Thematic Study | December 2020
25 questions, 25 frameworks
HIGHLIGHTS
The QGLP Checklist
Time is a friend of good companies and enemy of bad companies. In 25 years,
successful companies grow to unimaginable levels in sales, profits and market cap.
Of the top 500 companies listed in 1995, only 100 companies have outperformed the
benchmark over the next 25 years.
Stock returns are slaves of earnings power and growth. In the very long run, valuations
matter less.
The future always holds a lot more promise. Over 50% of current market cap is made
up of listings post 1995.
Equity investing is complex. A checklist is an excellent tool to bring discipline to the
process.
The 25 questions here and the 25 related frameworks are a good starting point for an
investor to create their own checklist over time.
“In my nearly fifty years of experience in Wall Street, I’ve found that I know less and less about
what the stock market is going to do but I know more and more about what investors ought to
do, and that’s a pretty vital change in attitude.”
— Benjamin Graham
TOP 10 WEALTH CREATORS (1995-2020)
FASTEST
Company
Infosys
Pidilite Inds
Eicher Motors
Shree Cement
Berger Paints
Honeywell Auto
Sun Pharma
Bajaj Finance
Motherson Sumi
Britannia Inds
25-year
Price
CAGR
30%
25%
25%
25%
24%
24%
23%
23%
23%
22%
BIGGEST
Company
Reliance Industries
Hind. Unilever
Infosys
HDFC
Kotak Mahindra
ITC
Asian Paints
Nestle India
Bajaj Finance
Larsen & Toubro
NWC
(INR b)
6,307
4,893
2,700
2,475
2,293
1,945
1,586
1,549
1,162
998
CONSISTENT
Company
Kotak Mahindra
Berger Paints
HDFC
Pidilite Inds
Shree Cement
Honeywell Auto
Motherson Sumi
Asian Paints
Dabur India
Sun Pharma
Consistency
Count
21
20
20
19
19
19
19
19
19
18
25-year
Price
CAGR
21%
24%
19%
25%
25%
24%
23%
22%
20%
23%
ALL-ROUND
Company
Kotak Mahindra
Pidilite Inds
Asian Paints
Shree Cement
Berger Paints
Sun Pharma
HDFC
Bajaj Finance
Dabur India
Eicher Motors
Total 1995-2020
of
Price
Ranks CAGR
20
21%
21
25%
26
22%
28
25%
28
24%
29
23%
29
19%
32
23%
43
20%
44
25%
Raamdeo Agrawal
(Raamdeo@MotilalOswal.com) /
Shrinath Mithanthaya
(ShrinathM@MotilalOswal.com)
We thank Mr Dhruv Mehta (Dhruv@SapientWealth.co.in) for his invaluable contribution to this report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.
 Motilal Oswal Financial Services
25th Annual Wealth Creation Study, 2020
Motilal Oswal 25th Annual Wealth Creation Study
Page
Celebrating 25 Years of Wealth Creation Studies!
........................................ 1
Wealth Creation 1995 to 2020:
Findings ................................................... 2-16
25 for 25:
Shortlisting Wealth Creators for the next 25 years .........16-17
Appendix 1:
The 100 Fastest Wealth Creators ................................ 18-19
Appendix 2:
The 100 Biggest Wealth Creators ................................ 20-21
Appendix 3:
The 100 Consistent Wealth Creators ............................ 22-23
Appendix 4:
The 100 All-round Wealth Creators ............................. 24-25
Appendix 5:
The 100 Wealth Creators (alphabetical) ...................... 26-27
Theme 2021:
The QGLP Checklist: 25 questions, 25 frameworks ........... 28-85
Wealth Creation 2015-20:
Findings ....................................................... 86-100
Appendix 5:
The 100 Biggest Wealth Creators ............................ 101-102
Appendix 6:
The 100 Fastest Wealth Creators ............................ 103-104
Appendix 7:
The 100 Wealth Creators (alphabetical) ......................... 105
The Wealth Creation Study Journey:
Summary of 24 past studies ... 106-113
Abbreviations and Terms used in this report
Abbreviation / Term
1995, 2015, 2020, etc
Avg
CAGR
L to P / P to L
INR bn
Price CAGR
WC
Wealth Created
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
actions such as fresh equity issuance, mergers, demergers, share buybacks, etc.
Note:
Capitaline database has been used for this study. Source of all exhibits is MOFSL analysis, unless otherwise stated
 Motilal Oswal Financial Services
25th Annual Wealth Creation Study, 2020
Celebrating 25 years of Wealth Creation Studies!
E
VERY YEAR, for the past 25 years, we publish the Motilal Oswal Annual Wealth Creation Study.
The studies have two main parts –
1. Analysis of Wealth Created in the stock markets over the past 5 years, and
2. Theme study.
Over these 25 years, we have covered a wide range of themes –
Good businesses which get better
Competitive strengths of Wealth Creators
How to value growth
Characteristics of Multi-baggers
Components of value
Role of Interest rates
Commodity cycles
Consistent Wealth Creators
Terms of Trade
Great, Good, Gruesome, Winner Categories, Category Winners
Blue Chip Investing
Economic Moat
100x: The power of growth
Mid-to-Mega: The power of leadership
Focused Investing: The power of allocation
CAP & GAP: The power of longevity
Valuation Insights: What works, what doesn’t
Management Integrity: Understanding sharp practices
Towards the end of the report, we present the essence and highlights of all previous 24 studies,
including links to the full reports for your easy reference. These studies and the various
frameworks covered therein have led to Motilal Oswal’s investment philosophy,
QGLP – Quality,
Growth, Longevity, at reasonable Price
(more on this in later pages).
We start the report with the key findings of Wealth Creation data from 1995 to 2020. We have 4
categories – Fastest, Biggest, Consistent and All-round Wealth Creators. The full lists are given in
pages 18-27. We follow this with the current year’s special theme study titled “The
QGLP
Checklist: 25 questions, 25 frameworks”
in pages 28-85. Finally, we cover the regular feature of
Wealth Creation data from 2015 to 2020.
We hope you find this edition as exciting as we feel bringing this to you.
Happy reading and happy Wealth Creation!
December 2020
1
 Motilal Oswal Financial Services
25th Annual Wealth Creation Study, 2020
Wealth Creation
(1995-2020):
Key findings
December 2020
2
 Motilal Oswal Financial Services
25th Annual Wealth Creation Study, 2020
25 years of Wealth Creation: 1995 to 2020
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, as in the past 25 years, we endeavor to cull out the
characteristics of businesses that 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, duly
adjusted for fresh equity issuances. (Note: For the 25-year study, we have considered Price CAGR,
and not total return on account of major corporate events such as demergers. Also, due to data
reliability, we have used PAT CAGR whereas EPS CAGR would have been ideal.)
Every year, we study the Wealth Creators of previous 5 years. But to commemorate the 25
th
Study, we have also looked at Wealth Creators over the 25 years, 1995 to 2020. For continuity
sake, the 5-year Wealth Creation data (i.e. 2015-20) is presented page 86 onwards.
For the 25-year study, our starting point is the top 500 companies in 1995 ranked by market
capitalization. Our key criteria for calling a company a Wealth Creator is that it should have
outperformed the benchmark index, in our case, BSE Sensex.
Over 1995 to 2020, the Sensex rose from 3,200 levels in March 1995 to 29,500 by March 2020
i.e. a CAGR of 9.2%. Interestingly, exactly 100 companies delivered returns higher than 9.2%. We
call these 100 the
Fastest Wealth Creators.
We then sort these companies in descending order
of absolute Wealth Created to decide the
Biggest Wealth Creators.
The third category is what we have called the
Consistent Wealth Creators.
From 1995 to 2020,
there are 23 three-year rolling periods i.e. 1995-98, 1996-99, 1997-2000, and so on up to 2017-
20. To determine Consistent Wealth Creators, we rank the companies based on the highest
number of rolling 3-year periods in which the companies outperform the corresponding Sensex
performance. Where the number is same, higher the Price CAGR, higher is the rank. Finally, we
combine the ranks of Fastest, Biggest and Consistent Wealth Creators to arrive at the
Best All-
round Wealth Creators.
This is followed by some interesting data points garnered from 25 years of India’s corporate
financial history.
December 2020
3
 Motilal Oswal Financial Services
25th Annual Wealth Creation Study, 2020
Infosys is the Fastest Wealth Creator over the last 25 years
Between 1995 and 2020,
Infosys
clocked a robust Price CAGR of 30% to emerge as the Fastest
Wealth Creator. This was backed by 25-year PAT CAGR of 33%.
The average market cap of the top 25 Fastest Wealth Creators was INR 4 billion in 1995, which
stood at over INR 750 billion in 2020.
INR 1 mn invested equally in these 25 stocks in 1995 would have grown to INR 162 mn in
2020, delivering 25-year CAGR of 23%.
Top 25 Fastest Wealth Creators (1995 to 2020)
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
Company
Infosys
Pidilite Inds
Eicher Motors
Shree Cement
Berger Paints
Honeywell Auto
Sun Pharma
Bajaj Finance
Motherson Sumi
Britannia Inds
Asian Paints
Balkrishna Inds
Titan Company
Kotak Mahindra Bank
Lupin
Coromandel Intl
CRISIL
3M India
Aarti Industries
Dabur India
Amara Raja Batteries
HDFC
Hindustan Zinc
Hero Motocorp
Kansai Nerolac
TOTAL OF ABOVE
TOTAL OF 100
25-year Price
Multiple
CAGR
30%
25%
25%
25%
24%
24%
23%
23%
23%
22%
22%
22%
22%
21%
20%
20%
20%
20%
20%
20%
19%
19%
19%
19%
19%
23%
17%
688
258
255
240
239
219
180
172
161
142
139
136
135
117
103
101
97
96
95
93
84
82
74
71
71
185
53
25-year
PAT CAGR
33%
20%
23%
19%
20%
22%
23%
26%
27%
20%
18%
21%
18%
22%
P to L
19%
18%
22%
18%
19%
20%
22%
19%
22%
16%
22%
17%
NWC*
(INR bn)
2,700
686
355
608
480
228
828
1,162
163
640
1,586
152
821
2,293
255
156
88
211
124
783
81
2,475
642
314
205
18,038
43,115
Mkt Cap (INR bn)
2020
1995
2,727
3
689
3
357
1
634
2
483
1
229
1
845
3
1,333
2
193
1
647
5
1,599
11
153
1
829
6
2,480
9
267
2
159
1
91
1
213
2
133
1
796
8
82
1
2,824
20
656
9
318
4
208
2
18,945
103
46,729
887
P/E (x)
2020
1995
17
26
60
20
20
10
41
9
75
12
47
24
21
16
25
14
17
26
46
32
59
27
19
15
55
24
29
14
-57
34
15
9
27
14
66
106
25
12
52
42
13
10
13
14
10
11
11
23
40
18
23
17
22
20
RoE
2020
25%
26%
18%
12%
24%
23%
9%
16%
10%
32%
27%
16%
23%
13%
-4%
25%
29%
18%
18%
23%
18%
17%
17%
21%
14%
17%
12%
1995
21%
13%
42%
24%
20%
19%
23%
19%
21%
19%
26%
16%
18%
26%
15%
10%
24%
8%
23%
14%
49%
17%
10%
26%
25%
17%
16%
* NWC – Net Wealth Created
Reliance is the Biggest Wealth Creator over 25 years
Between 1995 and 2020,
Reliance Industries
created wealth of INR 6.3 trillion to emerge the
Biggest Wealth Creator. It is significantly ahead of the second ranked
Hindustan Unilever
(INR 4.9 trillion of Wealth Created).
Infosys
and
Bajaj Finance
have a creditable performance of being among the top 10, both in
terms of Fastest and Biggest Wealth Creators.
December 2020
4
 Motilal Oswal Financial Services
25th Annual Wealth Creation Study, 2020
Top 25 Biggest Wealth Creators (1995 to 2020)
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
Company
Reliance Industries
Hindustan Unilever
Infosys
HDFC
Kotak Mahindra Bank
ITC
Asian Paints
Nestle India
Bajaj Finance
Larsen & Toubro
State Bank of India
Sun Pharma
Titan Company
Dabur India
Pidilite Inds
Hindustan Zinc
Britannia Inds
BPCL
Shree Cement
Dr Reddy's Labs
Berger Paints
Siemens
Eicher Motors
P&G Hygiene
Torrent Pharma
TOTAL OF ABOVE
TOTAL OF 100
NWC
(INR bn)
6,307
4,893
2,700
2,475
2,293
1,945
1,586
1,549
1,162
998
901
828
821
783
686
642
640
621
608
504
480
380
355
332
328
34,821
43,115
25-year
25-year Market Cap (INR bn)
Price CAGR PAT CAGR
2020
1995
16%
16%
7,052
120
16%
16%
4,975
82
30%
33%
2,727
3
19%
22%
2,824
20
21%
22%
2,480
9
14%
18%
2,114
69
22%
18%
1,599
11
18%
17%
1,572
23
23%
26%
1,333
2
14%
15%
1,133
59
10%
13%
1,758
83
23%
23%
845
3
22%
18%
829
6
20%
19%
796
8
25%
20%
689
3
19%
19%
656
9
22%
20%
647
5
11%
11%
686
44
25%
19%
634
2
15%
17%
518
9
24%
20%
483
1
13%
15%
396
15
25%
23%
357
1
17%
15%
339
7
18%
16%
334
5
18%
17%
37,775
602
17%
17%
46,729
887
P/E (x)
2020
1995
16
12
72
44
17
26
13
14
29
14
14
31
59
27
80
57
25
14
12
21
11
12
21
16
55
24
52
42
60
20
10
11
46
32
16
15
41
9
26
23
75
12
37
42
20
10
78
50
33
23
21
18
22
20
RoE
2020
9%
84%
25%
17%
13%
24%
27%
102%
16%
14%
6%
9%
23%
23%
26%
17%
32%
11%
12%
13%
24%
12%
18%
38%
21%
13%
12%
1995
14%
26%
21%
17%
26%
26%
26%
18%
19%
13%
15%
23%
18%
14%
13%
10%
19%
21%
24%
16%
20%
13%
42%
12%
21%
16%
16%
* NWC – Net Wealth Created
Kotak Mahindra Bank is the most Consistent Wealth Creator over 25 years
Kotak Mahindra Bank
is the most Consistent Wealth Creator between 1995 and 2020.
In the 23 three-year rolling periods between 1995 and 2020, Kotak Mahindra has
outperformed the corresponding benchmark in 21 of those periods.
It is closely followed by
Berger Paints
and
HDFC
with 20 periods of outperformance.
(Where consistency is the same, higher the Price CAGR, higher the rank.)
Six of the top 10 Consistent Wealth Creators are also among the top 10 Fastest Wealth
Creators –
Berger Paints, Pidilite, Shree Cement, Honeywell Automation, Motherson Sumi
and
Sun Pharma.
December 2020
5
 Motilal Oswal Financial Services
25th Annual Wealth Creation Study, 2020
Top 25 Consistent Wealth Creators (1995 to 2020)
Consistency
25-year
25-year
Market Cap (INR bn)
P/E (x)
RoE
Rank Company
Count *
Price CAGR PAT CAGR
2020
1995
2020
1995
2020
1995
1 Kotak Mahindra Bank
21
21%
22%
2,480
9
29
14
13%
26%
2 Berger Paints
20
24%
20%
483
1
75
12
24%
20%
3 HDFC
20
19%
22%
2,824
20
13
14
17%
17%
4 Pidilite Inds
19
25%
20%
689
3
60
20
26%
13%
5 Shree Cement
19
25%
19%
634
2
41
9
12%
24%
6 Honeywell Auto
19
24%
22%
229
1
47
24
23%
19%
7 Motherson Sumi
19
23%
27%
193
1
17
26
10%
21%
8 Asian Paints
19
22%
18%
1,599
11
59
27
27%
26%
9 Dabur India
19
20%
19%
796
8
52
42
23%
14%
10 Sun Pharma
18
23%
23%
845
3
21
16
9%
23%
11 CRISIL
18
20%
18%
91
1
27
14
29%
24%
12 3M India
18
20%
22%
213
2
66
106
18%
8%
13 Aarti Industries
18
20%
18%
133
1
25
12
18%
23%
14 Chola Financial
18
14%
13%
54
4
10
14
12%
10%
15 Bajaj Finance
17
23%
26%
1,333
2
25
14
16%
19%
16 Coromandel Intl
17
20%
19%
159
1
15
9
25%
10%
17 Astrazeneca Pharma
17
19%
10%
60
1
83
14
20%
36%
18 Eicher Motors
16
25%
23%
357
1
20
10
18%
42%
19 Balkrishna Inds
16
22%
21%
153
1
19
15
16%
16%
20 Titan Company
16
22%
18%
829
6
55
24
23%
18%
21 Hero Motocorp
16
19%
22%
318
4
11
23
21%
26%
22 Kansai Nerolac
16
19%
16%
208
2
40
18
14%
25%
23 Torrent Pharma
16
18%
16%
334
5
33
23
21%
21%
24 Abbott India
16
18%
13%
328
4
55
16
24%
75%
25 P&G Hygiene
16
17%
15%
339
7
78
50
38%
12%
* Consistency count is the number of outperformances over the 23 three-year rolling periods between 1995 and 2020
Where consistency is the same, higher the Price CAGR, higher the rank
Kotak Mahindra Bank is also the best All-round Wealth Creator
Besides being the Most Consistent Wealth Creator,
Kotak Mahindra Bank
has also emerged
the best All-round Wealth Creator.
The All-round Wealth Creators rank is arrived at by combining the ranks of Fastest, Biggest
and Consistent Wealth Creators.
Kotak Mahindra ranks 14
th
among the Fastest Wealth Creators, 5
th
among the Biggest and 1
st
among the Consistent Wealth Creators. This gives it a combined rank of 20, which is the best
of the 100.
It is closely followed by
Pidilite Industries
and
Asian Paints
with All-round Wealth Creators
rank of 21 and 22, respectively.
Here too, where the Total Rank is the same, higher the Price CAGR, higher the rank.
December 2020
6
 Motilal Oswal Financial Services
25th Annual Wealth Creation Study, 2020
Top 25 All-round Wealth Creators (1995 to 2020)
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
Company
Kotak Mahindra
Pidilite Inds
Asian Paints
Shree Cement
Berger Paints
Sun Pharma
HDFC
Bajaj Finance
Dabur India
Eicher Motors
Honeywell Auto
Titan Company
Britannia Inds
Motherson Sumi
Infosys
3M India
Nestle India
Reliance Industries
Hind. Unilever
Hero Motocorp
Coromandel Intl
Torrent Pharma
Balkrishna Inds
Abbott India
P&G Hygiene
Fastest
Rank
14
2
11
4
5
7
22
8
20
3
6
13
10
9
1
18
28
33
34
24
16
29
12
30
32
Biggest
Rank
5
15
7
19
21
12
4
9
14
23
33
13
17
43
3
35
8
1
2
27
45
25
48
26
24
Consistent
Rank
1
4
8
5
2
10
3
15
9
18
6
20
29
7
61
12
30
32
33
21
16
23
19
24
25
Total
of Ranks
20
21
26
28
28
29
29
32
43
44
45
46
56
59
65
65
66
66
69
72
77
77
79
80
81
1995-2020
Price CAGR
21%
25%
22%
25%
24%
23%
19%
23%
20%
25%
24%
22%
22%
23%
30%
20%
18%
16%
16%
19%
20%
18%
22%
18%
17%
1995-2020
PAT CAGR
22%
20%
18%
19%
20%
23%
22%
26%
19%
23%
22%
18%
20%
27%
33%
22%
17%
16%
16%
22%
19%
16%
21%
13%
15%
Consumer/Retail is the Biggest Wealth Creating sector over 25 years
At INR 12 trillion, Consumer/Retail is the biggest Wealth Creating sector during 1995 to 2020.
63 of the 100 Wealth Creators are from consumer-facing businesses, accounting for 68% of
total Wealth Created.
