Embed Size (px)
Citation preview
11TH
ANNUAL WEALTH CREATION STUDY
2001-2006
Concept
Wealth Creation is the process by which a company enhances the market value of the capital entrusted to it by its shareholders.
MethodologyWealth Creator = Company creating >1b net wealth
Wealth Creation study Companies >1b net wealth
2001-06 628
2000-05 383
1999-04 294
1998-03 83
1997-02 85
1996-01 71
1995-00 130
Minimum Wealth Created by a company among top 100Rs32.5B
The Biggest
RANK COMPANY
NET WEALTH CREATED
(RS B)APPRECIATION
(X)
1 O N G C 1678 9.92 Reliance Inds. 1078 2.53 Indian Oil 555 5.44 Infosys Tech. 536 2.95 ITC 528 3.66 B H E L 515 15.87 Wipro 478 2.58 St Bk of India 404 4.89 S A I L 321 14.9
10 Tata Motors 320 14.3
RANK COMPANY
ADJ. PRICE
CAGR (%)APPRECIATION
(X)
M. Cap 2001 (Rs B)
1 Matrix Labs. 183.0 181.7 0.062 Kirl. Brothers 170.0 143.4 0.293 Pantaloon Retail 169.9 143.2 0.204 Aban Offshore 169.0 140.7 0.255 Natl. Mineral 154.6 107.1 2.726 Unitech 142.6 84.0 0.417 Bajaj Hindustan 138.5 77.2 0.578 B E M L 135.6 72.6 0.759 Hind. Const. 126.4 59.5 0.58
10 Financial Tech. 125.0 57.6 3.14
The Fastest
The Most Consistent
RANK COMPANY
APPEARED IN WC
STUDY (X)
PRICE CAGR WITH DIV.
REINVEST (%)
1 Hero Honda Motors 10 42.32 Ranbaxy Lab. 10 30.93 Wipro 9 57.74 Dr Reddys Lab. 9 46.35 Cipla 9 45.56 H D F C 9 44.47 Satyam Computers 8 68.28 Infosys Tech. 8 53.49 ITC Ltd 8 34.1
10 Nicholas Piramal 8 32.6
Comparative Performance V/s BSE Sensex
(31.3.01 To 31.3.06)
Wealth Creators V/s BSE Sensex
Growth : Sensex V/S Wealth Creators
YEAR Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06
5 Year CAGR
(%)
BSE SENSEX 3604 3469 3049 5591 6493 11280 25.6
y-o-y perf. (%) (27.9) (3.7) (12.1) 83.4 16.1 73.7
Wealth Creators Index 100 115 111 227 274 471 36.3
y-o-y performance (%) 15.1 (3.3) 104.0 21.0 71.6
Sensex EPS 172 201 272 348 450 523 24.9
Sensex PE 20.9 17.3 11.2 16.1 14.4 21.6
Wealth Creators PE 11.2 11.9 8.0 12.9 12.3 19.0
Wealth Creation in MarketParticulars Rs tnMarket Capitalisation 2001 5.6Market Capitalisation 2006 30.3Difference 24.7
TOP 100 Wealth CreatorsMarket Capitalisation 2001 3.9Market Capitalisation 2006 18.3Wealth Created 14.3
2006 addition over 2001TOP 100 Wealth Creators 14.3528 Wealth creators 4.4Balance companies and new listings 6Total 24.7
Industry Classification
Industry
Speed CAGR
(%)No. of Cos.
