealth Created Mkt Cap (INR b)
P/E (x)
Multiple (x) Price
PAT
(INR b)
2013
2008
2013
2008
1 TTK Prestige
28
95
45
35
37
1
28
6
2 Eicher Motors
10
59
54
63
69
7
14
13
3 Page Industries
8
51
36
32
37
5
33
20
4 Wockhardt
8
50
33
191
220
29
14
8
5 Grasim Inds
8
50
2
168
258
236
7
7
6 GRUH Finance
7
47
28
32
38
5
26
12
7 GlaxoSmith C H L
7
47
22
150
176
26
40
16
8 Supreme Inds.
6
45
38
33
40
7
15
13
9 Lupin
6
45
27
237
282
41
21
10
10 Godrej Consumer
6
44
40
204
265
32
31
20
Note:
Grasim's Mkt Cap (and PAT) remained flat over 2008-13 due to the demerger of Cement division
into UltraTech. The mcap of UltraTech has been considered while calculating Grasim's price appreciation.
Rank
Of all the fastest wealth creators since 1999, this year is the slowest! (Price Appreciation - X)
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
28
TTK Prestige
24
TTK Prestige
50
Sanwaria Agro
28
Unitec h
54
Unitech
837
Unitech
665
B F Utilities
182
Matrix Labs
136
Matrix Labs
75
Matrix Labs
50
e- Serve
69
Wipro
66
Infosys
223
SSI
75
Satyam Computers
Satyam Computers
23
7
Cipla
30
Dr Reddy's Lab
Key Takeaway #2
Nine of the top 10 Fastest Wealth Creators had a market cap of less than INR50b in 2008.
In fact, five of them were below INR10b. Seven of the top 10 were below 15x P/E in 2008.
Thus, mid- and small-cap companies with the right business model, able management
and bought at reasonable valuation deliver handsome returns irrespective of economic
and stock market conditions.
13 December 2013 32

Wealth Creation Study 2008-2013
Findings
#3 Most Consistent Wealth Creating Companies
Asian Paints is the Most Consistent Wealth Creator
Asian Paints has emerged as the Most Consistent Wealth Creator, having appeared in all
past 10 Wealth Creation studies, and with the highest price CAGR of 36% (2004-13).
The topper for last two years - Kotak Mahindra Bank - is in second place with price CAGR
fractionally lower than that of Asian Paints.
Given low cyclicality, consumer facing companies (both goods and services) are better
placed to appear in the list of Most Consistent Wealth Creators. Notable exceptions this
year are Hindustan Zinc and Bosch. Hindustan Zinc has benefited from the commodity
cycle boom and change in management. Bosch's stock performance remains upbeat on
the back of the parent's buyback offer, with a view to delist the stock.
Top 10 Consistent Wealth Creators
Rank Company
1
2
3
4
5
6
7
8
9
10
Asian Paints
Kotak Mah. Bank
Sun Pharma.Inds.
Hind.Zinc
ITC
Axis Bank
HDFC Bank
M&M
Bosch
HDFC
Appeared in
2004-13 2004-13 PAT
WC Study (x) Price CAGR % CAGR %
10
36
25
10
36
33
10
33
30
10
32
32
10
27
18
10
27
39
10
26
34
10
25
28
10
23
26
10
22
16
P/E (x)
2013
2004
43
20
22
14
25
20
8
8
33
16
12
12
22
21
14
13
19
19
34
22
RoE (%)
2013
2004
32
27
14
14
22
39
20
35
32
25
16
25
19
19
19
20
21
22
16
26
Consumer facing companies score high on Consistent Wealth Creation
Consistent Wealth Creators (Last 5 years, 2008 to 2013)
Non-Consumer Facing
Consumer Facing
Healthcare
Sun Pharma (5)
Consumer
Asian Paints (5)
ITC (2)
Nestle India (1)
Others
Axis Bank (1)
Bosch (1)
H D F C (5)
HDFC Bank (5)
Hero MotoCorp (3)
Kotak Mah. Bk (4)
M & M (1)
Technology
Infosys (4)
Others
ACC (2)
Ambuja Cem. (3)
Hind.Zinc (2)
O N G C (2)
Reliance Inds. (3)
Siemens (1)
Number in brackets indicates times appeared within top 10 in last five Wealth Creation Studies
Key Takeaway #3
Consistent Wealth Creators are also consistent Value Creators i.e. their return on equity
is consistently higher than cost of equity. (In India, cost of equity is ~15% i.e. the long-
period return on benchmark index).
13 December 2013 33