Sector mix of Top 100 Wealth Creators (1995-2000)
Sector/
{No. of companies)
Consumer & Retail (14)
Oil & Gas (2)
NBFC (8)
Pharma & Healthcare (15)
IT (3)
Banks - Private Sector (1)
Paints (3)
Autos (14)
Cap Goods, Engg, Constn (8)
Banks - Public Sector (1)
Consumer Durables (6)
Building Materials (4)
Metals - Non-Ferrous (1)
Chemicals (4)
Textiles (2)
Others (14)
TOTAL (100)
December 2020
Net Wealth Created
INR bn
Mix
12,224
28%
6,928
16%
4,002
9%
3,515
8%
2,839
7%
2,293
5%
2,272
5%
2,235
5%
1,697
4%
901
2%
882
2%
869
2%
642
1%
343
1%
179
0%
1,292
3%
43,115
100%
Mkt Cap (INR bn)
2020
1995
12,571
220
7,738
164
4,607
36
3,758
79
2,870
5
2,480
9
2,290
15
2,389
74
1,881
98
1,758
83
911
24
915
20
656
9
372
13
183
4
1,349
34
46,729
887
1995-2020 CAGR
Mkt Cap
PAT
18%
17%
17%
15%
21%
21%
17%
16%
29%
33%
25%
22%
22%
18%
15%
16%
13%
15%
13%
13%
16%
17%
16%
13%
19%
19%
14%
14%
17%
15%
16%
16%
17%
17%
RoE
2020
29%
10%
16%
8%
24%
13%
23%
10%
14%
6%
17%
12%
17%
14%
20%
11%
12%
1995
22%
15%
16%
21%
14%
26%
25%
15%
14%
15%
12%
24%
10%
14%
11%
14%
16%
2020
40
16
15
32
16
29
59
20
16
11
25
35
10
21
16
23
22
P/E
1995
36
13
13
30
34
14
23
27
25
12
31
18
11
17
12
26
20
7
 Motilal Oswal Financial Services
25th Annual Wealth Creation Study, 2020
Top companies in 1995 which did not make it to the Wealth Creators list
Almost 60 of the top 100 market cap companies in 1995 did not make it to the Wealth
Creators list, as their return CAGR was lower than that of the Sensex (9.2%).
Below are the top 25 among them.
Top 25 companies in 1995 whose 25-year return CAGR was lower than that of the Sensex (9.2%)
Market Cap
Rank in 1995-2020 CAGR
Company
1995
Price
PAT
SAIL
1
-2%
3%
MTNL
3
-13%
0%
Tata Steel
6
3%
P to L
HPCL
8
6%
9%
Tata Motors
10
1%
P to L
Tata Comm
11
0%
P to L
Colgate-Palmolive
13
8%
11%
Hindalco Inds.
16
3%
11%
Grasim Inds
17
7%
12%
Tata Chemicals
18
3%
6%
Castrol India
19
4%
10%
ACC
20
6%
10%
BHEL
21
4%
P to L
Note:
P to L stands for Profit to Loss
Market Cap
Rank in
1995
23
24
26
28
32
33
36
37
38
39
41
42
1995-2020 CAGR
Price
PAT
-16%
P to L
4%
4%
2%
5%
-3%
0%
7%
7%
-10%
8%
9%
10%
9%
14%
-13%
-5%
-12%
P to L
6%
-2%
-5%
-5%
Company
JCT
Century Textiles
Indian Hotels
MRPL
Ashok Leyland
Reliance Infra
Tata Consumer
Ambuja Cements
Standard Battery
Reliance Capital
GE Shipping
Tata Power
Interesting data points over 25 years
Market Cap & PAT Mix between companies in 1995 and new listings post 1995
Around 50% of both current market cap and profits is by new listings post 1995. Clearly, the future
holds a lot of promise.
INR billion
Market Cap
Base companies
New companies
Mix
Base companies
New companies
Profit After Tax
Base companies
New companies
Mix
Base companies
New companies
1995
3,080
3,080
0
100%
-
166
166
0
100%
-
2000
7,527
5,003
2,525
66%
34%
273
160
114
58%
42%
2005
15,497
7,980
7,517
51%
49%
1,166
604
562
52%
48%
2010
58,398
26,695
31,704
46%
54%
3,023
1,352
1,671
45%
55%
2015
98,743
47,930
50,813
49%
51%
3,652
1,704
1,948
47%
53%
2020
1,12,507
53,726
58,781
48%
52%
4,226
2,248
1,978
53%
47%
December 2020
8
 Motilal Oswal Financial Services
25th Annual Wealth Creation Study, 2020
25 Most Profitable Companies (measured by Average RoE)
21 of 25 most profitable companies are consumer-facing. In the long run, amidst massive change,
consumer and consumer behavior are the most predictable elements.
1995-2020
Avg RoE
68%
62%
61%
56%
41%
36%
32%
32%
30%
1995-2020
Avg RoE
30%
29%
29%
28%
26%
24%
24%
24%
24%
1995-2020
Company
Avg RoE
Glaxo Pharma
23%
Foseco India
23%
Berger Paints
23%
Coromandel Intl
23%
Navneet Education
23%
Monsanto India
23%
Pidilite Inds
23%
Company
Hindustan Unilever
Nestle India
Colgate-Palmolive
Castrol India
Hero Motocorp
P&G Hygiene
Dabur India
VST Industries
Asian Paints
Company
Infosys
Abbott India
Britannia Inds
CRISIL
ITC
Titan Company
Sun Pharma
Motherson Sumi
Torrent Pharma
25 Companies with highest PAT CAGR
Time is the friend of good companies and enemy of bad companies. In 25 years, successful
companies grow to unimaginable levels. For instance, Infosys’s 1995 PAT was INR 0.13 billion,
which is now at INR 164 billion. This is a 33% CAGR or 1,256 times in 25 years.
1995-2020 PAT
CAGR
Multiple
33%
1,256
29%
565
27%
360
26%
321
26%
314
25%
242
23%
184
23%
173
22%
155
22%
147
22%
142
22%
135
21%
119
1995-2020 PAT
CAGR
Multiple
21%
119
21%
111
20%
105
20%
103
20%
94
20%
94
20%
92
20%
89
20%
87
19%
83
19%
80
19%
80
Company
Infosys
Vedanta
Motherson Sumi
Bata India
Bajaj Finance
Mphasis
Sun Pharma
Eicher Motors
Hero Motocorp
HDFC
Honeywell Auto
Kotak Mahindra Bank
Bharat Electronics
Company
Jubilant Life
Balkrishna Inds
Hind. Oil Exploration
Amara Raja Batt.
Mah. Seamless
Berger Paints
Pidilite Inds
Bombay Burmah
Britannia Inds.
Hindustan Zinc
Kalpataru Power
Supreme Petrochem
25 Companies with biggest increase in PAT
(INR bn)
Company
Reliance Industries
HDFC
Infosys
State Bank of India
ITC
Larsen & Toubro
Kotak Mahindra
Vedanta
Hindustan Unilever
Hindustan Zinc
Bajaj Finance
Grasim Inds
Sun Pharma
December 2020
1995-2020
Incr. in PAT
418
213
164
156
152
93
85
70
67
66
52
51
39
% of
FY20 PAT
97.6%
99.3%
99.9%
95.6%
98.6%
97.1%
99.3%
99.8%
97.3%
98.8%
99.7%
94.5%
99.5%
(INR bn)
Company
BPCL
Hindalco Inds
HPCL
Hero Motocorp
Bajaj Holdings
Asian Paints
LIC Housing
Ambuja Cements
Dr Reddy's Labs
Nestle India
Eicher Motors
Bharat Electronics
1995-2020
Incr. in PAT
39
36
30
30
27
27
24
20
20
19
18
18
% of
FY20 PAT
93.1%
92.6%
88.5%
99.4%
90.0%
98.4%
98.3%
96.4%
98.1%
97.9%
99.4%
99.2%
9
 Motilal Oswal Financial Services
25th Annual Wealth Creation Study, 2020
25 Companies with highest Sales CAGR
What was true about change in PAT is equally true for change in Sales. Infosys tops the list again
with Sales CAGR of 34% i.e. 1,638 times in 25 years.
1995-2020 Sales
CAGR
Multiple
34%
1,638
32%
1,074
30%
701
29%
638
27%
409
27%
406
27%
389
27%
366
26%
296
25%
247
25%
243
24%
227
24%
200
1995-2020 Sales
CAGR
Multiple
23%
177
23%
170
22%
159
22%
154
22%
139
22%
138
21%
129
21%
124
21%
112
20%
99
20%
97
20%
97
Company
Infosys
Motherson Sumi
Mphasis
Bajaj Finance
Vedanta
Sun Pharma
Lupin
Dewan Housing
HDFC
Max Financial
Amara Raja Batt.
Kalpataru Power
Thomas Cook (I)
Company
Zee Entertainment
Reliance Capital
Sundaram Clayton
Reliance Industries
Bombay Burmah
CRISIL
Kotak Mahindra Bank
Hindalco Inds
Cholaman.Inv.&Fn
Rain Industries
Dr Reddy's Labs
Piramal Enterprises
25 Companies with biggest increase in Sales
(INR bn)
Company
Reliance Industries
BPCL
HPCL
Tata Motors
Larsen & Toubro
Tata Steel
Hindalco Inds.
State Bank of India
M&M
Infosys
Vedanta
Grasim Inds
HDFC
1995-2020
Incr. in Sales
5,929
2,775
2,597
2,561
1,424
1,356
1,172
1,048
935
907
842
756
694
% of
FY20 Sales
99.4%
97.5%
96.5%
98.1%
97.9%
97.0%
99.2%
96.4%
98.2%
99.9%
99.8%
97.3%
99.7%
(INR bn)
Company
Motherson Sumi
MRPL
SAIL
ITC
Adani Enterp.
Hindustan Unilever
CPCL
Sun Pharma
Hero Motocorp
Tata Power
Ambuja Cements
Ashok Leyland
1995-2020
Incr. in Sales
635
502
491
470
428
370
349
328
288
281
267
211
% of
FY20 Sales
99.9%
100.0%
79.6%
95.2%
98.5%
92.9%
93.6%
99.8%
98.4%
96.5%
98.6%
93.9%
25 Fastest Book Value Growth Companies
Company
Infosys
Motherson Sumi
Sun Pharma
Eicher Motors
Larsen & Toubro
Lupin
Hero Motocorp
Amara Raja Batt.
Mphasis
1995-2020
BV CAGR
31%
28%
26%
25%
24%
24%
23%
23%
23%
Company
Cipla
Adani Enterprises
Rain Industries
Kotak Mahindra
Bajaj Finance
Sundaram Clayton
Balkrishna Inds
Shree Cement
Honeywell Auto
1995-2020
BV CAGR
23%
23%
21%
21%
21%
21%
20%
20%
20%
Company
Mah. Scooters
MRF
HDFC
Timken India
Asahi India Glass
ITC
Mah. Seamless
1995-2020
BV CAGR
20%
20%
19%
19%
19%
19%
19%
December 2020
10
 Motilal Oswal Financial Services
25th Annual Wealth Creation Study, 2020
25 Highest Cumulative PAT Companies (INR bn)
1995-2020
Company
Sum of PAT
Reliance Industries
3,784
State Bank of India
1,727
Infosys
1,520
ITC
1,206
HDFC
1,204
Hindustan Zinc
882
Tata Motors
859
Larsen & Toubro
752
BPCL
679
1995-2020
Company
Sum of PAT
Hindustan Unilever
611
HPCL
518
SAIL
487
Sun Pharma
469
Kotak Mahindra
460
Hindalco Inds.
456
BHEL
449
M&M
448
Grasim Inds
413
Company
Vedanta
Tata Steel
Sterlite Inds.
Hero Motocorp
Bajaj Holdings
Reliance Infra
Ambuja Cements
1995-2020
Sum of PAT
397
395
385
354
327
222
209
25 Highest Cumulative Dividend Companies (INR bn)
1995-2020
Company
Sum of Divd
ITC
708
Infosys
633
Hindustan Zinc
503
Hindustan Unilever
498
Reliance Industries
457
HDFC
312
Vedanta
271
BPCL
262
State Bank of India
260
1995-2020
Company
Sum of Divd
Hero Motocorp
206
Larsen & Toubro
206
HPCL
179
Tata Steel
176
SAIL
124
BHEL
118
M&M
99
Nestle India
83
Asian Paints
83
Company
Tata Motors
Ambuja Cements
Sun Pharma
ACC
Castrol India
Bajaj Holdings
Tata Comm
1995-2020
Sum of Divd
82
76
68
66
65
64
64
25 Biggest Capex Companies measured by increase in Gross Block (INR bn)
1995-2020
Company
Incr. in GB
Reliance Industries
7,385
Tata Motors
2,686
Tata Steel
1,934
Vedanta
1,398
Hindalco Inds
1,383
Grasim Inds
990
SAIL
984
BPCL
716
M&M
680
Company
State Bank of India
Tata Power Co.
HPCL
Tata Steel BSL
Larsen & Toubro
Infosys
Sun Pharma
Tata Comm
Motherson Sumi
1995-2020
Incr. in GB
664
660
604
564
510
389
351
346
307
Company
Reliance Infra
Hindustan Zinc
ITC
CESC
MRPL
Ambuja Cements
Apollo Tyres
1995-2020
Incr. in GB
288
285
272
262
254
250
240
25 Companies with Highest Increase in Debt (INR bn)
1995-2020
Company
Incr. in Debt
Reliance Industries
3,522
Larsen & Toubro
1,411
Tata Motors
1,236
Tata Steel
1,128
Grasim Inds
829
M&M
822
Hindalco Inds
680
BPCL
651
Vedanta
591
1995-2020
Company
Incr. in Debt
Tata Power
475
HPCL
434
Piramal Enterprises
421
SAIL
419
Ashok Leyland
218
Tata Steel BSL
166
Reliance Infra
162
MRPL
159
Aban Offshore
156
1995-2020
Company
Incr. in Debt
Motherson Sumi
131
CESC
127
Adani Enterprises
124
Tata Comm
122
Sundaram Clayton
120
Chambal Fertilisers
88
Sun Pharma
83
December 2020
11
 Motilal Oswal Financial Services
25th Annual Wealth Creation Study, 2020
1995-2020 Rank Analysis
In our 2015 Wealth Creation Study, we called large, mid and small cap stocks as
Mega, Mid
and
Mini,
defined as under:
Mega –
Top 100 stocks by market cap rank for any given year
Mid
–
Next 150 stocks by market cap rank
Mini –
All stocks below the top 250 ranks.
Market cap ranks of companies change constantly. Over time, companies also cross over from
one category to another. For the period 1995-20, the market cap ranks crossover matrix stands
as given below.
1995-2020: Market cap rank crossovers: Number of companies and average returns
FROM (in 1995)
Mini
Mid
Mega
TO (in 2020)
Mega
Avg Return
4
24%
10
21%
32
13%
Mid
Avg Return
16
18%
22
12%
20
7%
Mini
Avg Return
911
0%
99
-1%
45
-3%
How to read the table
FIRST COLUMN:
— Over1995-20, 4 Minis moved to the Mega category, delivering 34% return CAGR
— 16 Minis moved to Mid by 2020, (21% return CAGR).
— 911 Mini companies stayed as Mini (0% return CAGR).
SECOND COLUMN:
— 10 Mids moved to Mega by 2020 (21% return CAGR)
— 22 Mids stayed as Mid (12% return CAGR).
— 99 Mids slipped to Mini (-1% return CAGR).
THIRD COLUMN:
— Of the 100 Mega companies in 1995, only 32 stayed as Mega in 2020 (13% return CAGR).
— 20 slipped to Mid (7% return CAGR)
— A high 45 slipped to Mini (-3% return CAGR).
Note:
During the 1995-2020 period, Sensex return was 9.2%.
December 2020
12
 Motilal Oswal Financial Services
25th Annual Wealth Creation Study, 2020
We present the major positive crossovers below.
Mini to Mega (4 companies; 24% return CAGR)
Rank
Mar-20 Mar-95
52
388
47
450
95
439
70
1001
1995-2020 CAGR
Price
PAT
25%
23%
24%
20%
24%
22%
23%
28%
24%
Mkt Cap (INR bn)
Mar-20 Mar-95
357
1
483
1
229
1
300
0.2
P/E
Mar-20 Mar-95
20
10
75
12
47
24
41
12
Company
Eicher Motors
Berger Paints
Honeywell Auto
Havells India
AVERAGE
Mini to Mid (16 companies; 18% return CAGR)
Rank
Company
Mar-20 Mar-95
Vinati Organics
216
1065
Motherson Sumi
111
432
Balkrishna Inds
136
376
Coromandel Intl
128
324
CRISIL
195
452
Aarti Industries
148
377
Amara Raja Batt.
211
528
Astrazeneca
244
437
TTK Prestige
228
400
Apollo Hospitals
130
681
Mphasis
153
458
Exide Inds
167
286
Johnson Controls
245
735
Schaeffler India
165
300
Shriram Transport
140
987
Cholaman.Inv.&Fn
152
481
AVERAGE
1995-2020 CAGR
Price
PAT
28%
24%
23%
27%
22%
21%
20%
19%
20%
18%
20%
18%
19%
20%
19%
10%
18%
13%
18%
17%
16%
25%
16%
19%
16%
14%
15%
16%
13%
25%
10%
18%
18%
Mkt Cap (INR bn)
Mar-20 Mar-95
79
0.2
193
1
153
1
159
1
91
1
133
1
82
1
60
1
68
1
158
0.4
124
1
112
2
58
0.3
116
1
150
0.2
125
1
P/E
Mar-20 Mar-95
24
10
17
26
19
15
15
9
27
14
25
12
13
10
83
14
35
11
49
6
10
16
14
14
69
9
31
18
6
2
12
4
Mid to Mega (10 companies; 21% return CAGR)
Rank
Mar-20 Mar-95
6
156
32
202
37
250
25
153
15
212
81
241
100
222
66
119
63
123
96
107
1995-2020 CAGR
Price
PAT
30%
33%
25%
20%
25%
19%
23%
23%
23%
26%
20%
P to L
20%
22%
19%
22%
18%
13%
12%
14%
21%
Mkt Cap (INR bn)
Mar-20 Mar-95
2,727
3
689
3
634
2
845
3
1,333
2
267
2
213
2
318
4
328
4
229
5
P/E
Mar-20 Mar-95
17
26
60
20
41
9
21
16
25
14
-
34
66
106
11
23
55
16
47
28
Company
Infosys
Pidilite Inds
Shree Cement
Sun Pharma
Bajaj Finance
Lupin
3M India
Hero Motocorp
Abbott India
Whirlpool India
AVERAGE
December 2020
13
 Motilal Oswal Financial Services
25th Annual Wealth Creation Study, 2020
Stock Markets over 25 years – Key indicators
Sector profitability low for the last 8 years
Most businesses are cyclical in character. As is said, a rising tide lifts all boats. Most sectors
do well when the economy is on the upswing. Thus, at the peak of the economic boom in
2007, 29 of 37 sectors recorded RoE>13%. However, for the last 7 years, that number is down
to between 7 and 11.
Only 3 sectors –
Consumer/Retail, IT
and
Paints
– maintained RoE>13% for each of the last
25 years.
Sector profitability low for the last 8 years
Sector Mix by RoE
11 11
18 19
26
27
23
22
29 28
Sectors with RoE > 13%
8
16
14
Sectors with RoE <= 13%
11
20
17
15
20
24 26 26
30
27 27
26
27
26 26
29
19
18
11
10
21 23
14
8
15
9
26
17
20
22
17
13
11 11
7
10 10
11
10
Corporate Profit to GDP at all-time lows
We seem to have hit the bottom in corporate profits. Corporate Profit to GDP has stagnated for
the last 5 years. This is similar to 1999 to 2003, after which corporate profits took off for the next
5 years.