Contr. To Wealth
Created (%)
Contr. To Net Profit
(%)
Oil & Gas 46.5 8 19.0 23.5
Banks 46.7 15 12.2 15.3
Metals 59.2 9 11.5 16.2
Engineering 66.1 14 11.0 5.0
IT 23.6 5 9.7 6.6
Petrochem 22.5 2 7.9 10.6
Auto 64.6 8 7.7 5.5
Pharma 31.6 11 5.2 3.1
Cement 47.6 3 2.8 1.9
Sugar 121.3 2 0.8 0.4
Industries With Little Representation
IndustryNo of Cos
ROCE (%)
PAT (Rs B) PE P/S P/B
Cos in Top
100
Chemicals 48 14.5 9.8 15.3 1.2 3.2
Fertilizers 13 15.1 13.8 9.2 0.5 1.5 1
Paper 15 10.7 3.8 11.0 0.9 1.3
Tyres 8 9.6 2.2 23.5 0.5 2.0
Media 26 8.1 2.9 55.6 8.9 3.7 1
Hotels 18 15.6 6.5 30.0 5.7 4.7 1
Agrochemicals 11 14.9 4.1 24.4 2.2 3.4
Chlor-Alkali 5 22.5 2.7 5.9 0.8 1.5
Classification by Size
MARKET CAPITALIZATION
MEAN SIZE
NO. OF
COS
MEAN SPEED
(%)% Wealth Created
>= 45 132.5 23 27 51
25 < 45 31.3 10 52 14
12.5 < 25 17.6 17 48 12
5 < 12.5 8.2 21 60 11
2.5 < 5 3.4 10 94 6
< 2.5 0.9 19 118 6
All Companies 38.8 100 36.4 100
Large Unpopular Cos. Of 2001
CompanyMkt
Cap2006 (Rs B)
Mkt Cap 2001
(Rs B)
Net Wealth Created (Rs B)
Price CAGR
(%)
P/S 2001
P/B 2001
B H E L 550.0 34.8 515.2 73.7 0.6 0.9
S A I L 344.1 23.1 320.9 71.6 0.2 0.5
Tata Motors 357.1 16.6 320.2 70.3 0.3 0.5
L & T 334.2 55.0 298.7 61.5 0.7 1.4
Bajaj Auto 277.9 26.1 251.9 60.5 0.9 1.0
M & M 151.1 13.3 134.2 59.9 0.4 0.6
O N G C 1867.3 189.0 1678.2 58.1 0.8 0.6
Neyveli Lignite 125.9 15.5 110.5 54.2 0.6 0.3
Business Activity
Wealth Creation Study Focused Diversified
2001-06 97 3
2000-05 97 3
1999-04 96 4
1998-03 98 2
1997-02 96 4
1996-01 100 0
1995-00 95 5
1994-99 96 4
1993-98 93 7
1992-97 98 2
Product Attribute
2001-06No. of Companies
Wealth Created (RS B)
Wealth Created (%)
Brands 29 3,065 21.4
Commodity 48 8,084 56.5
Technology 23 3,153 22.0
Total 100 14,303 100.0
Business Dominance
PARTICULARSMonopolistic/ Dominant
Others Total
NO OF COMPANIES 62 38 100
NWC (Rs B) 12,108 2,195 14,303
% Net Wealth Created
85 15 100
SPEED (%) 36.0 38.3 36.3
Classification By Capital Allocation
Company Name
Change in Mkt Cap (Rs B)
Change in CE (Rs B)
ROCE 06 (%)
ROCE 01(%)
Chg Mkt cap / Chg CE
S A I L 321 -18.5 36.5 5.5 -
B H E L 515 30.0 33.4 7.0 17.2
Tata Motors 340 21.9 27.8 -0.1 15.5
ITC 532 47.9 35.6 39.3 11.1
Wipro 486 45.5 36.2 40.3 10.7
Infosys Tech. 548 55.1 39.7 50.5 10.0
O N G C 1678 318.9 32.8 27.5 5.3
Indian Oil 555 191.0 13.9 12.7 2.9
St Bk of India 404 141.8 15.9 11.9 2.8
Reliance Inds. 698 448.9 17.3 18.1 1.6
Classification ByEarnings Growth
Earnings Growth
No. of Companies
Wealth Created (%)
CAGR in MCAP (%)
0-10 18 7.8 15.3
10-20 16 16.1 37.2
20-30 24 38.6 35.5
30-40 12 15.5 42.5
>40 30 22.0 72.8
Total 100 100 36.4
Classification By Age Group
NO. OF YEARS
NO. OF COS.