Wealth Creation Study 2008-2013
Findings
#4 Wealth Creators (Wealthex) v/s BSE Sensex
Superior and more consistent performance over benchmark
We have compared the performance of Wealthex (top 100 Wealth Creators index) with the
BSE Sensex on three parameters - (1) market performance, (2) earnings growth and
(3) valuation.
Market performance:
Over the last five years, wealth creating companies have delivered
point-to-point return CAGR of 17% against only 4% for the BSE Sensex.
Earnings growth:
Over the last five years, wealth creating companies clocked earnings
CAGR of 16% compared to benchmark earnings CAGR of only 7%.
Valuation:
Wealth creating companies' aggregate P/E in March 2008 was at a 24% discount
to the Sensex, which over the next five years narrowed to only 5%. Higher-than-
benchmark earnings growth combined with valuation re-rating led to significantly
superior returns over benchmark.
Wealth Creators' Index v/s BSE Sensex (March 2008 to March 2013)
38,000
33,000
28,000
23,000
18,000
13,000
8,000
103% Outperformance
Wea l thex - Reba s ed
Sens ex
Sensex v/s Wealth Creators: Higher earnings growth, lower valuation
Mar-08
BSE Sensex
YoY performance (%)
Wealthex - based to Sensex
YoY performance (%)
Sensex EPS (INR)
YoY performance (%)
Wealthex EPS (INR)
YoY Performance (%)
Sensex PE (x)
Wealthex PE (x)
15,644
15,644
833
1,099
19
14
Mar-09
9,709
(38)
11,683
(25)
820
(2)
1,049
(5)
12
11
Mar-10
17,528
81
23,611
102
834
2
1,435
37
21
16
Mar-11
19,445
11
29,395
24
1,024
23
1,883
31
19
16
Mar-12
17,404
(10)
29,952
2
1,123
10
2,047
9
15
15
Mar-13
18,836
8
34,891
16
1,190
6
2,313
13
16
15
5-year
CAGR (%)
4
17
7
16
Key Takeaway #4
Wealth Creators defy the commonly heard maxim in equity markets - "High return, high
risk". At the time of purchase, Wealth Creators' P/E is lower than benchmark (i.e. lower
risk), and yet returns are higher. As Van Den Berg has said, "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."
13 December 2013 34

Wealth Creation Study 2008-2013
Findings
#5 Wealth Creation Classification by Industry
Consumer & Retail emerges as the largest Wealth Creating sector
For the first time since 1999, Consumer & Retail sector has emerged as the largest Wealth
Creator, with over INR4.4t of wealth created. Technology sector came in a close second
at INR4.2t.
Both Consumer and Technology sectors have increased their share of Wealth Created
from ~5% in 2008 to a massive 23-24% in 2013. Even as markets were flat, both sectors
have seen average price CAGR of 21-25%.
Consumer and Technology have beaten the erstwhile two-time leader Financials in
Wealth Creation. Interestingly, over 2008-13, PAT CAGR for Consumer and Technology at
19% is lower than that of Financials at 22%. However, both these sectors have seen
significant re-rating in valuation, as India's growth uncertainty led to "flight to safety"
towards domestic secular (Consumer) and global secular (Technology). In contrast,
Financials actually saw a de-rating in valuations (P/E down from 15x in 2008 to 11x in
2013).
Wealth Creators - Classification by industry: Consumer is king! (INR b)
Wealth
Industry
Created
(No of Companies)
(INR b)
Consumer & Retail (24) 4,456
Technology (7)
4,197
Banking & Finance (23) 3,605
Healthcare (14)
1,935
Auto (11)
1,679
Oil & Gas (5)
1,080
Cement (5)
691
Metals / Mining (2)
335
Media (3)
156
Others (4)
150
Capital Goods (2)
130
Total
18,413
Share of Wealth
Created (%)
2013
2008
24
5
23
5
20
13
11
3
9
3
6
23
4
2
2
17
1
1
1
18
1
10
100
100
CAGR (%)
Price
PAT
25
19
21
19
15
22
25
19
22
21
6
7
14
4
20
10
12
34
35
40
19
24
17
16
P/E (x)
2013 2008
33
26
19
17
11
15
22
17
13
13
10
10
14
9
8
5
31
78
10
11
16
20
15
14
RoE (%)
2013 2008
33
33
27
32
16
14
20
23
22
26
15
19
18
37
19
36
21
8
36
22
35
24
19
21
Top Wealth Creating sector: Consumer & Retail makes a comeback after a long time (INR b)
5,826
3,891
1,839
2,723
2,126
4,949
5,194
3,672
4,456
Oi l & Gas Oi l & Gas Oi l & Gas Oi l & Gas Oi l & Ga s Meta l s & Fi na nci al s Fi na nci a ls Cons umer
Mi ni ng
& Retai l
2005
2006
2007
2008
2009
2010
2011
2012
2013
Key Takeaway #5
Technology sector is poised to emerge as India's largest Wealth Creator in the near future
(TCS is already India's largest market cap company). The current leader, Consumer, enjoys
average P/E multiples of 33x, which is over 2x the market average of 15x. This leaves little
room for further re-rating. In contrast, Technology sector is valued at 19x, which is
reasonable considering its high PAT CAGR coupled with higher-than-average RoE.
13 December 2013 35