Corporate Profit to GDP at all-time lows
Corp Profit to GDP (%)
3.9
3.3
4.2
5.2
5.7
4.6
5.0
4.9
4.4
3.7
3.5
3.1
Long-period avg:
3.2%
2.6
2.9
2.8
2.5 2.6
2.2 2.1
2.5
1.9 1.7
1.6 1.7
2.3
2.3
December 2020
14
 Motilal Oswal Financial Services
25th Annual Wealth Creation Study, 2020
Sensex EPS is near flat FY14 through FY20
FY95-98:
17% CAGR
Sensex CAGR:
6%
FY98-03:
–1% CAGR
Sensex CAGR:
-5%
FY03-08:
25% CAGR
Sensex CAGR:
39%
FY95-20:
9% CAGR
FY08-14:
8% CAGR
Sensex CAGR:
6%
FY14-20:
2% CAGR
Sensex
CAGR: 5%
Interest rates are softening
Permanent change in long-term interest rate band (from 12-14% to 6-8%) is leading to change in
valuation expectations. Current valuations are supported by expected PAT revival after 5 years
of stagnation and high liquidity led by low interest rates.
Interest rates are softening
16
14
12
10-year G-Sec yield (%)
10
8
6
4
2
0
Falling interest rate is driving up valuations to well above long-period average
30
25
20
15
27
Sensex P/E
Long-period avg:
18x
10
5
0
December 2020
15
 Motilal Oswal Financial Services
25th Annual Wealth Creation Study, 2020
Market Cap to GDP close to all-time high
Valuations are frothy with market cap around 100% of GDP.
Market Cap to GDP well above long-period average
Market Cap to GDP (%)
Long-period average:
60%
42
43
33
45
82 83
103
95
100
88
81
71
79 83 79
69
64
66
36
42
26
26
23
30
52
55
56
Market outlook
In the near term, expect the market to track nominal GDP growth of 10-12%.
25-for-25
A logical approach to shortlist 25 stocks for the next 25 years
Having studied how wealth got created in the last 25 years, we thought it an interesting idea to
attempt shortlisting 25 stocks likely to deliver handsome returns over the next 25 years.
We describe the approach below and stick our neck out with the names.
The 25-for-25 approach
Step 1: Observe the top 25 Wealth Creators of the last 25 years
Our observations here are follows. Almost all companies …
Were small to mid in size in the base year 1995
Were consumer-facing, bestowing them a secular business model
Were very profitable (average base RoE was a robust 17%)
Grew to emerge as market leaders (among top 3) in their respective business
Had management with high integrity and competence.
Step 2: Build a portfolio of the potential 25 Wealth Creators for the next 25 years
Based on the learnings above, we used a logical approach to build a portfolio of 25 stocks which
are potential Wealth Creators over the next 25 years.
1.
SIZE:
We started with a list of 150 midcaps i.e. companies ranked 101 to 250 by current
market cap.
2.
BUSINESS MODEL:
We preferred consumer-facing companies with secular business models.
So we eliminated cyclical businesses like Auto ancillaries, Capital Goods, Chemicals, Oil & Gas
and Realty. This reduced the list of companies from 150 to 114.
December 2020
16
 Motilal Oswal Financial Services
25th Annual Wealth Creation Study, 2020
3.
VERY PROFITABLE:
To ensure this, we chose companies with last 5-year average RoE greater
than 15%. This reduced the list from 114 to 63.
4.
BUSINESS POTENTIAL & MANAGEMENT POTENTIAL:
Next, to the best of our ability, we
judged the business potential and management potential of the companies, and selected
only those which qualified on both counts. This reduced the list from 63 to 28.
5.
MARKET LEADERSHIP:
We selected market leaders from the 28 companies to arrive at a list
of 13 companies.
6.
VALUE MIGRATION:
We have observed that in situations of Value Migration (see page 63),
all companies benefit irrespective of market leadership. So, of the 28 in Point 4, we selected
5 beneficiaries of Value Migration, taking the total list of shortlisted stocks to 18.
7.
LARGE CAPS FOR FINANCIALS:
We believe Financial Services is quite a risky business, and
here size begets size. So, we mainly resorted to large caps for financials, and roped in 6 leader
names for the portfolio, taking the total to 24.
8.
DIGITAL PLAY:
Finally, we opted for a pure digital play, even if it didn’t meet some of the
above filters, taking the total to 25.
9.
VALUATION:
We believe in the very long run, valuations matter less. So we ignored the same
in the shortlisting process.
We present the “25-for-25” stocks below.
The 25 for 25 stocks
1
2
3
4
5
6
7
8
9
Ajanta Pharma
Alembic Pharma
Astral Poly Tech
AU Small Finance
Bajaj Finance
Bata India
Bayer Crop Science
Coromandel International
Dixon Technologies
10
11
12
13
14
15
16
17
18
Dr Lal Pathlabs
HDFC AMC
HDFC Bank
HDFC Life Insurance
Honeywell Auto
ICICI Lombard
ICICI Securities
Indiamart Intermesh
Max Financial
19
20
21
22
23
24
25
Mphasis
Muthoot Finance
P&G Health
Page Industries
Syngene International
Varun Beverages
Whirlpool India
IMPORTANT DISCLAIMER:
The stocks mentioned above are used to explain the concept only, and should not be used
for development or implementation of any investment strategy. The same should not be construed as investment
advice to any party. Motilal Oswal Group and its associates may have financial interest in some or all of the companies
named here.
1995-2020: Closing observations
Time is a friend of good companies and enemy of bad companies. In 25 years, successful
companies grow to unimaginable levels in sales, profits and market cap.
Sustained Wealth Creation is a challenge. Of the top 500 companies listed in 1995, only 100
companies have outperformed the benchmark.
Stock returns are slaves of earnings power and growth. In the very long run, valuations matter
less.
The future always holds a lot more promise. Over 50% of current market cap is made up of
listings post 1995.
December 2020
17
 Motilal Oswal Financial Services
25th Annual Wealth Creation Study, 2020
APPENDIX 1: Fastest Wealth Creators – 1995 to 2020
Note: NWC: Net Wealth Created; P to L: Profit to Loss; L to P: Loss to Profit; NM: Not Meaningful
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
Rank
Company
Infosys
Pidilite Inds
Eicher Motors
Shree Cement
Berger Paints
Honeywell Auto
Sun Pharma
Bajaj Finance
Motherson Sumi
Britannia Inds
Asian Paints
Balkrishna Inds
Titan Company
Kotak Mahindra Bank
Lupin
Coromandel Intl
CRISIL
3M India
Aarti Industries
Dabur India
Amara Raja Batteries
HDFC
Hindustan Zinc
Hero Motocorp
Kansai Nerolac
Astrazeneca Pharma
TTK Prestige
Nestle India
Torrent Pharma
Abbott India
Voltas
P&G Hygiene
Reliance Industries
Hindustan Unilever
Mphasis
Can Fin Homes
Ipca Labs
Grindwell Norton
Asahi India Glass
Exide Inds
Atul
Dr Reddy's Labs
Adani Enterprises
Schaeffler India
Carborundum Univ.
Larsen & Toubro
Blue Star
MRF
Sundaram Clayton
Trent
Company
25-year Price
Multiple
CAGR
30%
688
25%
258
25%
255
25%
240
24%
239
24%
219
23%
180
23%
172
23%
161
22%
142
22%
139
22%
136
22%
135
21%
117
20%
103
20%
101
20%
97
20%
96
20%
95
20%
93
19%
84
19%
82
19%
74
19%
71
19%
71
19%
70
18%
69
18%
68
18%
61
18%
57
17%
49
17%
49
16%
42
16%
41
16%
41
16%
40
16%
40
16%
40
16%
39
16%
38
16%
37
15%
37
15%
35
15%
34
14%
28
14%
28
14%
28
14%
28
14%
27
14%
27
25-year Price
Multiple
CAGR
25-year
PAT CAGR
33%
20%
23%
19%
20%
22%
23%
26%
27%
20%
18%
21%
18%
22%
P to L
19%
18%
22%
18%
19%
20%
22%
19%
22%
16%
10%
13%
17%
16%
13%
14%
15%
16%
16%
25%
15%
15%
14%
15%
19%
16%
17%
16%
16%
13%
15%
11%
18%
15%
11%
25-year
PAT CAGR
NWC
(INR bn)
2,700
686
355
608
480
228
828
1,162
163
640
1,586
152
821
2,293
255
156
88
211
124
783
81
2,475
642
314
205
59
67
1,549
328
324
156
332
6,307
4,893
121
34
171
49
35
102
116
504
138
113
40
998
41
238
27
148
NWC
(INR bn)
Mkt Cap (INR bn)
2020
1995
2,727
3
689
3
357
1
634
2
483
1
229
1
845
3
1,333
2
193
1
647
5
1,599
11
153
1
829
6
2,480
9
267
2
159
1
91
1
213
2
133
1
796
8
82
1
2,824
20
656
9
318
4
208
2
60
1
68
1
1,572
23
334
5
328
4
158
3
339
7
7,052
120
4,975
82
124
1
37
1
175
4
51
1
38
1
112
2
118
2
518
9
151
3
116
1
42
2
1,133
59
44
2
247
9
30
2
170
2
Mkt Cap (INR bn)
2020
1995
P/E (x)
2020
1995
17
26
60
20
20
10
41
9
75
12
47
24
21
16
25
14
17
26
46
32
59
27
19
15
55
24
29
14
-
34
15
9
27
14
66
106
25
12
52
42
13
10
13
14
10
11
11
23
40
18
83
14
35
11
80
57
33
23
55
16
29
16
78
50
16
12
72
44
10
16
10
7
29
23
30
14
25
15
14
14
18
15
26
23
16
12
31
18
15
13
12
21
31
15
17
43
8
17
154
33
P/E (x)
2020
1995
RoE
2020
25%
26%
18%
12%
24%
23%
9%
16%
10%
32%
27%
16%
23%
13%
-4%
25%
29%
18%
18%
23%
18%
17%
17%
21%
14%
20%
15%
102%
21%
24%
13%
38%
9%
84%
20%
17%
16%
14%
12%
12%
21%
13%
6%
12%
14%
14%
19%
12%
15%
5%
RoE
2020
1995
21%
13%
42%
24%
20%
19%
23%
19%
21%
19%
26%
16%
18%
26%
15%
10%
24%
8%
23%
14%
49%
17%
10%
26%
25%
36%
13%
18%
21%
75%
12%
12%
14%
26%
55%
23%
18%
19%
36%
10%
10%
16%
35%
18%
15%
13%
18%
15%
14%
21%
1995
December 2020
18
 Motilal Oswal Financial Services
25th Annual Wealth Creation Study, 2020
APPENDIX 1: Fastest Wealth Creators – 1995 to 2020 (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
ITC
Supreme Inds
Chola Financial
Cipla
Kajaria Ceramics
Bata India
Blue Dart Express
Gillette India
SRF
Siemens
Pfizer
Kalpataru Power
Godrej Industries
Sanofi India
J B Chem & Pharma
P&G Health
Bharat Forge
LIC Housing Finance
Zensar Tech
Whirlpool India
Bharat Electronics
Godfrey Phillips
Bosch
Sudarshan Chem
Akzo Nobel
Venky's (India)
Piramal Enterprises
M&M
Bombay Burmah
BPCL
Esab India
Nirlon
Elgi Equipments
Cholaman.Inv.&Fn
Navneet Education
State Bank of India
The Ramco Cement
Jubilant Life
ABB
Zee Entertainment
Bayer Crop Science
Timken India
EPL
Sundram Fasteners
Glaxo Pharma
Mah. Scooters
VIP Industries
VST Industries
Garware Technical
Max Financial
AGGREGATE
25-year Price
Multiple
CAGR
14%
27
14%
26
14%
25
14%
25
14%
25
14%
24
14%
24
14%
24
14%
24
13%
23
13%
23
13%
21
13%
21
13%
20
13%
19
12%
18
12%
18
12%
18
12%
17
12%
17
12%
16
12%
16
12%
16
11%
15
11%
15
11%
14
11%
14
11%
13
11%
13
11%
13
11%
13
11%
13
11%
12
10%
12
10%
12
10%
12
10%
12
10%
12
10%
12
10%
12
10%
12
10%
11
10%
11
10%
11
10%
11
10%
11
10%
11
10%
10
10%
10
10%
10
53
17%
25-year Price
Multiple
CAGR
25-year
PAT CAGR
18%
14%
13%
18%
13%
26%
-7%
16%
17%
15%
18%
19%
10%
14%
14%
13%
12%
18%
L to P
0%
21%
10%
15%
14%
9%
P to L
0%
P to L
20%
11%
13%
L to P
8%
18%
15%
13%
10%
21%
8%
15%
16%
L to P
12%
11%
7%
12%
13%
11%
9%
12%
17%
25-year
PAT CAGR
NWC
Mkt Cap (INR bn)
(INR bn)
2020
1995
1,945
2,114
69
107
110
3
30
54
4
312
341
12
56
60
2
154
158
4
50
52
2
175
178
3
157
160
3
380
396
15
166
184
4
19
28
1
79
95
8
137
144
7
37
39
2
57
60
3
99
109
4
97
119
5
18
19
1
223
229
5
168
181
12
46
49
3
255
278
22
24
26
2
94
100
6
11
12
1
109
212
7
313
354
17
47
51
4
621
686
44
15
17
1
19
22
1
16
18
1
95
125
1
13
14
1
901
1,758
83
111
121
10
32
40
2
179
198
19
114
119
4
149
155
5
48
57
4
45
49
3
56
61
5
196
211
13
21
23
2
32
34
1
39
43
4
21
23
1
96
104
3
43,115
46,729
887
NWC
(INR bn)
Mkt Cap (INR bn)
2020
1995
P/E (x)
2020
1995
14
31
24
20
10
14
23
47
23
16
48
362
NM
18
77
56
16
14
37
42
36
48
7
14
20
18
32
46
15
16
35
39
29
18
5
12
8
-29
47
0
10
78
15
10
25
69
20
35
42
22
-
12
866
26
-1
15
9
54
16
15
23
35
20
-
42
16
12
4
7
14
11
12
20
20
4
23
57
38
19
20
27
35
23
-
23
19
19
23
147
55
13
18
23
18
14
18
17
8
72
33
22
20
P/E (x)
2020
1995
RoE
2020
24%
21%
12%
9%
15%
17%
0%
25%
20%
12%
15%
12%
8%
19%
18%
19%
7%
13%
12%
19%
18%
15%
12%
22%
19%
-3%
0%
-1%
12%
11%
21%
24%
6%
13%
23%
6%
12%
17%
10%
7%
22%
16%
14%
16%
8%
2%
24%
39%
19%
7%
12%
1995
26%
15%
10%
26%
23%
1%
17%
11%
7%
13%
18%
18%
16%
12%
24%
21%
10%
16%
-9%
0%
5%
39%
17%
9%
13%
16%
13%
14%
7%
21%
11%
-29%
20%
15%
27%
15%
38%
9%
22%
34%
23%
-70%
23%
41%
0%
13%
13%
23%
28%
22%
16%
Rank Company
RoE
2020
1995
19
December 2020
 Motilal Oswal Financial Services
25th Annual Wealth Creation Study, 2020
APPENDIX 2: Biggest Wealth Creators – 1995 to 2020
Note: NWC: Net Wealth Created; P to L: Profit to Loss; L to P: Loss to Profit
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
Rank
Company
Reliance Industries
Hindustan Unilever
Infosys
HDFC
Kotak Mahindra Bank
ITC
Asian Paints
Nestle India
Bajaj Finance
Larsen & Toubro
State Bank of India
Sun Pharma
Titan Company
Dabur India
Pidilite Inds
Hindustan Zinc
Britannia Inds
BPCL
Shree Cement
Dr Reddy's Labs
Berger Paints
Siemens
Eicher Motors
P&G Hygiene
Torrent Pharma
Abbott India
Hero Motocorp
M&M
Cipla
Lupin
Bosch
MRF
Honeywell Auto
Whirlpool India
3M India
Kansai Nerolac
Glaxo Pharma
ABB
Gillette India
Ipca Labs
Bharat Electronics
Pfizer
Motherson Sumi
SRF
Coromandel Intl
Voltas
Bata India
Balkrishna Inds
Bayer Crop Science
Trent
Company
NWC
(INR bn)
6,307
4,893
2,700
2,475
2,293
1,945
1,586
1,549
1,162
998
901
828
821
783
686
642
640
621
608
504
480
380
355
332
328
324
314
313
312
255
255
238
228
223
211
205
196
179
175
171
168
166
163
157
156
156
154
152
149
148
NWC
(INR bn)
25-year
25-year
Price CAGR PAT CAGR
16%
16%
16%
16%
30%
33%
19%
22%
21%
22%
14%
18%
22%
18%
18%
17%
23%
26%
14%
15%
10%
13%
23%
23%
22%
18%
20%
19%
25%
20%
19%
19%
22%
20%
11%
11%
25%
19%
15%
17%
24%
20%
13%
15%
25%
23%
17%
15%
18%
16%
18%
13%
19%
22%
11%
P to L
14%
18%
20%
P to L
12%
15%
14%
18%
24%
22%
12%
0%
20%
22%
19%
16%
10%
7%
10%
8%
14%
16%
16%
15%
12%
21%
13%
18%
23%
27%
14%
17%
20%
19%
17%
14%
14%
26%
22%
21%
10%
16%
14%
11%
25-year
25-year
Price CAGR PAT CAGR
Market Cap (INR bn)
2020
1995
7,052
120
4,975
82
2,727
3
2,824
20
2,480
9
2,114
69
1,599
11
1,572
23
1,333
2
1,133
59
1,758
83
845
3
829
6
796
8
689
3
656
9
647
5
686
44
634
2
518
9
483
1
396
15
357
1
339
7
334
5
328
4
318
4
354
17
341
12
267
2
278
22
247
9
229
1
229
5
213
2
208
2
211
13
198
19
178
3
175
4
181
12
184
4
193
1
160
3
159
1
158
3
158
4
153
1
155
5
170
2
Market Cap (INR bn)
2020
1995
P/E (x)
2020
1995
16
12
72
44
17
26
13
14
29
14
14
31
59
27
80
57
25
14
12
21
11
12
21
16
55
24
52
42
60
20
10
11
46
32
16
15
41
9
26
23
75
12
37
42
20
10
78
50
33
23
55
16
11
23
-
15
23
47
-
34
25
69
17
43
47
24
47
0
66
106
40
18
147
55
57
38
77
56
29
23
10
78
36
48
17
26
16
14
15
9
29
16
48
362
19
15
27
35
154
33
P/E (x)
2020
1995
RoE
2020
9%
84%
25%
17%
13%
24%
27%
102%
16%
14%
6%
9%
23%
23%
26%
17%
32%
11%
12%
13%
24%
12%
18%
38%
21%
24%
21%
-1%
9%
-4%
12%
12%
23%
19%
18%
14%
8%
10%
25%
16%
18%
15%
10%
20%
25%
13%
17%
16%
22%
5%
RoE
2020
1995
1995
14%
26%
21%
17%
26%
26%
26%
18%
19%
13%
15%
23%
18%
14%
13%
10%
19%
21%
24%
16%
20%
13%
42%
12%
21%
75%
26%
14%
26%
15%
17%
15%
19%
0%
8%
25%
0%
22%
11%
18%
5%
18%
21%
7%
10%
12%
1%
16%
23%
21%
December 2020
20
 Motilal Oswal Financial Services
25th Annual Wealth Creation Study, 2020
APPENDIX 2: Biggest Wealth Creators – 1995 to 2020 (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
Adani Enterprises
Sanofi India
Aarti Industries
Mphasis
Atul
Zee Entertainment
Schaeffler India
The Ramco Cement
Piramal Enterprises
Supreme Inds
Exide Inds
Bharat Forge
LIC Housing Finance
Max Financial
Cholaman.Inv.&Fn
Akzo Nobel
CRISIL
Amara Raja Batt.