WEALTH CREATED
(Rs B)% WEALTH CREATED
0-20 17 3135 21.9
21-40 25 4031 28.2
41-50 18 2380 16.6
51-70 22 2949 20.6
>70 18 1807 12.6
Total 100 14303 100.0
Median age is 45 years
Ownership: State V/S Private
WEALTH CREATORS: STATE OWNED V/S PRIVATELY OWNED
2001-2006
STATE-OWNED PRIVATE
Number of Wealth Creators 26 74
5-year Earnings CAGR (%) 20 26
5-year Market Cap CAGR (%) 47 32
P/E at the beginning (x) 4.8 18.3
P/E at the end of study period (x) 13.6 23.5
Wealth Created (%) 35.9 64.1
Export Performance
0
5
10
15
20
25
30
35
40
45
50
2002 2003 2004 2005 2006
8
9
10
11
12
13
14
15
16Sales Growth (%)
Export Growth (%)
Export % to Sales
49 Companies have <15% export T/O36 Companies have >15% export T/O
Valuations 2001Price to Book (x) No of Cos % Wealth Created MCAP CAGR %
<1 51 50.2 56.61-2 21 13.0 33.4
>2 28 36.8 25.7
P/E (x) No of Cos % Wealth Created MCAP CAGR %
<5 37 35.7 56.35-10 24 17.7 39.9
>10 39 46.7 28.3
P/Sales (x) No of Cos % Wealth Created MCAP CAGR %
< 0.5 40 27.6 52.5
0.5-1.0 21 31.8 57.0>1 39 40.6 25.2
Valuations 2001Payout (%) No of Cos % Wealth Created MCAP CAGR %
>50 13 7.9 18.8
25-50 40 44.3 46.7
0-25 47 47.9 35.0
Payback Ratio (x) No of Cos % Wealth Created MCAP CAGR %
0.0-0.5 41 44.3 59.00.5-1.0 21 16.1 45.6
1.0-2.0 22 22.2 30.5
>2 16 17.3 20.1
Cash Flow/ Price(x) No of Cos % Wealth Created MCAP CAGR %
<5 33 40 545-10 13 22 30
>10 39 38 28
Wealth Destroyers
Co_NameMarket
Cap 2006 Rs B
Market Cap 2001
Rs B
Net Wealth Destroyed
Rs B
Loss in Mkt. Cap
(%)
Terms of Trade
Pentamedia 1.1 42.6 36.6 94 194
NIIT 5.7 27.7 21.9 59 158
Sterlite Optical 5.7 20.3 14.9 73 103
Morepen Labs. 1.5 8.9 8.8 93 208
Silverline Tech 1.2 6.2 8.0 94 384
Only 5 companies have destroyed wealth of over Rs5b.Total wealth destroyed by top 50 destroyers is only Rs124b.Hence, there is no serious wealth destruction over the last 5 years
“There is absolutely no substitute for paying right price.
In the Bible, it says that love covers a multitude of sins.
Well, in the investing field, price covers a multitude of mistakes.
For human beings, there is no substitute for love.
For investing there is no substitute for paying right price
– absolutely none.”
(Van Dan Berg, OID, April 2004)
THEME 2007:
Importance of ‘Terms of Trade’ in Wealth Creation
Why ‘Terms of Trade’
66% of wealth creators have earnings growth of
over 20%76 of the 85 non-banking wealth-creating companies
have positive operating cash flowOperating cash flow = cash profit + working capital
changeIt is not only important to make profit but also to
realize it in the form of cash.