Wealth Creation Study 2008-2013
Findings
#6 Wealth Creation by Ownership – PSU v/s Private
PSUs hit the floor in Wealth Creation
PSUs' (public sector undertakings) Wealth Creation performance during 2008-13 seems
to have hit the floor:
The number of PSUs in the top 100 Wealth Creators is at an all-time low of only 11.
Wealth Created by these 11 PSUs is also at an all-time low of 9% of the total.
Most interestingly, PSUs from only two sectors featured in the top Wealth Creators list -
Oil & Gas and Financials. Thus, PSUs have lost out on their erstwhile wealth creating
presence in sectors like Utilities, Metals & Mining and Capital Goods.
Average P/E of PSU Wealth Creators at 9x is half that of their private counterparts. This is
because on every single parameter - sales CAGR, PAT CAGR, RoE - PSUs have significantly
underperformed private companies during 2008-13.
PSUs have underperformed on every parameter
2008-2013
PSU
Private
No. of Wealth Creators in Top 100 11
89
Share of Wealth Created (%)
9
91
5-year Sales CAGR (%)
17
22
5-year PAT CAGR (%)
7
21
5-year Price CAGR (%)
8
20
RoE - 2008 (%)
20
21
RoE - 2013 (%)
14
22
P/E - 2008 (x)
9
18
P/E - 2013 (x)
9
18
PSUs Wealth Creation by Sectors: No erstwhile
presence in Utilities, Metals & Mining, Capital
Goods
Oi l &
Gas
55%
Fi na n-
cia l s
45%
PSUs' Wealth Creation performance during 2008-13 at a new low
49
51
36
25
35
27
No of PSUs
% Wea l th Crea ted
30
27
20
9
28
1999-
2004
30
2000-
2005
26
2001-
2006
18
2002-
2007
25
2003-
2008
16
2004-
2009
22
2005-
2010
24
2006-
2011
20
2007-
2012
11
2008-
2013
Key Takeaway #6
Wealth migration follows Value Migration. Over the years, value has migrated from PSUs
to private companies across sectors - Banking, Telecom, Oil & Gas, Metals & Mining,
Utilities, Capital Goods etc. This arguably lends further support to the maxim, "The
government has no business to be in business."
13 December 2013 36

Wealth Creation Study 2008-2013
Findings
#7 Wealth Creation by Age and Market Cap
"In youth we learn, in age we understand." -
Marie von Ebner-Eschenbach
Pace of Wealth Creation is fairly agnostic to age of companies. Younger companies start
off on a low base and manage to deliver high rates of growth. However, markets are
reasonably efficient in pricing these growth rates upfront. Hence, although PAT growth
rates vary across age groups, the price CAGR is much more homogenous and hovers
around the average overall return of 17%.
Wealth Creators: Classification by age-group
Age
No. of
range
cos
1-20
28
21-40
32
41-60
16
Above 61
24
Total
100
Wealth
Created
(INR b)
7,333
4,126
1,877
5,077
18,413
% Share
of
WC
40
22
10
28
100
CAGR (%)
Price
18
18
13
19
17
P/E (x)
2013
2008
15
16
18
18
12
9
16
14
15
14
RoE (%)
2013
2008
20
18
20
23
14
19
20
26
19
21
PAT
20
18
7
16
16
Small is beautiful … and fast!
Unlike younger companies, smaller companies (based on market cap of base year) seem
to have an edge in faster wealth creation. Data for 2008-13 suggests a clear inverse
relation between base market cap and stock returns i.e. smaller the company, higher
the returns.
Two of the top three fastest growing Wealth Creators (TTK Prestige and Page Industries)
had a market cap of under INR5b in 2008. The two combined delivered a high 65% price
CAGR over 2008-13.
Price CAGR and PAT CAGR by base market cap range
70
PAT CAGR (%)
Pri ce CAGR (%)
65
41
45
34
37
2008-13 Average PAT CAGR: 16%
2008-13 Average Price CAGR: 17%
29
20
16
17
1-5
6-10
11-15
Base Market Cap Range (INR b)
16-20
>20
Key Takeaway #7
Our theme study this year (see page 5) also touches on the role of age and size in Wealth
Creation. Many young companies emerge into the Value Creation zone i.e. RoE of 15% or
higher. If led by a good management, these companies are likely to sustain their above-
cost-of-equity performance for several years. In the process, they deliver huge shareholder
returns.
13 December 2013 37