Godrej Industries
TTK Prestige
Astrazeneca Pharma
P&G Health
Kajaria Ceramics
Sundram Fasteners
Blue Dart Express
Grindwell Norton
Timken India
Bombay Burmah
Godfrey Phillips
EPL
Blue Star
Carborundum Univ.
VST Industries
J B Chem & Pharma
Asahi India Glass
Can Fin Homes
VIP Industries
Jubilant Life
Chola Financial
Sundaram Clayton
Sudarshan Chem
Garware Technical
Mah. Scooters
Nirlon
Kalpataru Power
Zensar Tech
Elgi Equipments
Esab India
Navneet Education
Venky's (India)
AGGREGATE
NWC
(INR bn)
138
137
124
121
116
114
113
111
109
107
102
99
97
96
95
94
88
81
79
67
59
57
56
56
50
49
48
47
46
45
41
40
39
37
35
34
32
32
30
27
24
21
21
19
19
18
16
15
13
11
43,115
NWC
(INR bn)
25-year
25-year
Price CAGR PAT CAGR
15%
16%
13%
14%
20%
18%
16%
25%
16%
16%
10%
15%
15%
16%
10%
10%
11%
0%
14%
14%
16%
19%
12%
12%
12%
18%
10%
12%
10%
18%
11%
9%
20%
18%
19%
20%
13%
10%
18%
13%
19%
10%
12%
13%
14%
13%
10%
11%
14%
-7%
16%
14%
10%
L to P
11%
20%
12%
10%
10%
12%
14%
11%
14%
13%
10%
11%
13%
14%
16%
15%
16%
15%
10%
13%
10%
21%
14%
13%
14%
15%
11%
14%
10%
9%
10%
12%
11%
L to P
13%
19%
12%
L to P
11%
8%
11%
13%
10%
15%
11%
P to L
17%
17%
25-year
25-year
Price CAGR PAT CAGR
Market Cap (INR bn)
2020
1995
151
3
144
7
133
1
124
1
118
2
119
4
116
1
121
10
212
7
110
3
112
2
109
4
119
5
104
3
125
1
100
6
91
1
82
1
95
8
68
1
60
1
60
3
60
2
61
5
52
2
51
1
57
4
51
4
49
3
49
3
44
2
42
2
43
4
39
2
38
1
37
1
34
1
40
2
54
4
30
2
26
2
23
1
23
2
22
1
28
1
19
1
18
1
17
1
14
1
12
1
46,729
887
Market Cap (INR bn)
2020
1995
P/E (x)
2020
1995
16
12
32
46
25
12
10
16
18
15
19
20
31
18
20
20
866
26
24
20
14
14
29
18
5
12
72
33
12
4
42
22
27
14
13
10
20
18
35
11
83
14
35
39
23
16
19
23
NM
18
30
14
23
-
9
54
15
10
23
19
31
15
15
13
14
18
15
16
25
15
10
7
23
18
4
23
10
14
8
17
20
35
17
8
13
18
20
-
7
14
8
-
42
16
23
35
7
14
-
12
22
20
P/E (x)
2020
1995
RoE
2020
6%
19%
18%
20%
21%
7%
12%
12%
0%
21%
12%
7%
13%
7%
13%
19%
29%
18%
8%
15%
20%
19%
15%
16%
0%
14%
16%
12%
15%
14%
19%
14%
39%
18%
12%
17%
24%
17%
12%
15%
22%
19%
2%
24%
12%
12%
6%
21%
23%
-3%
12%
RoE
2020
1995
21
1995
35%
12%
23%
55%
10%
34%
18%
38%
13%
15%
10%
10%
16%
22%
15%
13%
24%
49%
16%
13%
36%
21%
23%
41%
17%
19%
-70%
7%
39%
23%
18%
15%
23%
24%
36%
23%
13%
9%
10%
14%
9%
28%
13%
-29%
18%
-9%
20%
11%
27%
16%
16%
Rank Company
December 2020
 Motilal Oswal Financial Services
25th Annual Wealth Creation Study, 2020
APPENDIX 3: Consistent Wealth Creators – 1995 to 2020
Note: Consistency in the tables here stands for number of 3-year rolling periods from 1995 to 2020, the stock has outperformed the Sensex
Where Consistency is the same, higher the Price CAGR, higher the rank. P to L: Profit to Loss; L to P: Loss to Profit; NM: Not Meaningful
Consistency
25-year
25-year
Rank Company
Count
Price CAGR PAT CAGR
1 Kotak Mahindra. Bank
21
21%
22%
2 Berger Paints
20
24%
20%
3 HDFC
20
19%
22%
4 Pidilite Inds
19
25%
20%
5 Shree Cement
19
25%
19%
6 Honeywell Auto
19
24%
22%
7 Motherson Sumi
19
23%
27%
8 Asian Paints
19
22%
18%
9 Dabur India
19
20%
19%
10 Sun Pharma
18
23%
23%
11 CRISIL
18
20%
18%
12 3M India
18
20%
22%
13 Aarti Industries
18
20%
18%
14 Chola Financial
18
14%
13%
15 Bajaj Finance
17
23%
26%
16 Coromandel Intl
17
20%
19%
17 Astrazeneca Pharma
17
19%
10%
18 Eicher Motors
16
25%
23%
19 Balkrishna Inds
16
22%
21%
20 Titan Company
16
22%
18%
21 Hero Motocorp
16
19%
22%
22 Kansai Nerolac
16
19%
16%
23 Torrent Pharma
16
18%
16%
24 Abbott India
16
18%
13%
25 P&G Hygiene
16
17%
15%
26 Grindwell Norton
16
16%
14%
27 Atul
16
16%
16%
28 The Ramco Cement
16
10%
10%
29 Britannia Inds
15
22%
20%
30 Nestle India
15
18%
17%
31 Voltas
15
17%
14%
32 Reliance Industries
15
16%
16%
33 Hindustan Unilever
15
16%
16%
34 Dr Reddy's Labs
15
15%
17%
35 Adani Enterprises
15
15%
16%
36 Schaeffler India
15
15%
16%
37 Blue Star
15
14%
11%
38 Bata India
15
14%
26%
39 SRF
15
14%
17%
40 Sanofi India
15
13%
14%
41 Godfrey Phillips
15
12%
10%
42 Akzo Nobel
15
11%
9%
43 Piramal Enterprises
15
11%
0%
44 BPCL
15
11%
11%
45 Elgi Equipments
15
11%
8%
46 Lupin
14
20%
P to L
47 Amara Raja Batt.
14
19%
20%
48 Hindustan Zinc
14
19%
19%
49 Can Fin Homes
14
16%
15%
50 Exide Inds
14
16%
19%
Rank Company
Consistency
25-year
25-year
Count
Price CAGR PAT CAGR
December 2020
Market Cap (INR bn)
2020
1995
2,480
9
483
1
2,824
20
689
3
634
2
229
1
193
1
1,599
11
796
8
845
3
91
1
213
2
133
1
54
4
1,333
2
159
1
60
1
357
1
153
1
829
6
318
4
208
2
334
5
328
4
339
7
51
1
118
2
121
10
647
5
1,572
23
158
3
7,052
120
4,975
82
518
9
151
3
116
1
44
2
158
4
160
3
144
7
49
3
100
6
212
7
686
44
18
1
267
2
82
1
656
9
37
1
112
2
Market Cap (INR bn)
2020
1995
P/E (x)
2020
1995
29
14
75
12
13
14
60
20
41
9
47
24
17
26
59
27
52
42
21
16
27
14
66
106
25
12
10
14
25
14
15
9
83
14
20
10
19
15
55
24
11
23
40
18
33
23
55
16
78
50
30
14
18
15
20
20
46
32
80
57
29
16
16
12
72
44
26
23
16
12
31
18
31
15
48
362
16
14
32
46
15
10
42
22
866
26
16
15
42
16
-
34
13
10
10
11
10
7
14
14
P/E (x)
2020
1995
RoE
2020
13%
24%
17%
26%
12%
23%
10%
27%
23%
9%
29%
18%
18%
12%
16%
25%
20%
18%
16%
23%
21%
14%
21%
24%
38%
14%
21%
12%
32%
102%
13%
9%
84%
13%
6%
12%
19%
17%
20%
19%
15%
19%
0%
11%
6%
-4%
18%
17%
17%
12%
RoE
2020
1995
22
1995
26%
20%
17%
13%
24%
19%
21%
26%
14%
23%
24%
8%
23%
10%
19%
10%
36%
42%
16%
18%
26%
25%
21%
75%
12%
19%
10%
38%
19%
18%
12%
14%
26%
16%
35%
18%
18%
1%
7%
12%
39%
13%
13%
21%
20%
15%
49%
10%
23%
10%
 Motilal Oswal Financial Services
25th Annual Wealth Creation Study, 2020
APPENDIX 3: Consistent Wealth Creators – 1995 to 2020 (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
Carborundum Univ.
Trent
ITC
Cipla
Blue Dart Express
Siemens
Pfizer
J B Chem & Pharma
Bosch
M&M
Infosys
TTK Prestige
Mphasis
Ipca Labs
Sundaram Clayton
Gillette India
Bharat Forge
LIC Housing Finance
Bharat Electronics
Nirlon
Cholaman.Inv.&Fn
Zee Entertainment
Bayer Crop Science
Glaxo Pharma
VIP Industries
VST Industries
Asahi India Glass
Larsen & Toubro
MRF
Supreme Inds
Kajaria Ceramics
Zensar Tech
Whirlpool India
Sudarshan Chem
Bombay Burmah
State Bank of India
Timken India
Mah. Scooters
Kalpataru Power
Godrej Industries
P&G Health
Venky's (India)
Esab India
Navneet Education
EPL
Sundram Fasteners
Garware Technical
Max Financial
ABB
Jubilant Life
AGGREGATE
Consistency
25-year
25-year
Count
Price CAGR PAT CAGR
14
14%
13%
14
14%
11%
14
14%
18%
14
14%
18%
14
14%
-7%
14
13%
15%
14
13%
18%
14
13%
14%
14
12%
15%
14
11%
P to L
13
30%
33%
13
18%
13%
13
16%
25%
13
16%
15%
13
14%
15%
13
14%
16%
13
12%
12%
13
12%
18%
13
12%
21%
13
11%
L to P
13
10%
18%
13
10%
15%
13
10%
16%
13
10%
7%
13
10%
13%
13
10%
11%
12
16%
15%
12
14%
15%
12
14%
18%
12
14%
14%
12
14%
13%
12
12%
L to P
12
12%
0%
12
11%
14%
12
11%
20%
12
10%
13%
12
10%
L to P
12
10%
12%
11
13%
19%
11
13%
10%
11
12%
13%
11
11%
P to L
11
11%
13%
11
10%
15%
11
10%
12%
11
10%
11%
11
10%
9%
11
10%
12%
10
10%
8%
9
10%
21%
17%
17%
Consistency
25-year
25-year
Count
Price CAGR PAT CAGR
Market Cap (INR bn)
2020
1995
42
2
170
2
2,114
69
341
12
52
2
396
15
184
4
39
2
278
22
354
17
2,727
3
68
1
124
1
175
4
30
2
178
3
109
4
119
5
181
12
22
1
125
1
119
4
155
5
211
13
34
1
43
4
38
1
1,133
59
247
9
110
3
60
2
19
1
229
5
26
2
51
4
1,758
83
57
4
23
2
28
1
95
8
60
3
12
1
17
1
14
1
49
3
61
5
23
1
104
3
198
19
40
2
46,729
887
Market Cap (INR bn)
2020
1995
P/E (x)
2020
1995
15
13
154
33
14
31
23
47
NM
18
37
42
36
48
15
16
25
69
-
15
17
26
35
11
10
16
29
23
8
17
77
56
29
18
5
12
10
78
20
-
12
4
19
20
27
35
147
55
23
18
14
18
25
15
12
21
17
43
24
20
23
16
8
-
47
0
20
35
9
54
11
12
23
-
13
18
7
14
20
18
35
39
-
12
23
35
7
14
23
19
19
23
17
8
72
33
57
38
4
23
22
20
P/E (x)
2020
1995
RoE
2020
14%
5%
24%
9%
0%
12%
15%
18%
12%
-1%
25%
15%
20%
16%
15%
25%
7%
13%
18%
24%
13%
7%
22%
8%
24%
39%
12%
14%
12%
21%
15%
12%
19%
22%
12%
6%
16%
2%
12%
8%
19%
-3%
21%
23%
14%
16%
19%
7%
10%
17%
12%
RoE
2020
1995
23
1995
15%
21%
26%
26%
17%
13%
18%
24%
17%
14%
21%
13%
55%
18%
14%
11%
10%
16%
5%
-29%
15%
34%
23%
0%
13%
23%
36%
13%
15%
15%
23%
-9%
0%
9%
7%
15%
-70%
13%
18%
16%
21%
16%
11%
27%
23%
41%
28%
22%
22%
9%
16%
Rank Company
December 2020
 Motilal Oswal Financial Services
25th Annual Wealth Creation Study, 2020
APPENDIX 4: All-round Wealth Creators – 1995 to 2020
Note:
Where Total of Ranks is the same, higher the Price CAGR, higher the Rank
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
Rank
Company
Kotak Mahindra Bank
Pidilite Inds
Asian Paints
Shree Cement
Berger Paints
Sun Pharma
HDFC
Bajaj Finance
Dabur India
Eicher Motors
Honeywell Auto
Titan Company
Britannia Inds
Motherson Sumi
Infosys
3M India
Nestle India
Reliance Industries
Hind. Unilever
Hero Motocorp
Coromandel Intl
Torrent Pharma
Balkrishna Inds
Abbott India
P & G Hygiene
Kansai Nerolac
Aarti Industries
Hindustan Zinc
Lupin
CRISIL
Dr Reddy's Labs
Voltas
ITC
Astrazeneca Pharma
Atul
Adani Enterprises
Larsen & Toubro
Amara Raja Batteries
Schaeffler India
Cipla
Siemens
Grindwell Norton
Ipca Labs
Bata India
SRF
BPCL
Exide Industries
Mphasis
Trent
Chola Financial
Company
Fastest
Rank
14
2
11
4
5
7
22
8
20
3
6
13
10
9
1
18
28
33
34
24
16
29
12
30
32
25
19
23
15
17
42
31
51
26
41
43
46
21
44
54
60
38
37
56
59
80
40
35
50
53
Fastest
Rank
Biggest
Rank
5
15
7
19
21
12
4
9
14
23
33
13
17
43
3
35
8
1
2
27
45
25
48
26
24
36
53
16
30
67
20
46
6
71
55
51
10
68
57
29
22
76
40
47
44
18
61
54
50
89
Biggest
Rank
Consistent
Rank
1
4
8
5
2
10
3
15
9
18
6
20
29
7
61
12
30
32
33
21
16
23
19
24
25
22
13
48
46
11
34
31
53
17
27
35
78
47
36
54
56
26
64
38
39
44
50
63
52
14
Consistent
Rank
Total
of Ranks
20
21
26
28
28
29
29
32
43
44
45
46
56
59
65
65
66
66
69
72
77
77
79
80
81
83
85
87
91
95
96
108
110
114
123
129
134
136
137
137
138
140
141
141
142
142
151
152
152
156
Total
of Ranks
1995-2020
Price CAGR
21%
25%
22%
25%
24%
23%
19%
23%
20%
25%
24%
22%
22%
23%
30%
20%
18%
16%
16%
19%
20%
18%
22%
18%
17%
19%
20%
19%
20%
20%
15%
17%
14%
19%
16%
15%
14%
19%
15%
14%
13%
16%
16%
14%
14%
11%
16%
16%
14%
14%
1995-2020
Price CAGR
1995-2020
PAT CAGR
22%
20%
18%
19%
20%
23%
22%
26%
19%
23%
22%
18%
20%
27%
33%
22%
17%
16%
16%
22%
19%
16%
21%
13%
15%
16%
18%
19%
P to L
18%
17%
14%
18%
10%
16%
16%
15%
20%
16%
18%
15%
14%
15%
26%
17%
11%
19%
25%
11%
13%
1995-2020
PAT CAGR
December 2020
24
 Motilal Oswal Financial Services
25th Annual Wealth Creation Study, 2020
APPENDIX 4: All-round Wealth Creators – 1995 to 2020 (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
Rank
Company
Sanofi India
TTK Prestige
MRF
Pfizer
Gillette India
Bosch
Blue Star
M&M
Can Fin Homes
The Ramco Cement
Carborundum Univ.
Piramal Enterprises
Bharat Electronics
Akzo Nobel
State Bank of India
Blue Dart Express
Whirlpool India
Supreme Inds
Godfrey Phillips
Bharat Forge
LIC Housing Finance
Asahi India Glass
Sundaram Clayton
Glaxo Pharma
J B Chem & Pharma
Kajaria Ceramics
Bayer Crop Science
Zee Entertainment
Cholaman.Inv.&Fn
Godrej Industries
Elgi Equipments
ABB
P&G Health
Bombay Burmah
Kalpataru Power
Nirlon
Zensar Tech.
Sudarshan Chem
Timken India
VST Industries
VIP Inds.
Max Financial
Sundram Fasteners
Venky's (India)
EPL
Esab India
Jubilant Life
Mah. Scooters
Navneet Education
Garware Technical
Company
Fastest
Rank
64
27
48
61
58
73
47
78
36
87
45
77
71
75
86
57
70
52
72
67
68
39
49
95
65
55
91
90
84
63
83
89
66
79
62
82
69
74
92
98
97
100
94
76
93
81
88
96
85
99
Fastest
Rank
Biggest
Rank
52
70
32
42
39
31
81
28
86
58
82
59
41
66
11
75
34
60
79
62
63
85
90
37
84
73
49
56
65
69
97
38
72
78
95
94
96
91
77
83
87
64
74
100
80
98
88
93
99
92
Biggest
Rank
Consistent
Rank
40
62
79
57
66
59
37
60
49
28
51
43
69
42
86
55
83
80
41
67
68
77
65
74
58
81
73
72
71
90
45
99
91
85
89
70
82
84
87
76
75
98
96
92
95
93
100
88
94
97
Consistent
Rank
Total
of Ranks
156
159
159
160
163
163
165
166
171
173
178
179
181
183
183
187
187
192
192
196
199
201
204
206
207
209
213
218
220
222
225
226
229
242
246
246
247
249
256
257
259
262
264
268
268
272
276
277
278
288
Total
of Ranks
1995-2020
Price CAGR
13%
18%
14%
13%
14%
12%
14%
11%
16%
10%
14%
11%
12%
11%
10%
14%
12%
14%
12%
12%
12%
16%
14%
10%
13%
14%
10%
10%
10%
13%
11%
10%
12%
11%
13%
11%
12%
11%
10%
10%
10%
10%
10%
11%
10%
11%
10%
10%
10%
10%
1995-2020
Price CAGR
1995-2020
PAT CAGR
14%
13%
18%
18%
16%
15%
11%
P to L
15%
10%
13%
0%
21%
9%
13%
-7%
0%
14%
10%
12%
18%
15%
15%
7%
14%
13%
16%
15%
18%
10%
8%
8%
13%
20%
19%
L to P
L to P
14%
L to P
11%
13%
12%
11%
P to L
12%
13%
21%
12%
15%
9%
1995-2020
PAT CAGR
December 2020
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 Motilal Oswal Financial Services
25th Annual Wealth Creation Study, 2020
APPENDIX 5: 1995 to 2020 Wealth Creators – Alphabetical listing
Fastest
Rank
18
89
19
30
43
75
21
39
11
26
41
80
8
12
56
91
5
71
67
57
47
79
73
10
36
45
53
84
54
16
17
20
42
3
83
93
81
40
99
58
95
72
63
38
22
24
34
23
6
1
Fastest
Rank
Biggest
Rank
35
38
53
26
51
66
68
85
7
71
55
18
9
48
47
49
21
41
62
75
81
78
31
17
86
82
89
65
29
45
67
14
20
23
97
80
98
61
92
39
37
79
69
76
4
27
2
16
33
3
Biggest
Rank
Consistent
Rank
12
99
10
18
29
29
46
77
4
15
18
29
15
18
29
61
2
61
61
46
29
77
46
29
46
46
10
61
46
15
10
4
29
18
29
89
89
46
89
61
61
29
89
18
2
18
29
46
4
61
Consistent
Rank
All-round
Rank
16
82
27
24
36
64
38
72
3
34
35
46
8
23
44
77
5
63
70
66
57
84
56
13
59
61
50
79
40
21
30
9
31
10
81
95
96
47
100
55
74
69
80
42
7
20
19
28
11
15
All-round
Rank
1995-2020
Price CAGR
20%
10%
20%
18%
15%
11%
19%
16%
22%
19%
16%
11%
23%
22%
14%
10%
24%
12%
12%
14%
14%
11%
12%
22%
16%
14%
14%
10%
14%
20%
20%
20%
15%
25%
11%
10%
11%
16%
10%
14%
10%
12%
13%
16%
19%
19%
16%
19%
24%
30%
1995-2020
Price CAGR
1995-2020
PAT CAGR
22%
8%
18%
13%
16%
9%
20%
15%
18%
10%
16%
11%
26%
21%
26%
16%
20%
21%
12%
-7%
11%
20%
15%
20%
15%
13%
13%
18%
18%
19%
18%
19%
17%
23%
8%
12%
13%
19%
9%
16%
7%
10%
10%
14%
22%
22%
16%
19%
22%
33%
1995-2020
PAT CAGR
Company
3M India
ABB
Aarti Industries
Abbott India
Adani Enterprises
Akzo Nobel
Amara Raja Batteries
Asahi India Glass
Asian Paints
Astrazeneca Pharma
Atul
BPCL
Bajaj Finance
Balkrishna Inds
Bata India
Bayer Crop Science
Berger Paints
Bharat Electronics
Bharat Forge
Blue Dart Express
Blue Star
Bombay Burmah
Bosch
Britannia Inds
Can Fin Homes
Carborundum Univ.