Terms Of Trade
Business entity primarily deals with two outside forces –(1) suppliers, dealings with whom reflect in creditors; and (2) customers, dealings with whom reflect in debtors
FAVORABLE TERMS OF TRADE
ADVERSE TERMS OF TRADE
Companies categorized into four situations
Classification According to Terms of Trade
Creditors Cycle
Debtors Cycle
Long Short
LongBad, but
manageableGreat
Short Worst situation Good
Determinants of Terms of Trade
Instances of low debtors:Consumer businessesCommodities quoted in global markets on spot basisMonopolistic suppliers of goods and services Goods and services sold on prepaid basisGoods in short supply
Effect on Companies
Benefits of favorable termsReduction in capital intensity Strong free cash flows
Adverse Terms of Trade Banks control the destiny
Wealth Creators Enjoy Favorable ‘Terms of Trade’
No of
companiesWealth Created
(Rs B)% wealth created
Speed CAGR (%)
Favourable 70 10123 81 33.2
Adverse 15 2437 19 29.3
Total 85 12560 100 35.2
Wealth Destroyers Have Adverse ‘Terms of Trade’
No of CosWealth
Destroyed Rs B% Wealth Destroyed
Speed CAGR (%)
Adverse 37 -105 84.8 -22.6
Favourable 13 -19 15.2 -18.9
Total 50 -124 100.0 -21.9
Terms of Trade Are Usually Stable
BSE 500 Companies
No of companies % of companies
Original Terms
Final Terms Final Terms
Favorable Adverse Total Favorable Adverse Total
Adverse 62 124 186 14 29 43
Favorable 205 38 243 48 9 57
Total 267 162 429 62 38 100
77% of BSE 500 companies had unchanged terms of trade
Wealth Creators Enjoy Favorable ‘Terms of Trade’
Co_Name
Terms of Trade 01
(%)
Terms of trade 06
(%)
Price CAGR
(%)ROCE 01 (%)
ROCE 06 (%)
Matrix Labs. 63 70 183 23 22
Pantaloon Retail 59 10 170 6 11
Unitech 13 4 143 9 16
Bajaj Hindustan 9 32 139 9 17
B E M L 66 65 136 5 32
Hind.Construct. 2 1 126 21 9
Areva T&D 100 79 121 3 28
Bharat Forge 92 46 94 17 17
Bharat Electronic 42 45 93 34 43
Siemens 57 66 87 31 47
Wealth Creators with Adverse ‘Terms of Trade’
Co_Name
Terms of Trade 01
(%)
Terms of trade 06
(%)
Price CAGR
(%)ROCE 01 (%)
ROCE 06 (%)
Wockhardt 113 110 32 25 18
Ranbaxy Labs. 114 108 19 14 7
Sesa Goa 122 155 118 7 74
Wipro 123 114 20 40 36
Glenmark Pharma 134 222 92 14 10
Sun Pharma. 157 158 45 33 16
Satyam Computer 218 266 29 55 33
Cummins India 250 133 33 25 31
Infosys Tech. 258 172 24 51 40
Tata Chemicals 325 120 47 12 15
HCL Tech. 409 126 12 27 26
Wealth Creators With A Positive Shift
Co_Name
Terms of Trade 01
(%)
Terms of trade 06
(%)
Price CAGR
(%)ROCE 01 (%)
ROCE 06 (%)
Thermax 105 44 93 -1 41
Crompton Greaves 115 82 113 2 29
Asian Paints 115 59 31 28 44
Jindal Steel 118 36 83 19 18
Glaxosmithkline 118 31 28 28 71
Dabur India 122 25 32 21 47
Kirl. Brothers 126 84 170 14 57
B H E L 130 81 74 7 33
Financial Tech. 131 4 125 13 41
Engineers India 136 61 54 28 21
Wealth Creators - Shift From Favorable To Adverse
Co_Name
Terms of Trade 01
(%)
Terms of trade 06
(%)
Price CAGR
(%)ROCE 01(%)
ROCE 06 (%)
Tata Power Co. 64 112 42 12 11
Cipla 90 138 27 33 30
Zee Telefilms 89 156 14 4 4
Hind.Zinc 31 166 90 24 57
Natl. Mineral 93 205 155 27 69
‘Terms of trade’ are broadly stable.Favorable ‘terms of trade’ is one of the enablers of
high RoCE and should be looked for while searching
for winners.
Conclusions From Terms of Trade
Looking Forward
CompanyBook Value Price
Price / Book Value
Terms of Trade (%)
HPCL 275 270 1.0 20
JSW Steel 320 379 1.2 28
Usha Martin 150 174 1.2 56
Shipping Corp.
170 167 1.0 31
MARKET OUTLOOK
Market Outlook
To form our opinion on the markets, we have looked at the following parameters:
1. Corporate earnings
2. Interest rates
3. Valuations
India: Corporate Profit To GDP (%)
India: 10-year G-sec Yield (%)
Earnings Yield/G-sec YieldDespite the run-up, Indian equities are still
reasonably valued
Sensex & P/EDespite the run-up, Indian equities are still
reasonably valued
Conclusions
Only corporate earnings growth is not sufficient for
markets to rise to higher levels.Large unpopular companies have been the source of
bulk of wealth creation.Favorable 'terms of trade' are an important
characteristic of a wealth creating company.'Terms of trade' are broadly stable and don’t change
often. But when 'terms of trade' change from adverse
to favorable, the impact on speed of wealth creation
can be significant.
Thank you
