Motilal Oswal’s 19th annual wealth creation study titled: “100x: The Power Of Growth In Wealth Creation” by CSInvesting

100x: The Power Of Growth In Wealth Creation

Highlights

  • 100x stocks are few. Finding them requires “vision to see, courage to buy, and the patience to hold.”
  • Value migration offers the most predictable 100x opportunities.
  • The 100x process is captured in SQGLP – Size, Quality, Growth, Longevity and Price.
  • “In evaluating a common stock, the management is 90%, industry is 9%, and all other factors 1%.” (Phil Fisher)
  • Quality does not guarantee growth, and in turn, rapid longterm Wealth Creation.

“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

100x Wealth Creation Motilal Oswal

Wealth Creation Study – Objective, Concept & Methodology

Objective

[drizzle]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 for the past 19 years, we endeavor to cull out the characteristics of businesses, which create value for their shareholders.

As Phil Fisher says, “It seems logical that even before thinking of buying any common stock, the first step is to see how money has been most successfully made in the past.” Our Wealth Creation studies are attempts to study the past as a guide to the future, and gain insights into the various dynamics of stock market investing.

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 over a period of last five years, after adjusting for equity dilution.

We rank the top 100 companies in descending order of absolute Wealth Created, subject to the company’s stock price at least outperforming the benchmark index (the BSE Sensex in our case). These top 100 Wealth Creators are also ranked according to speed (i.e. price CAGR during the period under study).

100x Wealth Creation Motilal Oswal

Wealth Creation 2009-2014 – Findings Summary

TCS is the Biggest Wealth Creator again

  • TCS has emerged the biggest Wealth Creator for the period 2009-14, retaining the top spot it held even for the period 2008-13.
  • The performance in the latest period is better than the previous one with Wealth Created at INR3.6 trillion v/s INR2.3 trillion over 2008-13. This is the highest ever wealth created in any 5-year period in India’s stock market history.
  • On the back of 29% PAT CAGR over 2009-14, TCS stock has delivered 51% price CAGR for the same period, and is currently India’s largest company by market cap.

100x Wealth Creation Motilal Oswal

Eicher Motors is the Fastest Wealth Creator

  • Eicher Motors has emerged the Fastest Wealth Creator during 2009-14, with Price CAGR of 94%, marginally higher than 93% for Bajaj Finance.
  • Eicher, Supreme Industries and Page Industries are among the 10 Fastest Wealth Creators for the last 3 studies in a row.
  • HCL Technologies enjoys the unique distinction of being in the top 10 of both the Biggest and the Fastest Wealth Creators.
  • 7 of the top 10 Fastest Wealth Creators had single-digit INR billion market cap in 2009 and/or were quoting at single-digit P/Es.

100x Wealth Creation Motilal Oswal

Kotak Mahindra Bank is the Most Consistent Wealth Creator

  • Kotak Mahindra Bank is the Most Consistent Wealth Creator over 2004-14, by virtue of: (1) Appearing among top 100 Wealth Creators in each of the last 10 studies; and (2) Highest 10-year Price CAGR, marginally ahead of Asian Paints and Sun Pharma.

Technology re-emerges as the largest ever Wealth Creating sector

  • After a 9-year holiday post 2004, Technology has re-emerged as India’s largest Wealth Creating sector. (It was the largest Wealth Creator for 4 consecutive years 2000 to 2004.)
  • Ironically, Oil & Gas is one of the lowest Wealth Creating sectors over 2009-14, with its share of Wealth Created collapsing to 1% v/s 22% in 2009.

PSUs’ decade of decline: Wealth Creation hits rock bottom

  • The number of PSUs in the top 100 Wealth Creators is at an all-time low of only 5.
  • The Wealth Created by these 5 PSUs is also at an all-time low of just 2% of total, from as high as 51% over 2000-05, signaling total value migration to the private sector.

100x Wealth Creation Motilal Oswal

Overall level of Wealth Destruction eases; will the tide turn?

Most of the Wealth Destroying companies and sectors are deeply cyclical and/or those affected by policy paralysis during UPA-2 regime. With a new government at the helm, major policy reforms coupled with economic recovery, could be hugely positive for many of them.

100x Wealth Creation Motilal Oswal

100x: The power of growth in Wealth Creation – Theme 2015

Acknowledgment

This report would most likely have been titled “Demystifying growth” … and then we came across this book “100 To 1 In The Stock Market” by Thomas W Phelps who is described as having been a private investor, columnist, analyst, author and financial advisor.

Written in 1972, the book makes a strong case for investors to “Buy right and hold on”. It offers examples of how in the US, over 365 stocks appreciated 100x or more over the 40 years ending 1971. We believe “100 to 1” is an excellent concept to apply our understanding of growth.

The “100 To 1” book is common sensical, conversational, and chucklesome (Sample this: “Unlike dogs, not every stock has its day. In fact, in Wall Street, a stock that does not have its day is called a dog!” And this: “Most deception is bad but self-deception is worse because it is done to such a nice guy!”)

We dedicate “100x” as a contemporary complement to this classic, and as our commemorative compliment to the late author (who passed away in November 1992 at the age of 90.)

1. What is 100x?

Opening the mind to the magic of long-term growth investing

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

For the purposes of this report, “100x” refers to stock prices rising 100-fold over time i.e. “100-baggers” in stock market jargon. Both the short words here are important – “100-fold” and “over time”.

1.1 “100-fold”: Accumulating massive purchasing power

The precise number of “100” is not as important as the fact that 100x opens the mind to the concept of long-term power of compounding in equity investing. Warren Buffett describes investing as the process of gaining higher purchasing power over time (i.e. net of inflation and taxes). In fixed income investing, the average annual post-tax return works out to

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