Chola Financial
Cholaman.Inv.&Fn
Cipla
Coromandel Intl
CRISIL
Dabur India
Dr Reddy's Labs
Eicher Motors
Elgi Equipments
EPL
Esab India
Exide Industries
Garware Technical
Gillette India
Glaxo Pharma
Godfrey Phillips
Godrej Industries
Grindwell Norton
HDFC
Hero Motocorp
Hindustan Unilever
Hindustan Zinc
Honeywell Auto
Infosys
Company
December 2020
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 Motilal Oswal Financial Services
25th Annual Wealth Creation Study, 2020
APPENDIX 5: 1995 to 2020 Wealth Creators – Alphabetical listing (continued)
Fastest
Rank
37
51
65
88
55
62
25
14
46
68
15
78
96
100
9
35
48
85
28
82
66
32
61
2
77
33
64
44
4
60
59
86
74
7
49
94
52
87
92
13
29
50
27
97
76
31
98
70
90
69
Fastest
Rank
Biggest
Rank
40
6
84
88
73
95
36
5
10
63
30
28
93
64
43
54
32
99
8
94
72
24
42
15
59
1
52
57
19
22
44
11
91
12
90
74
60
58
77
13
25
50
70
87
100
46
83
34
56
96
Biggest
Rank
Consistent
Rank
61
46
46
100
77
89
18
1
77
61
46
46
77
89
4
61
77
89
29
61
89
18
46
4
29
29
29
29
4
46
29
77
77
10
61
89
77
18
77
18
18
46
61
61
89
29
61
77
61
77
Consistent
Rank
All-round
Rank
43
33
75
97
76
85
26
1
37
71
29
58
98
92
14
48
53
99
17
86
83
25
54
2
62
18
51
39
4
41
45
65
88
6
73
93
68
60
89
12
22
49
52
91
94
32
90
67
78
87
All-round
Rank
1995-2020
Price CAGR
16%
14%
13%
10%
14%
13%
19%
21%
14%
12%
20%
11%
10%
10%
23%
16%
14%
10%
18%
11%
12%
17%
13%
25%
11%
16%
13%
15%
25%
13%
14%
10%
11%
23%
14%
10%
14%
10%
10%
22%
18%
14%
18%
10%
11%
17%
10%
12%
10%
12%
1995-2020
Price CAGR
1995-2020
PAT CAGR
15%
18%
14%
21%
13%
19%
16%
22%
15%
18%
P to L
P to L
12%
12%
27%
25%
18%
15%
17%
L to P
13%
15%
18%
20%
0%
16%
14%
16%
19%
15%
17%
13%
14%
23%
15%
11%
14%
10%
L to P
18%
16%
11%
13%
13%
P to L
14%
11%
0%
15%
L to P
1995-2020
PAT CAGR
Company
Ipca Labs
ITC
J B Chem & Pharma
Jubilant Life
Kajaria Ceramics
Kalpataru Power
Kansai Nerolac
Kotak Mahindra Bank
Larsen & Toubro
LIC Housing Finance
Lupin
M&M
Maharashtra Scooters
Max Financial
Motherson Sumi
Mphasis
MRF
Navneet Education
Nestle India
Nirlon
P&G Health
P&G Hygiene
Pfizer
Pidilite Industries
Piramal Enterprises
Reliance Industries
Sanofi India
Schaeffler India
Shree Cement
Siemens
SRF
State Bank of India
Sudarshan Chemicals
Sun Pharma
Sundaram Clayton
Sundram Fasteners
Supreme Industries
The Ramco Cement
Timken India
Titan Company
Torrent Pharma
Trent
TTK Prestige
VIP Industries
Venky's (India)
Voltas
VST Industries
Whirlpool India
Zee Entertainment
Zensar Tech.
Company
December 2020
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 Motilal Oswal Financial Services
25th Annual Wealth Creation Study, 2020
Theme 2021
December 2020
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 Motilal Oswal Financial Services
25th Annual Wealth Creation Study, 2020
The QGLP Checklist
25 questions, 25 frameworks
“In my nearly fifty years of experience in Wall Street, I’ve found that I know less and less about
what the stock market is going to do but I know more and more about what investors ought to
do, and that’s a pretty vital change in attitude.”
— Benjamin Graham
Introduction
Why checklist?
A checklist is a standardized list of required steps developed usually for repetitive tasks. The main
benefit of a checklist is that it helps us stay more organized, and ensuring that we don’t skip any
important step in the process.
Equity investing is a complex process with multiple variables involved. Having a checklist makes
sure that the investor has looked into all the key variables to see that they are in order. Further,
the checklist should help the investor arrive at the value of a stock, to be compared with the
prevailing price to determine Value-Price gap. When Benjamin Graham says in the above quote,
“I know more and more about what investors ought to do”, it may well be interpreted that an
investor ought to maintain a checklist of all that they need to do.
Given that almost every investor has their own unique investing style, there cannot be a one-size-
fits-all checklist. Whatever be the style, there is an appropriate checklist for the same, which the
investor should take time to create, and more importantly, apply it before every investment
decision.
Motilal Oswal’s investment philosophy is captured in the acronym
QGLP
– Quality, Growth,
Longevity, at reasonable Price (more on this later). Accordingly, our checklist is designed to help
decide whether a particular stock is “QGLP-compliant” or not.
Having said that, we believe the checklist presented here will also benefit a much larger audience
who follow stock-picking based on a company’s business and financial fundamentals.
IMPORTANT NOTE:
The checklist shared here is by no means gospel. It’s a work-in-progress, and
will be constantly improved, based on the learnings as we continue to implement it.
December 2020
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Backdrop
The basics of investing
Before we go into the checklist, we cover the basics of investing – from defining what is investing
to briefly discussing how to generate investment ideas.
What is investing
For the purposes of this Study, investing means buying into the equity shares of companies, listed
on the stock exchange. Having said that, the first thing to understand is that investing is different
from speculation (see Framework #1).
Framework #1
Investing v/s Speculation
Benjamin Graham wrote in his first classic book,
Security Analysis
(1934):
“An investment operation is one which, upon thorough analysis,
promises safety of principal and a satisfactory return. Operations
not meeting these requirements are speculative.”
Thus, an investor seeks a positive change in the value of their holding,
whereas the speculator seeks merely a change in price.
Note that this is not a judgement call that investing is better than speculation. However, this
framework helps the investor to bear in mind whether they are investing in a particular stock
or speculating.
Two approaches to equity investing
There are two approaches to equity investing, popularly known as
Top-down
and
Bottom-up
investing. As the graphic on next page suggests, top-down investing starts with analysis of the
economy and markets. Based on the same, investors determine which sectors are expected to
do well. Next, from within such sectors, investors try and pick up the stocks which are investment-
worthy, i.e. likely to outperform the market.
In contrast, the bottom-up investing directly starts with fundamental analysis of companies, its
financials and business. Prospects of the sector and economy are considered here too, but from
the perspective of how they impact the company.
Most global investors need to follow the top-down approach as they almost necessarily need to
take a call on which economies worldwide are expected to do well. Else, there’s the risk of their
capital eroding e.g. by virtue of a sharp depreciation of the local currency.
The checklist discussed here is for bottom-up stock picking. All the questions and frameworks,
including the ones pertaining to the sector and economy, are from the company’s perspective.
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Top-down and Bottom-up investing
Source:
Strategic Value Investing: Practical Techniques of Leading Value Investors,
by Stephen Horan,
Robert Johnson and Thomas Robinson.
The essence of equity investing is – buying (and staying invested in) only those stocks where there
is a significant
Value-Price gap.
As Warren Buffett has said, ‘Price is what we pay. Value is what
we get.” Thus, the equity investing process may be simply reduced to –
Assessing value of stocks
Comparing the value with the prevailing price and
Buying them only if there is adequate Margin of Safety i.e. the price should be meaningfully
lower than the assessed value to account for potential risks in investing.
Having defined equity investing, we next define Value and briefly discuss its components.
What is Value
Following are key extracts from our 23
rd
Wealth Creation
Study theme, “Valuation
Insights”.
Click on the cover page to
read the full study.
Investopedia defines
Intrinsic Value
as, “the
perceived
or
calculated value of a company, including tangible and
intangible factors, using fundamental analysis. The intrinsic
value may or may not be the same as the current market
value.”
The key word here is “perceived”. As is humorously said, “In
the stock market, most people know the price of everything
but the value of nothing.” Price is universal to all, but value lies
in the minds of individual investors. In fact, the very reason
stock trades happen is because at the same price, some investors think the stock is below
their
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perceived value (hence they buy), whereas some others think it is beyond
their
perceived value
(hence they sell). Those investors get rewarded whose perception of value is closer to that which
the market majority eventually converges to.
The most irrefutable definition of Intrinsic Value for any asset is –
present value of its lifetime
cash flows.
This is most easily depicted in valuing fixed income instruments.
Intrinsic value of fixed income instruments
The table below depicts the cash flow and Intrinsic Value calculation for a bond with face value
of INR 1,000 and 8% coupon. The annual interest inflows will be INR 80. In the 10
th
year, the
principal of INR 1,000 will also be repaid.
Now, these cash flows need to be discounted by the return that an investor desires. Thus, if an
investor desires 10% return, their present value of Year 1 interest inflow of INR 80 is INR 73
(80÷1.1), that of the Year 2 interest inflow is INR 66 (80÷1.21), and so on. This way, the total
present value of the interest and principal repayment inflows is INR 877, which is the bond’s
Intrinsic Value for this particular investor. If another investor desires a return of 12%, their
Intrinsic Value would work out to INR 774.
Intrinsic Value calculation for a bond with face value of INR 1,000 and 8% coupon if an investor desires 10% return
Year
1
2
3
4
5
6
7
8
9
Interest @ 8% of 1,000 (A)
Principal repayment
(B)
Total Cash flow
(C)=(A)+(B)
Discount factor @ 10%
(D)
80
-
80
1.10
(1.1)
73
80
-
80
1.21
(1.1
2
)
66
80
-
80
1.33
(1.1
3
)
60
80
-
80
1.46
(1.1
4
)
55
80
-
80
1.61
(1.1
5
)
50
80
-
80
1.77
(1.1
6
)
45
80
-
80
1.95
(1.1
7
)
41
80
-
80
2.14
(1.1
8
)
37
80
-
80
2.36
(1.1
9
)
34
10
80
1,000
1,080
2.59
(1.1
10
)
416
Present Value
(E)=(C)÷(D)
TOTAL PRESENT VALUE
877
The challenge of Intrinsic Value for equity stocks
The above approach of discounting cash flow is increasingly being adopted to value equity stocks.
However, there are key challenges –
No fixed coupon:
Unlike fixed income securities, equity stocks do not offer a fixed annual
coupon. Strictly speaking, the equity equivalent of a coupon is dividend. However, dividends
are dependent on the profits that companies earn and the dividend payout policy which they
choose to follow. Many times, even after earning healthy profits, companies may not declare
any dividends for a particular year(s) if they decide to conserve resources for expansion
and/or acquisitions.
No fixed tenure and terminal value:
Unlike fixed income securities, equity stocks have no
fixed tenure and hence terminal value.
The challenge of required return i.e. discount rate:
Intrinsic Value is very sensitive to the
required return or the discount rate. In the stock market, every investor will have their own
required return, and hence may arrive at their own Intrinsic Value. In equities, the key to
success is to accurately assess what value the broad market is likely to assign to a particular
company. Hence, choosing an appropriate discount rate is crucial in arriving at Intrinsic Value.
December 2020
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December 2020
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Key components of Value
Based on a simplified Discounted Free Cash Flow to Equity model (Framework #2 on previous
page), the key components of Value are RoE (return on equity), earnings growth and discount
rate (also may be called Cost of Equity).
Return on Equity, Earnings growth and Cost of Equity drive value
Return on Equity
Free Cash flow
PAT Growth
Cost of Equity
VALUE
What we look for in a company
At Motilal Oswal, we look for healthy compounders over the medium-to-long term. The power
of compounding is such that longer the holding period, higher the exponent (Framework #3).
Framework #3
Power of Compounding
Albert Einstein has described Compound Interest (i.e. interest on interest) as “the eighth
wonder of the world.” The most fundamental equation of compounding is –
A = P x (1 + r)
n
where A = Amount, P = Principal, r = rate of interest and n = number of years
As the table below shows, longer the holding period, higher is the exponent.
What happens to 1 rupee invested at various rates for various number of years
Rate
Years
3
5
10
15
20
25
30
1.3
1.6
2.6
4.2
6.7
11
17
1.5
2.0
4.0
8.1
16
33
66
1.7
2.5
6.2
15
38
95
237
2.0
3.1
9.3
28
87
265
808
2.2
3.7
14
51
190
706
2,620
2.7
5.4
29
156
837
4,500
24,201
10%
15%
20%
25%
30%
40%
Difference between
10 and 30 years is
not 3x but 87x!
December 2020
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 Motilal Oswal Financial Services
25th Annual Wealth Creation Study, 2020
Over the last several years, we have evolved our own formula for compounders. We call it
“QGLP”
– Quality, Growth, Longevity, reasonable Price
(Framework #4). Here –
Q
stands for (1) Quality of Business and (2) Quality of Management
G
stands for Growth in earnings
L
stands for Longevity of both Quality and Growth
P
stands for reasonable Price.
QGL is the Value component which is then juxtaposed with P to assess whether there is adequate
Value-Price gap.
All questions in the checklist discussed here are to determine whether a given stock is QGLP.
Framework #4
QGLP – Quality, Growth, Longevity, reasonable Price
Quality of business x Quality of management
•
•
•
•
•
Stable business, preferably consumer facing
Huge business opportunity
Sustainable competitive advantage
Management team with integrity
and competence
Healthy financials & ratios
Growth in earnings
•
•
•
•
•
Volume growth
Price growth
Mix change
Operating leverage
Financial leverage
QGLP
Longevity of Quality & Growth
•
•
•
Long-term relevance of business
Extending competitive advantage
period
Sustenance of growth momentum
Price
•
•
Reasonable valuation, relative to
quality and growth prospects
High margin of safety
QGLP is inspired by Warren Buffett’s investment process which
he outlined in his 2007 annual letter to Berkshire Hathaway
shareholders –
A business we understand
Favorable long-term economics
Able and trustworthy management
Sensible price tag.
The only missing element here is earnings growth. We
introduced this into QGLP following our insight from the
Quality-Growth Matrix, which we introduced in our 19
th
Wealth
Creation Study theme titled “100x:
The power of growth in
Wealth Creation”.
Click on the cover page to read the full study.
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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
Key takeaway from the Quality-Growth Matrix:
Avoid the not-so-obvious Quality Traps and Growth Traps, and invest only in True Wealth
Creators.
Having briefly discussed what we look for in a company (lot more details in the checklist), we
conclude the backdrop by touching upon how to generate stock ideas.
How to generate stock ideas
There are umpteen sources of stock ideas. The most common ones nowadays are –
Stockbroker reports and recommendations
Company/sector articles or CEO interviews in the media (print, TV and web)
Following other investment managers
Reading of annual reports and quarterly concall transcripts
Word of mouth
Running stock screeners based on various financial criteria. Of late, there are some free
screener service offerings such as
www.screener.in
The key thing to remember is that the above merely generate stock ideas. This is just the starting
point and not to be directly invested in. Once you come across an interesting idea, the immediate
next step is to run it through a checklist such as the one which follows.
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The QGLP Checklist
25 questions for bottom-up stock picking
At the outset, it must be mentioned that the art of equity investing is so intricate that any
checklist can have an infinite number of questions. For instance, in his book
The Investment
Checklist,
author Michael Shearn lists about 60 questions covering various aspects of business
and management. On the other hand, Philip Fisher in his classic
Common Stocks, Uncommon
Profits
offers a 15-point scuttlebutt (i.e. corroborative information on the company’s business
and management).
Two quotes are relevant here –
“Less is more” (modern business management jargon) and
“Everything can be made simple, but not simpler” (by Albert Einstein).
So, we take the middle path between Shearn and Fisher, and present a 25-question QGLP
checklist, coinciding with 25 years of Wealth Creation Studies. We interweave the checklist with
various frameworks covered by us over the past 25 studies. We believe this will make for a richer
understanding and recall of the checklist.
The 25-questions are organized under 5 broad heads –
1. Business checklist
2. Growth checklist
3. Management checklist
4. Price checklist and
5. Risk checklist.
Note that the questions are distinct from each other, but they are all inter-related. Also, the
sequencing of the questions and answers may be different depending on the situation.
We present the full checklist on the next page.
BUSINESS CHECKLIST
The main objective behind the Business Checklist is three-fold –
1. To understand the company’s business model, including its basic financials, and
2. To assess the company’s competitive landscape, and its sustainable competitive advantage.
We proceed to describe the 8 questions in the Business Checklist.
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The QGLP Checklist
BUSINESS CHECKLIST
Q#1 What is the history of the company and management?
Q#2 Is the company’s business model understandable? How does it make money?
Q#3 Is the company profitable? If not, is it expected to emerge?
Q#4 Are the company’s terms of trade favorable? Is Cash flow healthy?
Q#5 What is the company’s cost and margin structure? How has it changed in the past?
Q#6 How’s the Du Pont Analysis for the company?
Q#7 What is the competitive landscape? What is the role of regulation in the business?
Q#8 Does the company enjoy an Economic Moat? What are its sources?
GROWTH CHECKLIST
Q#9 What is the addressable market opportunity and its key drivers?
Q#10 What is the company's growth plan? How sustainable is the growth?
MANAGEMENT CHECKLIST
Q#11 Is the management high on Integrity & transparency?
Q#12 Is the management competent?
Q#13 Does the management have passion / growth mindset?
Q#14 Does the company have a rational capital allocation policy?
Q#15 Does the company have a suitable organization structure and depth of management?
Q#16 What is the organization culture?
Q#17 Does the company have a sound succession plan?
Q#18 Do the owners have enough skin in the game?
Q#19 Have the promoters pledged a large portion of their holding?
PRICE CHECKLIST
Q#20 Has the financial modeling been done with earnings estimates for at least 3 years?
