Motilal Oswal 27th Annual Wealth Creation Study 2022
Consistents & Volatiles – The two dimensions of Wealth Creation
Reliance Industries, Adani Transmission & Adani Enterprises
Biggest, Fastest & Most Consistent Wealth Creators
Mumbai, 08 December 2022: Motilal Oswal Financial Services Ltd. today announced the Motilal Oswal 27th Annual Wealth Creation Study, 2022. Every year for 27 years now, Mr. Raamdeo Agrawal, Chairman of Motilal Oswal Group, commissions an Annual Wealth Creation Study.
The Motilal Oswal 27th Annual Wealth Creation Study has two parts:
1) Findings on Wealth Creation during the 5-year period 2017-2022 (March ending)
2) Theme 2023: Consistents & Volatiles – The two dimensions of Wealth Creation
Key Highlights of Motilal Oswal 27th Annual Wealth Creation Study
· Reliance Industries, Adani Transmission & Adani Enterprises – Biggest, Fastest, & Most Consistent Wealth Creator,
respectively, between 2017 and 2022. Adani Enterprises and Adani Transmission are also the top All-round Wealth Creators.
· Technology sector is the largest wealth creating sector between 2017 and 2022, followed by the Financial sector.
· The Financial sector, coming out of despair, should continue to dominate Wealth Creation in the foreseeable future.
· There are only two types of companies - Consistents and Volatiles
· Consistency is the source of outperformance; Volatility is the source of underperformance
· Excellence in execution is non-negotiable for Consistency
· Buying below median valuations tilts the odds in favour of investors
Part 1) Wealth Creation Study findings
The Motilal Oswal 27th Annual Wealth Creation Study 2022 analyzes the top 100 wealth creating companies during the period 2017-22. Wealth created is calculated as change in the market cap of companies between 2017 and 2022 (March ending), 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
2017-22 Wealth Created at INR 92.2 lakh crores is the highest ever by far
- During 2017-22, the top 100 Wealth Creators of India Inc created wealth of INR 92.2 lakh crores, the highest ever by far.
Reliance smashes all records to emerge as the largest Wealth Creator
- For the fourth time in a row, Reliance Industries has emerged the largest Wealth Creator over 2017-22.
- This takes Reliance’s overall No.1 tally to 9 in the last 16 five-year study periods.
- As in recent studies, TCS, Infosys and HDFC Bank remain among the top 5 Wealth Creators.
Adani Transmission is the Fastest Wealth Creator for the second time in a row
- For the second successive time, Adani Transmission has emerged the Fastest Wealth Creator with 2017-22 Price CAGR of 106%.
Adani Enterprises is the Most Consistent Wealth Creator for the second successive year
- We define Consistent Wealth Creators based on the number of years the stock has out-performed in each of the last 5 years. Where the number of years is the same, the stock price CAGR decides the rank.
- Over 2017-22, Adani Enterprises has emerged as the Most Consistent Wealth Creator. It has outperformed the BSE Sensex in all the last 5 years, and has the highest price CAGR of 97%.
Two Adani Group companies are the Best All-round Wealth Creators
- We define All-round Wealth Creators based on the summation of ranks, under each of the 3 categories – Biggest, Fastest and Consistent. Where scores are tied, the stock price CAGR decides the All-round rank.
- Based on the above criteria, Adani Enterprises has emerged as the Best All-round Wealth Creator, followed by group company Adani Transmission.
Other key takeaways
·
Wealth Creation Classification by Industry: The Technology sector has emerged as the largest Wealth Creator after a gap of 8 years.
·
Wealth Creation by Ownership – PSU v/s Private: Wealth Creation by PSUs (public sector undertakings) over 2017-22 is the worst ever to date. The only Wealth Creating PSU is Gujarat Gas. Wealth Created by the company is a mere 0.3% of the total Wealth Created.
·
Wealth Destroyers: The total Wealth Destroyed during 2017-22 is INR 14 lakh crores, 16% of the total Wealth Created by top 100 companies. This is sharply below the previous Covid-hit study period 2015-20. Four of the top 10 Wealth Destroying companies are PSUs.
Part 2) Theme 2023: Consistents & Volatiles – The two dimensions of Wealth Creation
Defining Consistents & Volatiles
Our definitions make the abstract concepts of Consistency and Volatility concrete by backing them up with some math. (For ease of use, we call the consistent companies as “Consistents” and the volatile companies as “Volatiles”.)
For a company to be deemed a Consistent, it should meet the following 3 criteria –
1. Over a 15-year period, its annual PAT should not fall by over 10% more than thrice (twice if the period is 10 years);
2. No fall in PAT should be greater than 50%; and
3. The terminal year PAT should not be lower than the initial year PAT.
All companies that are not Consistents are Volatiles.
