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Motilal Oswal 22nd Annual Wealth Creation Study 2017 CAP & GAP – Power of longevity in Wealth Creation

Mumbai 08-Dec-2017

Motilal Oswal 22nd Annual Wealth Creation Study 2017
CAP & GAP – Power of longevity in Wealth Creation

TCS, Ajanta Pharma & Asian Paints – 
Biggest, Fastest & Most Consistent Wealth Creators

Mumbai, 8th December 2017: Motilal Oswal Financial Services Ltd. today announced the Motilal Oswal 22nd Annual Wealth Creation Study, 2017.
Every year for 22 years now, Mr. Raamdeo Agrawal, Joint Managing Director of Motilal Oswal Group, commissions an Annual Wealth Creation Study. 
The Motilal Oswal 22nd Annual Wealth Creation Study has two parts 
1) Findings on Wealth Creation during the period 2012-17, and
2) Theme 2018: CAP & GAP – Power of longevity in Wealth Creation

Key Conclusions of Motilal Oswal 22nd Annual Wealth Creation Study
•TCS, Ajanta Pharma & Asian Paints – Biggest, Fastest & Most Consistent Wealth Creator, respectively, between 2012 and 2017.

•Banking & Finance is the largest wealth creating sector between 2012 and 2017.

•State-owned companies have become marginalized in Wealth Creation with their share collapsing from 51% in 2005 to 10% in 2017.

•Payback ratio (Mkt Cap ÷ 5-years forward PAT) < 1 remains the most reliable indicator of superior Wealth Creation across market cycles.

•Longevated profit growth companies are few. Understanding of Competitive Advantage Period (CAP) and Growth Advantage Period (GAP) improves the chances of finding them.

•Moat without growth will underperform; growth without moat will end soon.

•Longevity and speed of growth are inversely correlated. 

•Three characteristics of CAP-cum-GAP companies are –
Clear strategy, High growth mindset, and High-growth industry situations.
Part 1) Wealth Creation Study findings
The 22nd Wealth Creation Study analyzes the top 100 wealth creating companies during the period 2012-17. Wealth created is calculated as change in the market cap of companies between 2012 and 2017, duly adjusted for corporate events such as mergers, de-mergers, fresh issuance of capital, buyback, etc. The Study identifies the Fastest, Biggest and Most Consistent wealth creators. Further, it analyzes key trends in wealth creation, provides insights into winning companies and distills strategies for successful equity investing.
Study Highlights – Wealth Creation

Top 100 Wealth Creators created Rs 38.9 lakh crores wealth during 2012-17
This is the highest ever quantum of Wealth Created. During 2012-17, Sensex CAGR was only 11%, but pace of Wealth Creation was healthy at 22% CAGR. This reinforces the point that Wealth Creation happens in all kinds of market conditions. So, investors are better off focusing on which stocks to invest in, rather than timing the markets.

TCS is the Biggest Wealth Creator for the fifth time in a row
TCS has emerged the biggest Wealth Creator for the period 2012-17, with Rs 2.5 lakh crores of Wealth Created. HDFC Bank is a close No.2 with Rs 2.3 lakh crores of Wealth Created.

Ajanta Pharma is the Fastest Wealth Creator for the third year in a row
Ajanta Pharma has emerged as the Fastest Wealth Creator for the second time in a row, with 2012-17 stock return at a whopping 96% CAGR. Eicher Motors is among the top 10 Fastest Wealth Creators in the last 6 studies, and Bajaj Finance in the last 4.

Asian Paints is the Most Consistent Wealth Creator
Asian Paints is the Most Consistent Wealth Creator over the last 10-year period 2007-17, by virtue of – (1) Appearing among top 100 Wealth Creators in each of the last 10 studies; and (2) Recording highest 10-year Price CAGR of 30%, ahead of Titan Company (27%) and HDFC Bank (22%).