Q#21 Is it a QGL stock?
Q#22 Is valuation reasonable?
Q#23 Is there enough Margin of Safety?
Q#24 Is the stock reasonably liquid?
RISK CHECKLIST
Q#25 What can go wrong with the company narrative & numbers?
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Q#1 What is the history of the company and management?
Objective:
This is the starting point of all research on a company. A sense of history is vital before
embarking on work related to the future.
What to look for:
What’s the company’s business?
What is its business infrastructure? – no. of plants/branches/depots/retail outlets, etc
Has the company explicitly articulated its vision and values?
What is the age of the company? (also see Framework #5)
Who is the owner of the company?
What is the composition of its Board of Directors? Does it appear to be fairly broadbased?
Is the company owner-managed or professionally managed?
How’s the basic financial and stock market performance of the company and its group
companies?
Data/information sources:
Visit the company website; read background information on the company, and also download
relevant material like Annual Reports, investor presentation and concall transcripts.
Read the company’s Annual Reports for the last 5 years at least.
Browse through the media coverage of the company, whether print/TV/online (e.g. CEO’s
interview on YouTube).
If there’s access, read the company profile on some paid service providers such as Bloomberg.
Read broker reports on the company.
Framework #5
Lindy Effect
This framework has been popularized by Nassim Nicholas Taleb in his
book,
Skin In The Game.
Lindy is a café in New York, frequented by
Broadway actors. Gossiping over time, they discovered that Broadway
shows which lasted, say, a hundred days, had a better chance of lasting
another hundred days, than a show which has been running, say, for the
last 10 days.
Says Taleb, “That which is Lindy is what ages in reverse, i.e. its life expectancy lengthens with
time, conditional on survival. Only the non-perishable can be Lindy. When it comes to ideas,
books, technologies, procedures, institutions, and political systems under Lindy, there is no
intrinsic aging and perishability.”
Relevance of Lindy to stocks
Going by the Lindy Effect, investors should tend to look at older companies much more favorably
than younger ones. This is because the older companies have been through all kinds of adversities
and survived. Hence, given Lindy Effect, their chance of surviving and thriving in the future is that
much higher.
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Q#2 Is the company’s business model understandable? How does it make money?
Objective:
This is the core question regarding the company’s business. If the company’s business
model is not understood, any investment in the same is tantamount to speculation. For instance,
in Q#1, it may turn out that the company is in the business of life insurance. However, if the
investor does not understand how money is made in life insurance, all plans to invest in the
company need to be abandoned.
What to look for:
The key question here is – Can you describe the company’s business(es) in your own words?
Is it a product company or service company?
Is it a domestic company or global company?
Does it have a monoline or diversified business? If diversified, what is the business mix?
Is the business secular or cyclical?
Who are its major customers? When it comes to customers, there are 3 types of businesses:
(1) B2C (business-to-consumer), (2) B2B (business-to-business) and (3) B2G (business-to-
government). B2C companies tend to have higher bargaining power with their customers,
which is progressively lower for B2B and B2G.
Understanding the business model also involves a thorough understanding of the company’s
value chain. A value chain is a set of activities that an organization carries out to create value for
its customers. For companies that produce goods, a value chain comprises the steps that involve
bringing a product from conception to distribution, and everything in between — such as
(1) Procuring raw materials, (2) Manufacturing functions, and (3) Marketing activities. For a
service company, the Value Chain is likely to involve: (1) Marketing, (2) Service delivery and
(3) Customer Relationship Management. Having said that the Value Chain for every single
company will be unique and needs to be well understood.
Value chain analysis also helps determine how exactly the company makes money. For instance,
for a primary steel company –
It may have captive mines for iron ore and coal
Both iron and coal are put into a blast furnace and melted to produce what is called molten
iron or hot metal
Blowing oxygen through the hot metal lowers the carbon content of the alloy and changes it
into steel.
The steel is then converted into various forms – bars, rods, coils, etc.
The same may be sold direct to users or through the company’s distributors.
Value gets added at each of the steps.
Data/information sources to understand the company’s business:
Reading up of industry material available online
Interacting with industry associations
Discussion with the Investor Relations team of the company.
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Q#3 Is the company profitable? If not, is it expected to emerge?
Objective:
Companies are capital input-output machines. The main objective of companies is to
optimize return on capital invested. The first step in this process is to be profitable i.e. earn return
on capital higher than cost of capital. This question is a test of the same.
Further, a company may not be currently earning return on capital higher than cost of capital. In
such case, the question to be asked is: Is it expected to emerge? (Emergence here means the
company achieving return higher than cost of capital for the first time, or after a long break.)
What to look for:
Return on Equity greater than Cost of Equity:
Our favorite measure of profitability is Return
on Equity (RoE). A company can be said to be profitable if it consistently earns Return on
Equity higher than Cost of Equity. As stated in Framework #2, Cost of Equity is the minimum
return expected by investors on a stock. Our threshold Cost of Equity is 13%. So, we deem
companies to be profitable only if their RoE is consistently higher than 13%.
For Emergence,
look for companies which have reported RoE > 13% for the first time ever,
or after quite a while.
Based on return on capital, Warren Buffett classifies companies into 3 types – Great, Good and
Gruesome (Framework #6).
Framework #6
Great, Good, Gruesome
In our 13
th
Wealth Creation Study (2008), we wrote -
“Every year, Warren Buffett personally writes the Chairman’s
annual letter to shareholders of his diversified company,
Berkshire Hathaway Inc. His 2007 letter has a section on
“Businesses
– The Great, the Good and the Gruesome”,
where he discusses what kind of companies Berkshire likes
and what it wishes to avoid.”
Defining Great, Good and Gruesome
Buffett equates the Great, the Good and the Gruesome
companies to three types of bank savings accounts, where the interest rate is RoE.
He says, “Think of three types of savings accounts. The Great one pays an extraordinarily high
interest rate that will rise as the years pass. The Good one pays an attractive rate of interest that
will be earned also on deposits that are added. Finally, the Gruesome account both pays an
inadequate interest rate and requires you to keep adding money at those disappointing returns.”
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Framework #6 (continued)
Graphically, Great, Good and Gruesome companies can be depicted as under.
Depicting Great, Good, Gruesome
High
Great companies
Return on
equity
Good companies
Gruesome companies
Low
Time / Equity capital employed
Understanding Great, Good, Gruesome
Great companies
A truly Great company must have an “enduring moat” (i.e. long-term competitive advantage) that
protects excellent returns on invested capital. This is possible only in either of two cases:
1. It must possess powerful brand(s), or
2. It must be a low-cost producer.
Great companies tend to grow slower than their Good and Gruesome counterparts. But the key
aspect of this growth is that it is achieved by consuming very little additional capital. Over time,
given the power of compounding, Great companies become significant cash machines with high
RoE and high dividend payouts.
Good companies
Good companies grow at healthy rates, but need large increases in capital to sustain growth. Like
Great companies, they too enjoy competitive advantage and make healthy profits. However, they
need to reinvest a significant proportion of these profits for growth.
Buffett calls this the “put-up-more-to-earn-more” phenomenon, which is true of most companies
across countries. Compared to great companies, return ratios will tend to be much lower, as will
dividend payouts.
Gruesome companies
Paradoxically, Gruesome companies tend to enjoy very high growth rates, which turns out to be
a trap. These companies require significant capital for such growth, and then earn little or no
money. Buffett says, “Think airlines. Here a durable competitive advantage has proven elusive
since the days of the Wright brothers … The airline industry’s demand for capital ever since that
first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by
growth when they should have been repelled by it.”
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Framework #6 (continued)
Characteristics of Great, Good and Gruesome companies
Return on equity is the financial differentiator of Great, Good and Gruesome companies.
However, numbers are lag indicators, and are the outcome of several qualitative characteristics
of the businesses. We summarize them below.
Great, Good, Gruesome – A comparison
Criteria
Nature of
business
Great
Good
Gruesome
Stable business i.e. no
rapid or continuous
change
High and rising
competitive advantage
from brand / lowest-
cost production
High pricing power
Low dependence on
greatness of
management
Typically moderate
growth; high growth
rates a rarity
Low capital intensity;
high level of intangible
assets
High and rising RoE
Typically, high
dividend payout
Hindustan Unilever,
Nestle
Subject to moderate
change
Steady competitive
advantage
Business likely to have
rapid changes
Low or no competitive
advantage
Competitive
advantage
Pricing power
Management
Moderate pricing
power
Management, key
success factor
Moderate-to-high
growth rate
Moderate-to-high
capital intensity
Stable, attractive RoE
Reasonable dividend
payout
HDFC Bank, Avenue
Supermart
Pricing power absent
High dependence on
management
High growth rates
Growth
Capital
intensity
RoE
Dividend
payout
Examples:
Very high capital
intensity
Low / falling RoE
Low or zero dividend
payout
MTNL, Jet Airways
Key investing principle
Avoid investing in gruesome companies no matter how cheap they appear. There is high risk of
permanent capital loss.
Having discussed the concept of profitability, we next discuss cases where hitherto unprofitable
companies turn profitable i.e. achieve RoE higher than Cost of Equity (CoE) for the first time ever,
or after a significantly long break. We call this phenomenon Emergence. Having Emerged, the
next challenge for companies is Endurance i.e. sustaining RoE higher than CoE. Companies which
successfully travel and journey from Emergence to Endurance (we call them Value Creators) are
rare. But those that do, reward investors handsomely (Framework #7).
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Framework #7
Emergence & Endurance
In our 18
th
Wealth Creation Study (2013) titled
Uncommon
Profits: Emergence & Endurance
we wrote -
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 industry-
level and company specific factors. Early identification of such
companies enables investors to fully participate in the
company's Uncommon Profit generation through its lifecycle.
Case Study for successful Emergence to Endurance: Titan Company
Company background
Titan Company (then, Titan Industries) was incorporated in
1984 as a joint venture of Tata Group and TIDCO (Tamil Nadu
Industrial Development Corporation) for the manufacture of
wristwatches. Today, it is one of the 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
2003
Revenue (INR bn)
CAGR (%) post-emergence
PAT (INR bn)
CAGR (%) post-emergence
RoE (%)
Divd Payout Ratio (%)
Market Cap (INR bn)
P/E – Trailing (x)
Stock Price (INR)
Return CAGR (%)
Sensex CAGR (%) post emergence
Outperformance (%)
23
0
2
12
2
0.2
7
2008
31
32
2
53
40
23
47
30
53
85
39
46
2013
101
30
7
45
42
26
228
31
257
59
20
39
Year of Emergence
Key business driver of
Emergence
Company Unique Value
Proposition
Post-emergence financial
performance highlights
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Framework #7 (continued)
We have compiled 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.
Emerging Value Creator Checklist: More the positive ticks, greater the confirmation
Industry-level factors
Is the industry’s competitive landscape favorable?
Do players enjoy superior bargaining power /
terms of trade with customers and/or suppliers?
Does the industry enjoy a large profit pool which
can be effectively tapped into by a company with
a unique value proposition or strategy?
Is the industry showing trends of value migration?
Or does it offer opportunity for the same in
future?
Is the industry fairly stable i.e. less prone to
destabilizing factors like business cyclicality, high
production innovation, and regulatory controls?
Is it a new industry or strategic opportunity with
huge potential?
Company-specific factors
Does the company have a solid
corporate-parent and management
team?
Does the company have a unique value
proposition or strategy to overcome
competitive forces?
Does it enjoy bargaining power with its
customers and/or suppliers? How strong
is the advantage?
Is the company a market leader or a
pioneer?
Q#4 Are the company’s terms of trade favorable? Is Cash flow healthy?
Objective:
These two questions have a two-fold objective –
1. To assess whether the company has reasonable bargaining power with its customers and
suppliers, and
2. To ensure that much of the company’s profit is not stuck in working capital and fixed capital.
What to look for:
Companies with favorable Terms of Trade i.e. low Debtors-Creditors ratio (Framework #8).
Companies with healthy and preferably rising Operating Cash Flow
No sustained negative Free Cash Flow i.e. the company is not a capital guzzler.
Framework #8
Terms of Trade
We covered this framework in our 11
th
Wealth Creation Study.
Click on the cover page to read the full study.
Key concepts:
Terms of Trade (ToT):
ToT refers to the credit terms which
any company has with its customers on the one hand and
suppliers on the other. A company with highly favorable
terms of trade will collect cash quickly from its customers
and enjoy extended credit period with its suppliers.
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Framework #8 (continued)
In contrast, a company with adverse terms of trade will need to extend lengthy credit period
to its customers and pay its suppliers early. We measure ToT using the following formula –
Terms of Trade (% terms) = Debtors ÷ Creditors
The lower the ratio, more favorable the ToT, and vice versa.
ToT and Operating Cash Flow (OCF):
A company’s ToT directly impacts its OCF, defined as
Cash Profit adjusted for changes in Working Capital. The key components of Working Capital
are Inventory, Debtors and Creditors. ToT reflects in both Debtors and Creditors and hence
strongly influences OCF. The more adverse the ToT the lower will be OCF vis-à-vis PAT (Profit
After Tax), and vice versa.
The key conclusions of our 11
th
Wealth Creation Study theme are –
ToT are broadly stable and do not change often.
Favorable ToT are an important characteristic of a wealth creating company.
When ToT changes from adverse to favorable, RoCE (Return on Capital Employed) is favorably
impacted, in turn enabling significant wealth creation.
To sum up, favorable ToT is one of the enablers of high RoCE and should be looked for in the
search for winners in the stock market.
How classical Terms of Trade works – fall in Terms of Trade, rise in Cash Flow from Operations
Amara Raja Batteries
2.5
15
Indraprastha Gas
1.5
1.0
0.5
15
10
5
2.0
1.5
10
5
0
2015 2016 2017 2018 2019 2020
Cash Flow from Operations (INR bn) - RHS
Terms of Trade
1.0
0.5
0.0
0.0
2015 2016 2017 2018 2019 2020
Cash Flow from Operations (INR bn) - RHS
0
Terms of Trade
Is Cash flow healthy?
This is the second part of Q#4. Healthy Cash flow is critical to the attractiveness of a company. As
stated earlier, the intrinsic value of a company is the present value of its future Free Cash Flow
(FCF). (FCF is OCF less Capex i.e. capital expenditure such as Plant & Machinery).
A company’s past Cash flow track record is a fairly good pointer to its future. The ideal company
is one where both OCF and FCF are robust. But in the least, OCF needs to be positive and not
significantly lower than PAT. Companies can have intermittent negative FCF because of growth
Capex. However, perennially negative FCF is a cause for concern as there could be misallocation
of capital (e.g. outsized acquisitions).
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Q#5 What is the company’s cost and margin structure? How has it changed in the past?
Objective:
This question will help the investor get a grip on the past cost and margin structure,
and changes in the same. The same can be used to estimate future margins.
What to look for:
Long-term trend of costs and margins using common-size analysis (Framework #9).
Framework #9
Common-size Analysis
We believe Common-size Analysis is a dying art among investors; yet we find it a very powerful
framework for insights into a company’s business.
Under Common-size Analysis, the Sales of the company are set to 100 across the years. Then all
other heads of cost and margins are presented as a percentage of that 100. This gives a good
trend of costs and margins over the years.
Example #1:
Consider Bata’s Common-size Analysis from 2005 to 2010, tabled below.
Bata India – Common-size Analysis
Year ending
Dec-05
Net Sales
100.0
EXPENDITURE :
Raw Materials
46.7
Power & Fuel Cost
3.2
Employee Cost
25.3
Manufacturing Exps
4.9
Selling and Admin Exps
14.3
Miscellaneous Exps
3.0
Total Expenditure
97.3
EBITDA
Depreciation
EBIT
Interest
Other Income
Profit Before Tax
Tax
Profit After Tax
2.7
1.7
1.0
1.7
2.7
1.9
0.2
1.8
Dec-06
100.0
47.4
3.1
23.8
4.5
14.3
1.1
94.1
6.0
1.8
4.2
1.4
3.6
6.4
1.2
5.2
Dec-07
100.0
47.1
3.0
20.8
3.4
16.4
1.9
92.6
7.4
1.9
5.5
1.2
1.6
5.9
0.4
5.5
Dec-08
100.0
47.0
2.9
17.2
3.0
19.1
1.7
91.0
9.0
1.9
7.1
1.1
1.3
7.3
1.1
6.1
Dec-09
100.0
44.9
2.6
15.1
3.0
20.6
2.0
88.3
11.7
2.6
9.1
0.9
1.0
9.2
3.0
6.2
Dec-10
100.0
45.6
2.6
13.6
2.6
21.1
1.1
86.7
13.4
2.6
10.8
0.6
1.2
11.4
3.8
7.6
There are clear insights from the above –
Employee cost collapsed 12 percentage points from 25.3% in 2005 to 13.6% in 2010.
Most other costs were also controlled.
Hence, despite 7 percentage point increase in Selling & Admin expenses, EBITDA Margin
shot up from 2.7% in 2005 to 13.4% in 2010.
Further, despite rise in tax, PAT Margin is up from 1.8% in 2005 to 7.6% in 2010.
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Framework #9 (continued)
Example #2:
Consider BHEL’s Common-size Analysis from 2015 to 2020, tabled below.
BHEL – Common-size Analysis
Year ending
Net Sales
EXPENDITURE :
Raw Materials
Power & Fuel Cost
Employee Cost
Manufacturing Exps
Selling and Admin Exps
Miscellaneous Exps
Total Expenditure
EBITDA
Depreciation
EBIT
Interest
Other Income
Profit Before Tax
Tax
Profit After Tax
Mar-15
100
44.2
1.8
17.5
14.6
4.7
10.4
93.2
6.8
3.5
3.4
0.3
3.9
7.0
2.4
4.6
Mar-16
100
51.9
2.0
21.1
14.4
4.1
12.2
105.6
-5.6
3.67
-9.3
1.4
5.9
-4.8
-1.8
-3.0
Mar-17
100
49.6
1.6
19.0
13.1
5.1
7.8
96.2
3.8
2.98
0.9
1.5
2.6
2.0
0.5
1.6
Mar-18
100
44.5
1.6
21.1
15.0
4.7
7.3
94.3
5.7
2.73
3.0
1.2
2.4
4.2
2.7
1.5
Mar-19
100
46.0
1.6
18.1
15.0
5.9
6.7
93.3
6.7
1.56
5.1
1.2
2.2
6.0
2.8
3.3
Mar-20
100
50.1
2.1
25.2
16.4
7.2
-0.4
100.6
-0.6
2.34
-3.0
2.9
2.8
-3.1
3.8
-6.8
Insights from the above –
2015 to 2020 is a period of economic slowdown.
So even as virtually every cost line item has gone up for BHEL, the sharpest rise is in Employee
Cost from 17.5% to 25.2%. This is not necessarily because absolute Employee Cost has gone
up; but because it is fairly fixed in nature, its percentage rises when Sales fall due to the
slowdown.
As a result, EBITDA Margin is down from 6.8% in 2015 to a loss in 2020. Same is the case with
PAT Margin.
Thus, Common-size Analysis provides powerful insights into a company’s costs and margin
structure. This also forms the basis for questioning the company’s management on how they plan
to rectify problems in some of the line items, if any.
Having understood the past cost and margin structure, they key next question is – how will it play
out in the future? We discuss this under Q#10, using the framework of CVPM Analysis (Cost,
Volume, Price, Mix).
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Q#6 How’s the Du Pont Analysis for the company?
Objective:
The objective of Du Point Analysis is for granular insight into the most important
business metric, namely, RoE (Return on Equity).
What to look for:
Long-term trend of the 3 components of RoE – Profit Margin, Asset turnover and Leverage.
Framework #10
Du Pont Analysis
Du Pont Analysis is a financial framework developed by Du Pont Corporation, USA. It breaks down
RoE into insightful components as under –
Return on Equity i.e.