Wealth Creation Study 2008-2013
Findings
#8 Wealth Creation by earnings growth and RoE
Earnings growth determines pace of equity returns…
Earnings growth is a key driver of stock price appreciation. High earnings growth can
even offset some valuation de-rating and deliver above-average equity returns.
During 2008-13, companies which delivered above-average earnings growth also
delivered above-average stock price returns.
Interestingly, the market seems to be more efficient in factoring a quantum jump in
earnings (e.g. turnarounds) rather than steady-state earnings growth. Thus, during 2008-
13, 9 companies combined delivered 115% PAT CAGR. However, as much of this was
priced in (high P/E in 2008), average price CAGR was only 18%.
Wealth Creators: Classification by PAT Growth
PAT
Growth
Range
<10
10-20
20-30
30-40
>40
Total
No. of
cos
18
30
27
16
9
100
Wealth
Created
(INR b)
2,189
7,057
5,414
3,081
673
18,413
% Share
of
WC
12
38
29
17
4
100
CAGR (%)
Price
8
16
25
27
18
17
P/E (x)
2013
2008
13
9
17
16
18
18
13
18
7
133
15
14
RoE (%)
2013
2008
14
25
20
22
21
16
22
19
25
1
19
21
PAT
1
16
24
34
115
16
…and earnings power determines longevity
In 2008-13, companies with RoE greater than 30% had PAT CAGR of only 14-15%. Still,
they delivered higher stock returns than those with RoE less than 15%, despite the
latter's high PAT CAGR of 36%.
Companies with high earnings power (captured by RoE and RoCE) are most likely to
enjoy some form of Economic Moat (i.e. competitive advantage), which is unlikely to be
easily breached by competition.
Besides pace of earnings growth, markets also value longevity of earnings. Thus,
companies with above-average earnings power are likely to outperform markets even
if their earnings growth is in line with average.
Price CAGR and PAT CAGR by RoE range
Pri ce CAGR (%)
36
PAT CAGR (%)
2008-13 Avera ge PAT CAGR: 16%
2008‐13 Average Price CAGR: 17%
18
12
11
15
15
12
21
15
24
14
17
<15
15-20
20-25
25-30
2008 RoE Range
30-35
>35
Key Takeaway #8
Sustained Value Creation (i.e. earning above cost of capital) is the basis of sustained
wealth creation. Our theme study on Emergence & Endurance of uncommon profits (see
page 5) suggests that identifying Value Creators early leads to superior stock market
returns.
13 December 2013 38

