Motilal Oswal’s wealth creation study, which has been coming out for the last two decades, is famous for providing interesting takeaways for investors. The 27th study, covering the 2017-2022 period, is not different. Here are some interesting takeaways.
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, the study defines wealth created as the difference in market capitalisation (m-cap) over a period of last five years, adjusted for corporate events such as fresh equity issuance, mergers, demergers, share buybacks, etc.
Forget market, think stocks
During 2017-22, the top 100 wealth creators of India Inc. created wealth of ₹92.2 trillion, the highest ever by a fair margin. Naturally, while the BSE Sensex grew 15 per cent CAGR, the pace of wealth creators was a staggering 28 per cent CAGR, which is the highest in the last eight years.
For the past eight successive study periods, market benchmark indices have delivered muted returns ranging from 5 per cent to 15 per cent. Still, the top wealth creators have maintained their track record of 10-15 per cent outperformance over the benchmark. This reinforces the age-old take on market timing, “Forget markets, think stocks.”
The biggest
In this section, the study ranks the top 100 companies in descending order of absolute wealth created, subject to the company’s stock price at least outperforming the benchmark index (BSE Sensex in this case). For the fourth time in succession, 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.
Investors must note that since the ‘biggest wealth creators’ are based on absolute wealth creation value, the really big companies will often get repeated in this list. True that Reliance Industries (RIL) created ₹13,000 billion in the study period at a CAGR of 32 per cent, but equally important is that fact that RIL is a company with about ₹17 trillion m-cap. Ditto for other giant-cap companies such as TCS, Infosys, HDFC Bank, etc.
At the same time, Bharti Airtel is a surprise entry in the top 10 of the ‘biggest wealth creators’ club after being out of last year’s list of top 100. This could be an indicator that the worst may be over for the Indian telecom sector.
The fastest
For the second successive time, Adani Transmission has emerged the fastest wealth creator with a 2017-22 price CAGR of 106 per cent. Like last year, this year too yet another Adani Group company, Adani Enterprises (97 per cent CAGR), features among the top 10 fastest wealth creators. The other companies in the ‘fastest’ club are Tanla Platforms (100 per cent CAGR), Brightcom Group (92 per cent), Tata Tele. Mah. (87 per cent), Deepak Nitrite (76 per cent), Alkyl Amines (74 per cent), Tata Elxsi (65 per cent), Coforge (59 per cent) and Mindtree (57 per cent).
But before you get too excited with these 50-100 per cent CAGR numbers for these fast hitters, slow down. Did you know historically some of the fastest wealth creators also are stocks that subsequently lost a lot of money? In 1998 and 1999, Satyam Computers was the fastest with 87 per cent and 137 per cent CAGR. In 2008, 2009 and 2010, Unitech ruled the charts with 284 per cent, 122 per cent and 95 per cent 5-year price CAGR. There are some more examples, especially in and around the last few bull market cycles. Those stocks zoomed in a short period of time and now are down 50-90 per cent from their erstwhile peaks.
Focus on consistency
The key thing about wealth creation is sustainability. The Motilal Oswal study has an entire section dedicated to this theme. It defines consistent wealth creators based on the number of years the stock has outperformed in each of the last five years. Where the number of years is the same, the stock price CAGR decides the rank. Based on this, over 2017-22, Adani Enterprises has emerged as the most consistent wealth creator. It has outperformed the BSE Sensex in all the last fiveyears, and has the highest price CAGR of 97 per cent. The others in the top-10 list are Alkyl Amines, Coforge, Mindtree, L&T Infotech, SRF, Divi’s, Astral, Varun Beverages and Aarti Industries.
But do note that consistent wealth creation is a challenge — only 13 of the 100 wealth creators have outperformed in each of the five years. One key characteristic of mid- and small-cap stocks is high volatility of returns. Such stocks may outperform over five years, but in the interim, they may cause investors quite a few anxious moments. This is where consistency comes in.
The study defines all-round wealth creators based on the summation of ranks, under each of the three categories — Biggest, Fastest and Consistent. Based on the above criteria, it’s probably a more credible feat by Titan Co. that it features in the top 10 all-round wealth creators despite not being in the top 10 in any individual category, Biggest, Fastest and Consistent.