PAT
=
Net Worth
PAT
x Sales x Assets
Sales
Assets
Net Worth
PAT Margin x Asset Turnover x Leverage
Investors must monitor all 3 variables to get timely opportunities. We ran a screener on the top
500 companies in 2015. The criteria were –
2020 PAT Margin > 2015 PAT Margin
2020 Asset Turnover > 2015 Asset turnover and
Leverage <2 i.e. Debt equity not > 1.
Only 17 out of 500 companies met the above criteria. Needless to add, 15 of the 17 stocks have
outperformed the market. Their average return is 15% v/s 1% for the Sensex. These companies
are profiled below.
Rising margin and asset turn with healthy leverage is a sound formula for investing success
Company
P&G Health
Abbott India
Honeywell Auto
Astrazeneca
EPL
Balkrishna Inds
3M India
Godfrey Phillips
Ipca Labs
Sanofi India
Mphasis
VST Industries
The Ramco Cement
Jubilant Life
Carborundum Univ.
ABB
Siemens
PAT Margin
2015
2020
4%
16%
9%
12%
5%
13%
-4%
7%
6%
8%
12%
17%
6%
10%
6%
10%
8%
13%
9%
13%
10%
12%
16%
22%
7%
11%
-1%
10%
4%
10%
3%
4%
2%
6%
Asset Turn (x)
2015
2020
2.4
2.9
6.5
9.2
3.6
4.9
4.9
6.4
1.4
1.4
1.0
1.0
2.5
3.0
2.1
2.4
1.1
1.3
1.8
2.2
1.8
2.0
6.8
27.4
0.6
0.8
0.8
1.0
1.4
1.6
2.6
3.0
2.9
3.0
Leverage
2015
1.1
1.2
1.1
1.0
1.3
1.0
1.0
1.0
1.0
1.0
1.1
1.7
1.5
1.7
1.0
1.1
1.1
AVERAGE
Sensex
Price CAGR
2015-20
32%
31%
25%
21%
20%
20%
19%
17%
17%
13%
12%
12%
11%
10%
3%
-4%
-4%
15%
1%
49
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Q#7 What is the competitive landscape? What is the role of regulation in the business?
Objective:
All the checklist questions so far were internal to the company. This is the first
question external to the company. But it is arguably the most important one, as the level of
competition and regulation in a sector can make or break the fortunes of players in that sector.
What to look for:
What is the type of competition in the sector? e.g. perfect competition, monopoly, oligopoly
Who are the company’s key competitors?
Is the company’s product/service globally tradable or non-tradable?
Is there a threat of new entrants?
Can the company’s product or service be substituted by current or emerging substitutes?
What is the bargaining power of customers and suppliers?
Is the sector heavily regulated, including restrictions on product/service pricing and/or
returns on investment?
Type of competition
Economists refer to four major types of market/competitive structures –
Perfect Competition:
Here there are large number of buyers and sellers with an absolutely
homogenous product/service.
Monopoly:
This is the extreme opposite of Perfect Competition, where there’s only one
major seller. This is quite rare in today’s day and age e.g. Power Grid Corporation is a virtual
monopoly in India’s power transmission infrastructure.
Oligopoly:
Oligopoly is when a small number of firms collude, either explicitly or tacitly, to
restrict output and/or fix prices, in order to achieve above normal market returns.
Monopolistic Competition:
This type is the mid-path between Perfect Competition and
Monopoly, and the most prevalent form. Here, a large number of sellers offer products/
services which are similar but not perfect substitutes of each other i.e. differentiated. A
company may earn above-normal return on capital for some time, but competition soon
catches up to drive down returns to sector average.
The above classification is based on number of sellers in the sector. However, the number of
sellers alone does not determine profits and profitability in a sector. Rather, it is the intensity of
competition between the players which does.
Consider Paints versus Wireless Telecom in India. The Paints sector has four major players – Asian
Paints, Berger Paints, Kansai Nerolac and Akzo Nobel – while the Wireless Telecom sector has
only three – Bharti Airtel, Vodafone Idea and Reliance Jio (through Reliance Industries). Yet the
following is the PAT and RoE trend of both the sectors.
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Competition in the Paints sector is benign
Paints Sector
50
PAT (INR bn)
RoE (RHS)
30%
40
30
20
10
25%
20%
15%
10%
5%
0
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
0%
Competition in the Wireless Telecom sector is cut-throat
Wireless Telecom Sector
100
0
20%
10%
-100
-200
0%
-10%
PAT (INR bn)
-300
RoE (RHS)
-20%
-400
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
-30%
Competition in the Paints sector is completely benign. The sector continues to make rising profits
and robust RoE in excess of 20%. In sharp contrast, competition in the Wireless Telecom sector
is cut-throat. As a result, the sector is bleeding. It is reporting losses in the aggregate, and RoE is
hugely negative.
A holistic way to assess the competitive landscape is offered by Michael Porter’s Five Forces
model (Framework #11).
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Framework #11
Porter’s Five Forces
The Five Forces framework of Michael Porter is ideal to assess the attractiveness of industry
structure. The exhibit below presents the diagrammatic representation of the Five Forces.
Porter’s Five Forces framework
Porter’s Five Forces – Implications
FORCE #1 – Inter-firm rivalry
Implication:
This lies at the core of the industry structure analysis. Higher the rivalry among
incumbents, lower the industry attractiveness and vice-versa.
FORCE #2 – Threat of new entrants
Implication:
The threat of new entrants compels incumbents to operate at low profitability as
a strategy to keep them away.
FORCE #3 – Threat of substitute products or services
Implication:
Like the threat of new entrants, the threat of substitutes also compels incumbents
to operate at low profitability. However, this is relatively rare.
FORCE #4 – Bargaining power of customers
Implication:
Higher the bargaining power of customers, lower the sector attractiveness and vice
versa. If the customers are large and concentrated, their bargaining power tends
to be high, whereas fragmented customers tend to have lower bargaining power.
High brand pull and high switching costs also imply lower bargaining power of
customers.
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Framework #11 (continued)
FORCE #5 – Bargaining power of suppliers
Implication:
Higher the bargaining power of suppliers, lower the sector attractiveness and vice
versa. If the suppliers are large and concentrated, their bargaining power tends to
be high, whereas fragmented suppliers tend to have lower bargaining power.
We have rated most sectors on the five forces (tabled on next page). Sectors with score of 3 or
higher are attractive i.e. incumbents in these sectors will have a relatively easy time in terms of
profitability. On the other hand, if sector score is 2.5 or lower, incumbents in such sectors will
need to have a sharp strategy to survive and thrive.
Tradable or Non-tradable
Tradable businesses are those who products can be traded across geographies. Such businesses
are perennially exposed to the threat of imports, and product prices will be invariably linked to
landed cost e.g. metals and chemicals. In contrast, non-tradable businesses are insulated from
imports. Product pricing here is just a function of domestic competitive forces e.g. FMCG, cement,
and the full array of services such as banking, insurance, etc.
What is the role of regulation in the business?
This is the second part of Q#7. Regulation is outside the five forces framework, and can make or
mar the fortunes of a sector. For instance, in the power generation and transmission business,
Return on Equity is capped at 12%. Likewise, the domestic pharma sector faces the overhang of
government putting quite a few of its products under price control. Investors need to keep a
sharp eye on regulation, and preferably avoid over-regulated businesses.
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Sector Structure Score for major industries based on Porter’s Five Forces
Threat of
Inter-firm
Bargaining Power of
Sector
Rivalry Entrants Substitutes
Customers Suppliers
Cigarettes
1
1
1
1
1
Paints
1
1
1
1
1
Automobiles - 2-wheelers
0.5
0.5
1
1
1
Oil & Gas - Downstream
1
1
0.5
1
0.5
Ports & related
0.5
1
1
0.5
1
Automobiles - Tractors
0
1
1
0.5
1
Gas Distribution
1
1
0.5
1
0
Automobiles - Cars/UVs
0
0.5
1
0.5
1
Banks - Private Sector
0
0.5
1
0.5
1
Banks - Public Sector
0
0.5
1
0.5
1
Cement
0
0
1
1
1
Fertilizers
0
1
1
1
0
IT - Software
1
1
0
0
1
Mining/Minerals
0.5
0.5
1
0.5
0.5
NBFC - Insurance
0
0.5
1
0.5
1
Oil & Gas - Upstream
0.5
0.5
1
1
0
Pharmaceuticals
0.5
0
0.5
1
1
Telecom
0
1
1
0.5
0.5
Agri & related
0
0
0.5
1
1
Auto Ancillaries
0.5
1
1
0
0
Automobiles - LCVs/HCVs
0
0
1
0.5
1
Aviation
0
0.5
1
1
0
Ceramic Products
0
0.5
1
0.5
0.5
Consumer Durables
0
0
1
0.5
1
Hospitals/Diagnostics
0.5
0
1
0.5
0.5
Hotels & Restaurants
0
0.5
1
0
1
NBFC - Housing
0
0
1
1
0.5
Non Ferrous Metals
0.5
0
0.5
1
0.5
Paper
0
1
1
0
0.5
Capital Goods
0
0
1
0
1
Chemicals
0
0
1
0
1
Engineering
0
0
1
0
1
Gems & Jewelry
0
0
1
0.5
0.5
Media - Print/TV
0
0.5
0.5
0
1
NBFC
0
0
1
0.5
0.5
Plastic Products
0
0.5
1
0.5
0
Realty
0
0
1
0
1
Steel
0
0
0.5
0.5
1
Travel
0
0.5
1
0
0.5
Retail
0.5
0.5
0.5
0
0.5
Tyres
0.5
0.5
1
0
0
Construction
0
0
1
0
0.5
Shipping
0
0.5
0.5
0
0.5
Packaging
0
0.5
0.5
0
0
Sugar
0
0
1
0
0
Textiles
0
0
1
0
0
SCORING
METHODOLOGY:
Each of the Five
Forces is rated 0 or
1 with a middle
score of 0.5.
As an illustration,
for a sector, if
Bargaining Power of
Customers is high,
that sector gets 0
for that Force.
Conversely, if
Bargaining Power of
Customers is low,
the sector gets 1.
If Bargaining Power
is balanced, the
sector gets 0.5.
Every Force is rated
this way, and the
sum total of all Five
Forces is the Sector
Structure Score.
TOTAL
SCORE
5.0
5.0
4.0
4.0
4.0
3.5
3.5
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3.0
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.5
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
1.5
1.5
1.0
1.0
1.0
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Q#8 Does the company enjoy an Economic Moat? What are its sources?
Objective:
To ascertain whether the company can sustain its profits and profitability amidst
strong competitive forces.
What to look for:
Strength of a company to keep competitors from nibbling away its profits
Framework #12
Economic Moat
We covered the concept of Economic Moat in our 17
th
Wealth
Creation Study (2012). Click on the cover page to read the full
study.
What’s an Economic Moat?
The concept of 'Economic Moat' has its roots in the idea of
a traditional moat. A moat is a deep, wide trench, usually filled
with water, that surrounds the rampart of a castle or fortified
place. In many cases, the waters are also infested with sharks
and crocodiles to further keep enemies at bay, and the
inhabitants safe.
Akin to a moat, an Economic Moat protects a company's profits from being attacked by a
combination of multiple business forces. Traditional management theory terms such as
"Sustainable Competitive Advantage" or "Entry Barriers" essentially connote the idea of an
Economic Moat. Companies with "deep, dangerous moats" outperform those without such
moats, both in terms of financial performance and stock returns.
Factors determining an Economic Moat
Economic Moat arises from the weave of (1) Sector structure, and (2) Corporate Strategy.
We covered sector structure (Porter’s Five Forces) under Q#7. A favorable sector structure can
create an Economic Moat. For instance, it is almost impossible for new entrants in the cigarettes
business in India, as cigarettes can’t even be advertised. However, where the sector structure is
neutral or unfavorable, the only way companies can build an Economic Moat is by have a sharp
Corporate Strategy.
Here too, Porter has a solid framework for Corporate Strategy (Framework #13)
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Framework #13
Corporate Strategy
The elements of Porter’s Corporate Strategy framework are:
1. Distinctive value proposition (to customers):
This emerges from Porter’s belief that
companies should not compete to be the best, but to be unique. Thus, the first step to
achieving this is by offering to meet customer needs differently from that of rivals by:
(1) choosing the target customer, (2) identifying the needs, and (3) creating a product or
service which addresses both (1) and (2).
2. Tailored Value Chain:
A Value Chain is the sequence of activities that a company performs
to design, produce, sell, deliver, and support its products. In turn, it is part of a company’s
larger Value System i.e. all activities and players involved to deliver its value proposition,
including by suppliers, distribution channel, etc. A tailored value chain makes a company’s
value proposition hard to replicate.
3. Trade-offs different from rivals:
This essentially involves deciding on what a company will
or will not do, differently from its rivals e.g. budget airlines do not offer free food and
beverages on board, as they are targeting only those customers whose focus is to reach
their destination faster (than rail, road, etc), and not food.
4. Fit across value chain:
Fit is how well the value chain activities connect with each other to
amplify the company’s value proposition, and make it even harder to replicate e.g.
Domino’s globally is focused on home delivery of pizzas. Accordingly, its outlets are smaller
than Pizza Hut which is more designed for dine-in. In fact, even the Domino’s pizza is
tailored for home delivery so that it does not get soft and soggy during delivery.
5. Continuity over time:
In business, change is the only constant. Hence, a company’s strategy
should enable it adapt to change and to innovate.
What are the sources of a company’s Economic Moat?
Some common sources a company’s Economic Moat are –
Strong brand leading to customer loyalty
Patents
Wide distribution network or service network
Switching costs
Proximity to key raw materials and markets
Cost advantages due to scale
What causes an Economic Moat to be breached?
The main causes are –
Disruptive competition
Drastic regulatory change
Capital misallocation by the management.
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Example of strong Economic Moat – Maruti Suzuki
Economic Moat:
Maruti enjoys a dominant 51% market share in Cars/UVs.
Maruti volumes & market share
44.7%
45.3%
38.4%
39.4%
42.1%
45.1%
Volumes (mn)
47.4%
50.0%
1.6
Market share
46.9%
51.2%
1.7
51.0%
1.1
0.9
1.0
1.1
1.1
1.2
1.3
1.4
1.4
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
Industry structure:
As tabled on page 54, the Cars/UVs sector has a Sector Structure Score
of 3 i.e. moderately attractive. This implies that much of Maruti’s moat arises from its
Corporate Strategy.
Corporate Strategy:
We evaluate Maruti’s strategy on the Porter framework as follows.
Strategy element
Distinctive value proposition
Maruti’s position
“A car for every pocket”
Given the predominant middle class in India, Maruti offers
value-for-money cars with the widest possible sales and
service network (3,000+ showrooms and 4,000+ authorized
service centers across 1,900 cities and towns)
Maruti has created an auto hub around its manufacturing
plants with all components reaching it on a just-in-time basis
Maruti itself has entered into JVs for quite a few
components
It has tie-ups with several insurance companies for vehicle
insurance
It has entered into a JV with Toyota for electric cars,
insulating it from sector disruption, if any
Its latest strategy is to get all incremental cars produced by
Suzuki, making it asset-light
All of the above is very tough for competitors to replicate
Maruti’s biggest trade-off is to stay predominantly focused
on value-for-money cars
With this, it has gained tremendous scale, which further
helps it keep costs and selling prices low
Tailored value chain
Trade-offs distinct from rivals
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Fit across value chain
Maruti’s scale and already large car population makes its
dealer showrooms and service centers highly viable. More
and more entrepreneurs are willing to take up Maruti
dealership, further widening its sales and service network –
a strong hook for car customers
Thus, Maruti’s fit has got it into a virtuous cycle of rising
customers leading to rising dealerships, in turn, leading to
rising customers
Maruti continues to innovate and improve its strategy
e.g. Nexa network of showrooms for its premium cars
Continuity over time
Impact of Economic Moat:
From FY06 to FY18, Maruti clocked a steady PAT CAGR of 15%. In
the two years post that, profits more than halved due to the slowdown led by financial crisis.
Still FY06 to FY20, its stock has delivered return CAGR of 12% v/s 7% for the Sensex.
Maruti’s Economic Moat delivers steady financials, driving its long-term outperformance
70
60
1200
50
40
30
20
Maruti - Adjusted PAT
(INR bn)
Maruti - Stock performance
900
600
300
0
10
0
Maruti year-end price - Indexed
Sensex - Indexed
Example of breached Economic Moat – Bharti Airtel
Economic Moat:
Beginning 2002, Bharti Airtel was India’s largest wireless service provider.
It was supremely profitable with rising PAT and robust RoE.
How the moat got breached:
Two key events took place –
1.
Disruptive competition:
In 2008, the government issued 122 fresh 2G licenses. Players
like Idea, Telenor, Tata Docomo, etc, entered the fray and competition swelled. Still,
Bharti went from strength to strength with PAT rising from INR 63 billion in FY08 to INR
91 billion in FY10.
2.
Sub-optimal capital allocation:
Then, in mid-2010, Bharti ventured into Africa by
acquiring Zain Telecom for an enterprise value close to USD 11 billion.
Bharti’s moat got breached, and ever since, its PAT and RoE are nowhere close to their peak.
The stock has underperformed the benchmark since 2010.
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Bharti’s PAT peaked in FY10, and has never looked up ever since the Zain acquisition in June 2010
91
76
Bharti Airtel PAT (INR bn)
58
42
21
26
50
63
40
58
44
45
6
12
20
14
-4
Disruptive competition and sub-optimal capital allocation breached Bharti’s moat
42.9%
38.3%
Bharti Airtel RoE
Bharti acquires
Zain Africa
33.9%
27.0%
122 new 2G
licenses issues
30.0%
26.2%
13.1%
8.4%
14.4%
9.1% 9.3%
4.2% 4.7%
6.6%
2.0%
7.8%
-0.5%
Bharti has underperformed since 2010
250
200
150
Bharti stock price movement
100
50
Sensex - Rebased
0
Bharti stock price - Rebased
Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20
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Framework #14
CAP & GAP
We covered CAP & GAP in our 22
nd
Wealth Creation Study
(2017). Click on the cover page to access the full study.
What is CAP?
Competitive Advantage Period (CAP) is the time during which
a company generates returns on investment that exceed its
cost of capital. If a company earns above-average return on its
invested capital, it will attract competitors who will be willing
to operate at lower returns, eventually driving down overall
industry returns to economic cost of capital, and sometimes
even below it. In effect, CAP is a measure of longevity of a company’s Moat.
Diagrammatic representation of CAP
Rate of
Return
Competitive forces work to
bring down excess return
Excess
Return
WACC
Return = WACC
CAP
0
Time (in years)
The factors influencing CAP are: (1) Industry attractiveness (Framework #11) and (2) Company
strategy effectiveness (Framework #13).
Key takeaway:
A portfolio of long-CAP companies has the potential to meaningfully outperform
benchmark indices.
What is GAP?
Growth Advantage Period (GAP) is the time during which a company grows its profits at a faster
rate than that of the benchmark indices. Pace of earnings growth in a company is typically highest
during its GAP. As stock returns are correlated with earnings growth, it is logical that stocks
outperform the benchmark during their GAP.
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Framework #14
The 3 major factors determining GAP are: (1) CAP, (2) Industry growth, and (3) Company growth
mindset (Framework #23).
There are two dimensions to GAP: (1) Length (i.e. longevity of growth) and (2) Height (rate of
growth). The takeaways are –
Long GAP companies are typically those with secular businesses, and will deliver reasonably
high profit growth over an extended period.
High GAP companies are predominantly those with cyclical businesses, and will deliver super-
normal profit growth but in a very short burst.
GROWTH CHECKLIST
The Business Checklist will lead to a thorough understanding of the company’s business and its
moat (i.e. sustainable competitive advantage). This sets the stage for two key questions related
to its growth opportunity and growth plans.
Q#9 What is the addressable market opportunity and its key drivers?
Objective:
This question helps to assess the growth potential of a company. It is very challenging
for a company to grow sales and profit when its end-market itself is not growing.