Wealth Creation Study 2008-2013
Findings
#9 Wealth Creators by Valuation Parameters
Unusual times defy time-tested thumb-rules … except Payback Ratio
In almost each of our past Wealth Creation studies, the key valuation indicators for
multi-baggers are - (1) P/E < 10x, (2) Price/Book < 1x, (3) Price/Sales <= 1x and (4) Payback
Ratio < 1x. (Payback is a proprietary ratio of Motilal Oswal, defined as current market cap
divided by estimated profits over the next five years. We back-test this in 2007, based on
the actual profits reported over the next five years).
Wealth
Created
(INR b)
2,616
2,683
5,850
3,048
3,244
971
18,413
213
1,954
2,863
1,901
1,936
2,805
6,741
18,413
1,904
2,779
3,736
3,888
2,533
3,572
18,413
2,210
7,557
6,618
2,028
18,413
% Share
of
WC
14
15
32
17
18
5
100
1
11
16
10
11
15
37
100
10
15
20
21
14
19
100
12
41
36
11
100
Wealth Creators: Classification by Valuation Parameters (March 2008)
No. of
cos
CAGR (%)
Price
PAT
16
11
22
23
16
24
17
22
10
13
21
23
16
25
17
19
17
13
21
19
18
17
24
16
18
16
17
14
11
19
20
25
26
16
30
16
11
20
25
16
19
16
12
16
12
16
23
29
16
22
14
17
15
16
P/E (x)
2013
2008
9
11
20
27
19
36
15
8
8
12
16
20
20
28
15
10
12
14
22
19
19
15
9
13
21
30
15
8
11
17
23
27
40
14
11
11
11
15
21
20
22
14
7
11
13
18
23
30
14
8
12
20
29
14
RoE (%)
2013
2008
16
17
25
24
19
17
19
14
15
18
18
23
20
34
19
15
17
17
30
21
23
19
18
18
21
24
19
18
22
30
22
14
17
21
10
14
25
23
20
28
38
21
20
20
21
36
23
13
21
22
20
19
27
21
Range
P/E - 2008
<10
22
10-15
21
15-20
23
20-25
15
25-30
11
>30
8
Total
100
P/B - 2008
<1
3
1-2
18
2-3
20
3-4
19
4-5
8
5-6
8
>6
24
Total
100
P/S - 2008
<1
20
1-2
26
2-3
26
3-4
10
4-5
7
>5
11
Total
100
Payback Ratio
<1
24
1-2
39
2-3
25
>3
12
Total
100
Key Takeaway #9
2008-13 was an unusually tough time, both for the Indian economy and stock markets. So,
most time-tested thumb-rules of valuation were turned on their head. Given flight to
high quality and extreme safety, the highest P/E and P/B stocks (typically Consumer,
Technology and Healthcare) delivered the highest returns during the period. However,
the Payback Ratio of less than 1x proved itself to be the most reliable indicator for high
stock returns, irrespective of economic and market conditions.
13 December 2013 39

Wealth Creation Study 2008-2013
Findings
#10 Wealth Destroyers
Wealth destroyed during 2008-13 at unprecedented high
The 2008-13 period saw unprecedented Wealth Destruction of over INR17t, almost
entirely wiping out the total Wealth Created by top 100 companies (the figure in last
year's study was 33%; during the peak of market boom in 2003-08, Wealth Destruction
was negligible).
The irony is that the biggest Wealth Destroyer during this period is none other than
Reliance Industries -- five times consecutive biggest Wealth Creator from 2007 to 2011.
Five of the top 10 Wealth Destroyers are public sector undertakings.
One-third of the Wealth Destroyed can be attributed to three broad ownership groups -
Reliance (Mukesh Ambani), Reliance (Anil Ambani) and Government of India.
Top-10 Wealth Destroyers (2008-2013)
Company
Wealth Destroyed
(INR b)
% Share
Reliance Industries
1,128
7
Reliance Communication
921
5
MMTC
891
5
NMDC
822
5
DLF
703
4
Reliance Power
619
4
BHEL
574
3
SAIL
506
3
Bharti Airtel
460
3
NTPC
454
3
Total of Above
7,077
41
Total Wealth Destroyed
17,140
100
Price
CAGR (%)
-7
-36
-29
-17
-18
-21
-16
-20
-7
-6
Wealth Destruction by Industry (%)
Sector
No of
Cos
Wealth Destroyed
(INR b)
% Share
Metals / Mining
Capital Goods
Construction / Real Estate
Telecom
Utilities
Oil & Gas
Technology
Banking & Finance
Tex tiles
Media
Auto
Chemicals & Fertilizers
Healthcare
Sugar
Others
Total
124
161
102
23
14
11
156
194
164
49
87
93
66
30
430
1,704
2,896
1,895
1,805
1,693
1,678
1,520
1,519
679
318
173
156
148
137
134
2,390
17,140
17
11
11
10
10
9
9
4
2
1
1
1
1
1
14
100
Wealth Destroyed during 2008-13 at unprecedented high
Wea l th des troyed (INR B)
% of Wea l th Crea ted by top 100 Weal th Creators
93
43
33
18
2,586
1
124
2000-05
2001-06
1
142
2002-07
0
59
2003-08
2004-09
2
1,704
650
2005-10
3,254
2006-11
5,425
2007-12
2008-13
15
17,140
Key Takeaway #10
The stock market's perception of ineffective management (including capital mis-
allocation, consistent failure to deliver on guidance, low dividend payout etc) is a major
source of Wealth Destruction. When the market is disappointed, it does not spare even
those stocks which were its darlings till recently.
13 December 2013 40