This way, the entire corporate sector can be divided into just two categories of companies – Consistents and Volatiles.
Sources of Consistency & Volatility
Whether a company is Consistent or Volatile is influenced by a wide range of industry-level and company-specific factors.
Industry-level factors
The important industry-level factors influencing Consistents and Volatiles are –
1. Nature of demand
2. Competitive landscape
3. Value inflow/outflow and
4. Government regulation.
Company-specific factors
The important company-specific factors influencing Consistents and Volatiles are –
1. Company strategy and execution
2. Industry leadership
3. Pricing power
4. Capital (mis)allocation.
Analyzing the numbers behind the narratives
We analysed about 700 companies listed throughout the last 15 years i.e. 2007 to 2022. Our top-level findings are tabled below.
Consistents v/s Volatiles – Top-level findings over the period 2007-2022
|
Consistent
|
Volatile
|
TOTAL
|
No. of years of PAT degrowth > 10%
|
Max 3
|
Greater than 3
|
|
Number of stocks
|
114
|
583
|
697
|
% of total
|
16%
|
84%
|
|
Outperformers
|
99
|
192
|
291
|
% of no. of stocks
|
87%
|
33%
|
|
Underperformers
|
15
|
391
|
406
|
% of no. of stocks
|
13%
|
67%
|
|
|
|
|
|
Average Return CAGR (2007-22)
|
17%
|
1%
|
|
Outperformers
|
18%
|
15%
|
|
Underperformers
|
5%
|
-6%
|
|
|
|
|
|
Nifty return
|
9%
|
9%
|
|
|
|
|
|
RoE
|
20%
|
2%
|
|
Outperformers
|
20%
|
13%
|
|
Underperformers
|
19%
|
-3%
|
|
|
|
|
|
PAT CAGR
|
16%
|
Not Meaningful
|
|
Outperformers
|
16%
|
12%
|
|
Underperformers
|
10%
|
Not Meaningful
|
|
|
|
|
|
Key takeaways –
· A very high 87% of Consistents have outperformed the benchmark. That figure is 33% in the case of Volatiles.
· The average 15-year return of Consistents is a high 17% as compared to 1% for Volatiles. (Benchmark Nifty return during this period is 9%.)
· There are outperformers in both the categories. However, Consistent outperformers have delivered an average 18% return CAGR v/s 15% for Volatile outperformers.
· A portfolio of Consistent companies is likely to have robust average RoE (20% in the above case) and PAT CAGR (16% in the above case).
Reconfirming the findings
We wished to reconfirm the above data over different time series. So, we repeated the exercise for the respective top 500 companies over 13 rolling 10-year periods from 2000 to 2022. The results staggered us. In every single 10-year period, Consistents as a group outperformed the benchmark, and in every single 10-year period, Volatiles underperformed the benchmark (tabled below). Even more staggering is that the outperformance-underperformance phenomenon holds true across market cap categories – large, mid and small.
Large: Top 100 companies by market cap;
Mid: Companies ranked 101 to 250;
Small: Companies ranked 251 to 500
How to create wealth from Consistents & Volatiles
There are two elements of Wealth Creation using equity stocks – (1) Entry strategy and (2) Exit strategy. The entry strategy for Consistents is to buy below median P/E (Price-to-Earnings ratio), and for Volatiles, it is to buy below median P/B (Price-to-Book ratio). As regards the exit strategy, it is possible to practice “Buy-and-Hold” in the case of Consistents. However, Volatiles must be sold at an appropriate price, typically significantly higher than median P/B. Failing to do this can lead to prolonged no or low return.
Conclusions
· There are only two types of companies – Consistents & Volatiles
Ø This makes the practitioner’s job significantly easy. Having bucketed a stock as either Consistent or Volatile, the next major steps are clear –
1. Determine whether it is likely to remain Consistent over the next 3 years at least
2. If yes, check whether its current P/E is below its long-period median
3. If yes, Buy.
1. Determine whether it is likely to hit a Consistency Patch over the next 3 years
2. If yes, check whether its current P/B is below its long-period median
3. If yes, Buy.
· Consistency is the source of Outperformance; Volatility is the source of Under-performance
Ø Consistents outperform only as long as they remain Consistent; they underperform if they turn Volatile.
Ø Likewise, even Volatiles outperform when they hit a Consistency Patch.
· Excellence in execution is non-negotiable for Consistency
Ø As seen earlier, there are cases of Consistents even in Volatile sectors. This is possible only through excellence in execution.
· Buying below median valuations tilts the odds in favour of investors
Ø The key words are “tilts the odds”. In investing, no methodology can assure a 100% guarantee of success.
IMPORTANT DISCLAIMER
• 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.