What to look for:
The current and potential size of the market(s) which the company operates in
There are various ways to assess the potential market size for a company’s products or services.
Level of domestic penetration e.g. Indian cars opportunity
India’s car population is estimated at 28 million. Considering 250 million households, this
translates to penetration of 11%. For the US and most European countries, this number
would be 80-100%. China’s penetration currently is 45%. Even if we reach 30%
penetration in 10 years’ time, we are looking at a population of over 75 million cars i.e.
incremental volumes of 4.7 million every year. Further, at least 10% of current population
will come up for replacement every year. Thus, it’s a 5 million cars per annum opportunity
versus the current annual sale of 2.8 million cars. Thus, there’s a huge addressable
opportunity.
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India’s potential car sales is 5 million per annum v/s current 2.8 million
Car household
penetration
45%
> 80%
Potential car
population (mn)
75
Potential car
annual sales
(mn)
5.0
2.8
28
11%
Current
India
China
US/Europe
10 years
later
Actual
Potential
Global benchmarking e.g. Insurance
IRDA’s (Insurance Regulation & Development Authority) latest Annual Report suggests that
world insurance premium is at USD 5.2 trillion or 6% of global GDP. Against this, India’s
premium is about USD 100 billion i.e. 3.7% of GDP. Despite the second highest population in
the world, India ranks 10
th
in life insurance and 15
th
in non-life insurance. Thus, India’s
annual insurance market potential is at least 1.6x the current level.
Insurance is a lucrative opportunity in India
Insurance Premium (% of GDP)
World
6.1%
India's global rank
Life insurance
10
India
3.7%
Non-life
15
Source:
Insurance Regulatory & Development Authority Annual Report, 2018-19
Other growth frameworks
– Value Migration (Framework 15), India’s NTD (Next Trillion
Dollar, Framework #16) and Winner Categories, Category Winners (Framework #17).
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Framework #15
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 here stands for profits and market cap. Value Migration results
in a gradual yet major shift in how the current and future Profit Pool
in an industry is shared. 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.
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.
Examples of Value Migration
Sector/Company
Value migration from
IT Services
Pharmaceuticals
Banking
Telecom
e-tailing
Gems & Jewelry
Aviation
Developed world
Developed world
State-owned banks
Fixed line networks
Brick-and-mortar retailing
Unorganized jewelry market
Full service airlines and railways
Value migration to
Low labor-cost countries
Low-cost chemistry countries
Private banks
Wireless networks
Online retailing
Organized jewelry retailing
Low cost airlines
Framework #16
India’s NTD Opportunity
We covered India’s NTD Opportunity in our 12
th
Wealth Creation
Study (2007). Click on the cover page to read the full study.
NTD here stands for Next Trillion Dollar of India’s GDP. The
essence of the framework is this –
It took India over 60 years post-Independence to clock its
First Trillion dollar of GDP.
Having achieved this, every successive NTD is taking shorter
and shorter time (see chart below).
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Framework #16 (continued)
India is adding the Next Trillion Dollar of GDP in successively few years
The Next Trillion Dollar opportunity
India GDP trend (USD bn)
3rd US$ tn
4th US$ tn
3 years
5th US$ tn
3 years
8 years
2nd US$ tn
7 years
1st US$ tn
61 years
The chart below depicts the typical disposal of per capita GDP. At per capita GDP of USD 1,000,
60% of it would be towards basic spend (food, clothing, shelter, health), 10% towards
discretionary spend such as education and travel, and 30% towards saving. When per capita GDP
trebles to US# 3,000, basic spend would increase barely 20% to around USD 750, discretionary
would increase to USD 1,050 and leaving the balance as savings.
Trebling of per capita GDP leads to 10x opportunity in discretionaries and 4x opportunity in savings &
investment products
Basic spend
Discretionary spend
Saving
300
100
600
GDP p.c. $1,000
4x
10x
1200
1,050
750
GDP p.c. $3,000
Thus, linear GDP growth leads to exponential opportunity for many sectors, especially those
catering to discretionary needs such as two-wheelers, cars, ACs, etc and savings/investment
products such as bank deposits, mutual funds, insurance, etc.
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Framework #17
Winner Categories, Category Winners
We covered Winner Categories, Category Winners in our
14
th
Wealth Creation Study (2009). Click on the cover page
to read the full study.
Winner Categories
are categories (i.e. sectors) which are –
(1) Expected to grow at least 1.5x nominal GDP growth; and
(2) Consolidated i.e. not too many players to partake of the
expected growth.
Category Winners
are companies in Winner Categories with
(1) Entry Barriers / Competitive advantage and (2) Great Management.
Winning investments
happen when Category Winners are bought at reasonable valuation.
Example: Eicher Motors
Consider the period 2010 to 2020.
Winner Category:
Auto 2/3-wheelers is a Winner Category with revenue growth at 21% is
more than 1.5x the corresponding nominal GDP growth of 12%. It is a highly consolidated
sector with only a handful of players.
Category Winner:
Eicher Motors enjoys huge competitive advantage in its niche of super
premium motorcycles, coupled with a change of management led by Siddharth Lal.
Winning Investment:
In March 2010, Eicher Motors was reasonably valued at a P/E of 21x.
As a result, over the next 10 years, it is a massive outperformer with FY10-20 return CAGR of
35% v/s 5% for the Sensex.
In 2010, Eicher was a Category Winner available at reasonable valuation i.e. a Winning Investment
5000
Eicher Motors Share Price Movement
4000
Eicher Motors - Rebased
3000
2000
Sensex - Rebased
1000
0
Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20
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Q#10 What is the company’s growth plan? How sustainable is the growth?
Objective:
Having understood the addressable opportunity, the next step is to know what is the
company’s growth plan to tap into that opportunity.
What to look for:
Capacity expansion
New product launches / Business diversification
Exports / New geographies
Mergers & Acquisitions
CVPM (Cost-Volume-Price-Mix) Analysis (Framework #18)
Funding of the growth.
We briefly discuss each one of the above.
Capacity expansion
If the addressable opportunity for a company is large, it will need to expand capacity to capitalize
on the same. Once the fresh capacity is commissioned, it is expected to contribute to the
company’s sales and profit. Investors need to bear in mind the gestation period for the new
capacity to go on stream. Also, capacity ramp-up will most likely be gradual. Sales and profit
projections need to be made accordingly.
Shree Cement: Aggressive capacity expansion
Shree Cement capacity trend (mn tons)
5%
8%
6%
7%
8%
8%
5%
4%
4%
5%
5%
12
FY10
13
FY11
14
FY12
14
FY13
18
FY14
22
26
29
35
38
40
FY15
FY16
FY17
FY18
FY19
FY20E
Shree Cement capacity (mn tons)
% share of sector capacity
New product launches / Business diversification
This is yet another way to ensure growth in sales and profits. However, not all new launches may
be successful. Here, the company’s past track record of product launches is a good indicator of
the success of its future products. ITC is a good example of successful product launches in its
FMCG segment. Reliance is a good example of business diversification, venturing into retail and
telecom from its oil & gas business.
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ITC: Non-cigarette FMCG sales on the rise
150
30%
ITC - FMCG Sales trend
120
90
25%
20%
15%
60
30
10%
5%
0
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FMCG Sales (INR bn)
% of total (RHS)
0%
New geographies/Exports
Companies may foray into new geographies to expand their addressable opportunity. Here, the
new geography may be within India itself and/or newer markets overseas. It must be
remembered that a company’s sustainable competitive advantage in one market does not
migrate to the new one. The dynamics of each geography are different, and the company will
need to adapt its business model accordingly.
Alkem has set a blazing trend of exports
30.0
42%
Alkem Exports Trend
25.0
20.0
Exports (INR bn)
35%
% of sales
28%
15.0
10.0
21%
14%
5.0
0.0
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
7%
0%
Mergers & Acquisitions
This is yet another way to boost sales and earnings growth, without having to go through the
gestation involved in new capacity expansion, product launches or foray into new geographies.
However, successfully integrating the acquired entity is a massive challenge, both operational,
and more importantly, human. Corporate history is replete with examples of failed mergers and
acquisitions, both in India and globally.
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Motherson has an excellent track record of acquisitions, mostly global
Motherson Sumi PAT mix (INR bn)
Standalone PAT
Subsidiaries PAT
7.3
7.2
8.0
5.7
2.3
3.5
5.1
2.7
0.6
1.0
1.8
2.9
3.2
4.7
-0.3
5.4
7.2
8.3
8.8
8.1
9.0
-0.6
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
Tata Steel’s Corus acquisition has gone awry
Tata Steel PAT mix (INR bn)
39
52
-72
Standalone PAT
Subsidiaries PAT
100
69
67
51
-15
-138
64
60
50
64
-68
105
10
-52
34
42
-90
-15
-103
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
Framework #18
CVPM Analysis
This framework is borrowed from the domain of cost accounting. A Cost-Volume-Price-Mix
Analysis, where possible, will help determine how sales growth translates to profit growth.
Example:
A company makes two products A and B. In FY21, it sold 100 units of each. Product A is
sold at INR 100 per unit, and Product B at INR 120. Raw Material cost is INR 60 per unit for Product
A and 70 per unit for Product B. All other operating costs are fixed at INR 2,000 for both products.
In FY22, the company reports volume growth of 20%, the mix changes to 45% Product A and 55%
Product B. Both, product prices and raw material see cost inflation of 10%. How much will FY22
EBITDA grow by?
As the table below shows, a 20% volume growth translates to a high 60% EBITDA growth due to
the interplay of Cost, Volume, Price and Mix –
Cost -
Fixed costs remain the same despite volume growth; so per unit incidence is lower
Volume –
Total volume grows by 20%
Price –
Selling price goes up by 10%, but due to mix change, average selling price is up 11%
Mix –
Changes from 50:50 to 55:45 in favor of Product B, which has higher contribution per
unit.
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Framework #18 (continued)
Example of CVPM analysis
FY21
Product Product
A
B
100
100
50%
50%
10,000
100
(6,000)
60
4,000
40
(2,000)
20
2,000
20
20%
12,000
120
(7,000)
70
5,000
50
(2,000)
20
3,000
30
25%
Total/
Avg
200
FY22
Product Product
A
B
108
132
45%
55%
11,880
110
(7,128)
66
4,752
44
(2,000)
19
2,752
25
23%
17,424
132
(10,164)
77
7,260
55
(2,000)
15
5,260
40
30%
Total/
Avg
240
% change
Tota/
Avg
20%
Volume
Product Mix
Sales
Selling Price
Raw Materials
Per unit
Contribution
Per unit
Fixed cost
Per unit
EBITDA
Per unit
EBITDA Margin
22,000
110
(13,000)
65
9,000
45
(4,000)
20
5,000
25
23%
29,304
122
(17,292)
72
12,012
50
(4,000)
17
8,012
33
27%
33%
11%
33%
11%
33%
11%
0%
-17%
60%
34%
Funding of the growth
Merely knowing a company’s growth plan is not enough. It is equally important to know how the
same in funded. There are 3 forms of funding –
1. Self-funded i.e. through internal accruals
2. Externally funded i.e. through debt and/or equity
3. Mix of both (1) and (2).
A mega capacity expansion or acquisition may involve raising of large doses of debt and/or equity
capital. Given this, in some cases, the capacity expansion may not be significantly profit-accretive
or EPS-accretive.
Having discussed the key aspects of a company’s growth plan, we present 3 growth-related
frameworks covered in our Wealth Creation Studies: 100x (Framework #19), Mid to Mega
(Framework #20) and Large unpopular (Framework #20).
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Framework #19
100x
We covered the 100x theme in our 14
th
Wealth Creation Study.
Click on the cover page to read the full study.
“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
What is 100x?
“100x” refers to stock prices rising 100-fold over time i.e.
“100-baggers” in stock market jargon. Very few investors
experience 100x in their investments 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 above quote above aptly puts it, “is the rarest
of the three” qualities, the other two being vision and courage.
What’s the framework to identify 100x stocks?
We have propounded SQGLP as the framework to identify
100x stocks. S stands for small i.e. market cap ideally around
US$1 billion or INR 75 billion. QGLP refers to the Quality, Growth,
Longevity and Price framework discussed on page 35.
Framework #20
Mid to Mega
We covered the Mid to Mega theme in our 15
th
Wealth Creation
Study. Click on the cover page to read the full study.
What is Mid to Mega?
We classify all stocks based on their market cap ranks as follows:
Mega – Stocks ranked 1 to 100
Mid – Stocks ranked 101 to 250
Mini – Stocks ranked below 250.
Mid to Mega is a significant crossover of a company from the Mid category to Mega. In the
process, the company delivers handsome stock returns. Every year, about 15 stocks crossover
from Mid to Mega, also implying a healthy strike rate of 10%.
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Framework #20 (continued)
What it takes for Mid to Mega?
The framework for Mid to Mega is “MQGLP with leadership inside”. The M stands for Midsize i.e.
rank 101 to 250. QGLP refers to the Quality, Growth, Longevity and Price framework discussed
on page 35. Another key dimension of Mid to Mega is market leadership i.e. ranked among the
top 3 in their respective sectors. This is because most of the Mega stocks are market leaders. So
any company which aspires to enter the Mega league needs to already reflect leadership traits.
Current Mid stocks which demonstrate market leadership
3M India
ABB
ACC
AIA Engineering
Amara Raja Batt.
Apollo Hospitals
Apollo Tyres
Astral Poly Tech
BHEL
Bank of India
Bata India
Bayer Crop Science
Bharat Electronics
Bharat Forge
Castrol India
Container Corpn.
Coromandel Intl
CRISIL
Dixon Technologies
Dr Lal Pathlabs
Emami
Endurance Tech.
General Insurance
Gillette India
Glaxo Pharma
Godrej Properties
Gujarat Gas
Honeywell Auto
IRCTC
ICICI Securities
Indiamart Intermesh
Indian Hotels
Kajaria Ceramics
Kansai Nerolac
LIC Housing Finance
Mahanagar Gas
Manappuram Finance
MRF
New India Assurance
NHPC
Oracle Financial
Page Industries
Polycab India
Power Finance
Rajesh Exports
REC
Relaxo Footwear
Schaeffler India
Sun TV Network
Supreme Inds
Tata Chemicals
TVS Motor
United Breweries
Varun Beverages
Voltas
WABCO India
Whirlpool India
Zee Entertainment
Framework #21
Large unpopular
This is yet another framework for growth-led returns on the stock market. Many large companies
become unpopular in the markets due to various reasons e.g. downturn in business cycle, adverse
regulatory change, perceived weak management, etc. But when these “large, unpopular”
companies turn around, they generate significant returns for investors.
Past example: HPCL
In end-FY13, on a revenue of over INR 2 trillion, HPCL stock was trading at a market cap of less
than INR 100 bn. This was mainly on perception of excessive government control over petrol and
diesel prices – a classic large, unpopular. In October 2014, the government deregulated diesel
prices. In the 4 years between FY13 and FY17, HPCL’s PAT rose 16x and stock price 5.5x, delivering
a handsome 53% return CAGR.
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Framework #21 (continued)
HPCL was a classic large unpopular stock in FY13
HPCL - PAT and stock price trend (FY13-17)
PAT (INR bn)
Stock Price (RHS)
175
350
144
82
63
69
47
15
FY15
FY16
FY17
5
FY13
11
FY14
Current example: ITC, PSUs
Currently, ITC and PSUs are classic cases of large, unpopular – ITC because of concerns regarding
ESG (Environmental, Social, Governance), and PSUs because of business downturn, and
government dilly-dallying on privatization. When this changes, expect healthy returns on these
stocks.
3.3 MANAGEMENT CHECKLIST
In his book
Paths to Wealth Through Common Stocks,
investment guru Philip Fisher writes,
“In evaluating a common stock, the management is 90 per cent, the industry is 9 per cent, and all
other factors are 1 per cent.”
Going by this math, the following 9 questions are critical in evaluating an investment idea.
Q#11 Is the management high on integrity and transparency?
Objective:
The objective is to establish Management Integrity at
the very outset. Else there is a great risk of the stock racing to zero!
What to look for:
No Sharp Practices (Framework #22)
Preferably full-tax paying company
Healthy dividend payout
A moment of management integrity, during interaction with
constituents such as customers, employees, distributors/
dealers, competitors, etc.
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What is management integrity?
We covered Management Integrity in our 24
th
Wealth Creation Study (2019). Click on the cover
page to read the full study. We present key extracts here.
For the purpose of equity investing, Management Integrity can be defined as dealing with all
company stakeholders honestly and with a sense of trusteeship. This is reflected as tabled below.
Management Integrity in a nutshell
Stakeholder
Company behavior
Corporate Parent /
Founders
Senior Management
Government
No or minimal conflict of interest (e.g. royalty for brand, technology)
No or minimal related party transactions
Reasonable compensation relative to company median
Calibrated stock options
Courtesy and respect for all employees
Adequate opportunity for personal and professional development
Fostering sense of ownership through calibrated stock options
Offering products and/or services matching customer expectations
Retaining customers through appropriate loyalty programs
Fair dealing on post-sale commitments e.g. warranties, repairs, etc
Maintaining fair terms of trade
Collaborating for innovations, where relevant
Presenting a true and fair view of the company's affairs through
annual and interim reports
Maintaining a rational policy of payouts (dividends and/or buybacks)
Timely paying due taxes, both direct and indirect
Abiding by the law of the land in all matters
Pursuing an active Corporate Social Responsibility program
Ensuring compliance with all community norms e.g. effluent-
treatment, waste management, etc
Employees
Customers
Suppliers
Shareholders
Community &
Environment
Compromised integrity typically gets reflected in the financial books in the form of Sharp
Practices (Framework #22).
On transparency, there are two points to monitor –
1. What’s the track record of the company meeting its performance guidance, if any, and
2. Whether the company is forthright in sharing with the investors negative developments as
well, rather than just the positive ones.
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Framework #22
Sharp Practices
Sharp Practices may be defined as “ways of behaving, especially in business, that are dishonest
but not illegal.” However, once the management starts resorting to Sharp Practices, it’s what
Satyam Computer founder B Ramalinga Raju wrote in his fraud confession letter, “like riding a
tiger, not knowing how to get off without being eaten”. It’s tough to say when a Sharp Practice
degenerates into an intentional fraud.
Authors Howard Schilit, Jeremy Perler and Yoni Engelhart in their book
Financial Shenanigans
identify two broad categories of accounting
shenanigans or Sharp Practices –
1. Earnings manipulation and
2. Cash Flow shenanigans.
The authors also present an interesting backdrop to the whole issue of
Sharp Practices. In 1988, there was a Hollywood comedy hit,
Twins.
The twins were born in a genetics lab as the result of a secret experiment to create the perfect
child. Thus, one of the twins gets all the desirable traits while the other gets the “genetic trash”.
The relationship between Earnings and Cash Flow is somewhat similar. Companies try their
utmost to present the best Earnings position, only to dump all the “financial trash” into the
Balance Sheet, reflecting in Cash Flow. The double-entry accounting term for this is –
Credit P&L A/c, Debit Balance Sheet
Apart from accounting Sharp Practices, there are also non-accounting ones such as related party
transactions and misleading earnings guidance.
Besides keeping an eye on the management’s Sharp Practices, investors would do well to keep a
tab on auditors’ report, top management changes, promoters’ pledged shares, and also take a
360-degree feedback on Management Integrity from customers, employees (current and ex),
distributors/dealers, suppliers, competitors, etc.
The purpose of the whole exercise detailed above – right from looking out for various Sharp
Practices to the 360-degree feedback – is to arrive at what author Michael Shearn in his book,
The Investment Checklist
calls,
the moment of integrity
i.e. that final piece of clinching evidence
as to whether the management is honest in its dealings with stakeholders or not.
In the final analysis, Philip Fisher’s words in
Common Stocks And Uncommon Profits
are most
appropriate: “Regardless of how high the rating may be in all other matters, however, if there is
a serious question of the lack of a strong management sense of trusteeship for stockholders, the
investor should never seriously consider participating in such an enterprise.”
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