Wealth Creation Study 2008-2013
Wealth Creation
2008-2013
The 18
TH
Annual Study
Appendix
13 December 2013 41

Wealth Creation Study 2008-2013
Appendix I: MOSL 100 – Biggest Wealth Creators
Ranked according to amount of Wealth Created
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
Sun Pharma
ONGC
HDFC
Tata Motors
Hindustan Unilever
Wipro
HCL Technologies
Asian Paints
M&M
ICICI Bank
Nestle India
State Bank of India
Hinustan Zinc
UltraTech Cement
Kotak Mahindra Bank
Lupin
Axis Bank
Godrej Consumer
Dr Reddy's Labs
Cairn India
Wockhardt
Titan Inds
Hero Motocorp
Bosch
Grasim Inds
GSK Consumer
IOCL
IndusInd Bank
Dabur India
Oracle Financial
Bank of Baroda
United Breweries
Cipla
Castrol India
BPCL
Cadila Healthcare
Colgate-Palmolive
Maruti Suzuki
Shree Cement
Pidilite Inds
GSK Pharma
Yes Bank
Marico
REC
Zee Entertainment
Ambuja Cements
Wealth Created
INR b
Share (%)
2,284
12.4
1,635
8.9
872
4.7
839
4.6
592
3.2
567
3.1
559
3.0
518
2.8
516
2.8
469
2.5
380
2.1
356
1.9
327
1.8
316
1.7
299
1.6
293
1.6
289
1.6
276
1.5
249
1.4
237
1.3
215
1.2
204
1.1
199
1.1
194
1.1
191
1.0
181
1.0
170
0.9
168
0.9
168
0.9
150
0.8
150
0.8
147
0.8
143
0.8
135
0.7
134
0.7
128
0.7
127
0.7
127
0.7
121
0.7
119
0.6
118
0.6
113
0.6
104
0.6
101
0.5
97
0.5
91
0.5
91
0.5
88
0.5
85
0.5
81
0.4
CAGR (2008-13, %)
Price
PAT
Sales
31
23
23
25
19
17
19
34
29
15
15
19
27
17
27
5
3
11
12
18
33
17
35
40
15
15
14
11
14
13
26
31
28
33
22
20
20
15
25
6
27
6
25
21
19
5
15
19
18
9
10
19
22
31
16
18
24
45
27
29
11
38
31
44
40
42
24
28
19
4
L to P
77
50
33
16
37
37
27
17
17
18
20
9
15
50
2
10
47
22
20
5
-16
15
39
70
30
20
18
21
22
21
8
19
25
25
30
26
20
12
17
16
39
15
10
13
0
17
34
21
23
27
16
16
9
7
20
30
31
22
32
20
17
16
1
11
20
45
45
26
19
19
14
35
31
11
12
15
7
-7
11
RoE (%)
2013
2008
37
41
33
26
19
14
25
34
23
31
16
26
17
19
26
26
134
127
23
28
31
25
34
44
18
30
15
7
59
99
15
15
21
37
18
37
14
16
26
32
16
12
26
93
24
10
25
0
66
30
37
33
42
32
17
24
19
37
32
25
6
20
14
7
36
54
15
15
14
14
12
17
17
19
69
51
12
15
23
25
101
141
13
20
26
39
26
28
28
40
22
15
20
54
22
16
18
15
15
38
P/E (x)
2013
2008
22
16
32
24
22
29
18
18
24
16
11
10
23
29
9
11
26
26
17
19
14
16
41
27
15
9
12
28
41
35
8
11
7
5
19
10
22
23
21
10
12
26
31
20
20
23
4
-
14
8
31
32
15
14
30
19
7
7
40
16
19
6
20
34
31
28
20
19
6
7
107
74
20
24
35
14
14
8
22
12
34
22
15
14
14
14
32
20
33
16
12
25
34
24
5
11
28
25
21
10
13 December 2013 42

Wealth Creation Study 2008-2013
Appendix I: MOSL 100 – Biggest Wealth Creators
(contd.)
Ranked according to amount of Wealth Created
Rank
51