 Other key takeaways
•Wealth Creation Classification by Industry: Banking/Finance has emerged as India’s biggest Wealth Creating sector after a gap of four years. The surge in Wealth Creation in the sector has been led by private banks and NBFCs..
•Wealth Creation by Ownership – PSU v/s Private: PSUs' (public sector undertakings) Wealth Creation performance remains weak during 2012-17: (1) The number of PSUs in the top 100 Wealth Creators is only 9, and (2) Wealth Created by these 7 PSUs is only 10% of the total. However this is higher than 2% and 4% in the previous two studies, suggesting early signs of potential revival in PSU fortunes.
•Wealth Creators by Valuation Parameters: Every study invariably suggests that the highest return is generated when payback ratio is less than 1x. (Payback is a proprietary ratio of Motilal Oswal, defined as current market cap divided by estimated profits over the next five years. For 2011, we calculate this ratio based on the actual profits reported over the next five years).
•Wealth Destroyers: The total Wealth Destroyed during 2012-17 is Rs 6 lakh crores, 15% of the total Wealth Created by top 100 companies. The broader theme of Wealth Destruction is cyclical downturn, led by Metals/Mining sector followed by Banking & Finance (mainly PSU banks).

Part 2) Theme 2018: CAP & GAP: Power of longevity in Wealth Creation

Backdrop: What is longevity?
For the purposes of this study, Longevity refers to the sustenance of a company’s competitive advantage (popularized by Warren Buffett as “Moat”) and earnings growth. The study attempts to measure the longevity of both moat and growth, and combine the learnings to identify characteristics of companies with long-term profit growth.

Measuring longevity of moat – 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.

The factors determining CAP are – (1) Industry structure, and (2) Company’s own strategy. Favourable industry structure and clear strategy tend to longevate CAP.

Measuring longevity of growth – 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. As stock returns are correlated with profit growth, it is logical that stocks outperform the benchmark during their GAP.

The major factors determining GAP are – (1) Industry growth, and (2) Company growth mindset. High industry growth and high company growth mindset tend to longevate GAP.

Putting CAP and GAP together
The study combines the learnings from CAP and GAP to identify three key characteristics of CAP-cum-GAP companies –
Clear strategy, High growth mindset, and High-growth industry situations

Two of the three characteristics above relate to company management. Hence, a thorough assessment of the management holds the key to successful investing. As Phil Fisher has said, "In evaluating a common stock, the management is 90%, industry is 9%, and all other factors are 1%."

•This study is primarily an analysis of economic data, company financials and stock prices.
•The companies mentioned here should not be construed as our investment recommendations or opinions.

About Motilal Oswal Financial Services Limited.

Motilal Oswal Financial Services Ltd. (NSE: MOTILALOFS, BSE: 532892, BLOOMBERG: MOFS IN) is a well-diversified, financial services company focused on wealth creation for all its customers, such as institutional, corporate, HNI and retail. Its services and product offerings include wealth management, retail broking and distribution, institutional broking, asset management, investment banking, private equity, commodity broking and principal strategies. The company distributes these products through 1,554 business locations spread across 530 cities and the online channel to over 750,077 registered customers. MOFSL has strong research capabilities, which enables them to identify market trends and stocks with high growth potential, facilitating clients to take well- informed and timely decisions. MOFSL has been ranked by various polls such as the Best Local Brokerage 2005, Most Independent Research - Local Brokerage 2006 and Best Overall Country Research - Local Brokerage 2007 in the Asia Money Brokerage Polls for India. MOSL won 4 awards in the ET-Now Starmine Analyst Awards 2010-11, placing it amongst the Top-3 award winning brokers, was ranked No. 2 by AsiaMoney Brokers Poll 2010 in the Best Local Brokerage Category and won the ‘Best Market Analyst’ Award for 2 sectors at the India’s Best Market Analyst Awards 2011. MOFSL won the ‘Best Capital Markets and Related NBFC’ award at the CNBC TV18 Best Banks and Financial Institutions Awards 2011. MOSL also won the ‘Best Equity Broking House’ award for FY11 at the Dun & Bradstreet Equity Broking Awards 2011. MOSL won the ‘Best Performing National Financial Advisor Equity Broker' award at the CNBC TV18 Financial Advisor Awards 2012, for the second year in a row. MOSL also won ‘Best Equity Broker’ award at Bloomberg UTV Financial Leadership Awards 2012, ‘Retailer of the Year (Banking & Financial Services) award at Retail Excellence Awards 2012, and was ranked 2nd in the “Best Overall Brokerage” category by Asia Money in 2011. MOFSL won the ‘Best Employer Brand’ Award at the IPE Banking, Financial Services & Insurance Awards 2012. 

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