14th Annual Wealth Creation Study Motilal Oswal

14th Annual Wealth Creation Study
2004-2009
By Raamdeo Agrawal
December 17, 2009
Discussion Points
14th Wealth Creation Study Findings
Theme 2010:
Winner Categories + Category Winners Conclusions
www.motilaloswal.com
14th Annual Wealth Creation Study Concept of Wealth Creation:

The process by which a company enhances market value of the capital entrusted to it by its shareholders
Net Wealth Created:

Change in Market Cap over the study period adjusted for corporate actions
Wealth Creation Study - Methodology
Wealth Creators:
Though Rs 100 crores of net wealth created is the qualifying criteria, the top 100th wealth creating company managed Rs 1,000 crores
10 Biggest Wealth Creators

Rank, Company NWC (Rs cr) Price CAGR Rank, Company NWC (Rs cr) Price CAGR
1. Reliance Inds. 2. Bharti Airtel

3. B H E L
151,386 89,091
58,845
28% 32%
38%
6. ITC 7. Infosys
8. L&T 9. SAIL 10. HDFC
43,556 40,461
29,110 26,497 19,313
22% 16%
36% 24% 17%
4. NMDC 5. O N G C
57,826 47,081
71% 7%
Last 6 years, Wealth Creation dominated by Oil & Gas:
ONGC for first 3 years, Reliance in the next 3 years

14th Annual Wealth Creation Study www.motilaloswal.com
10 Fastest Wealth Creators

Rank, Company 1. Unitech
2. Areva T&D
Price Price Appn. (x) CAGR % 54

29
Rank, Company
Price Price Appn. (x) CAGR %
122
97
6. Shriram City
7. United Spirits 8. Jindal Steel
14
12 12
70
64 64
3. BF Utilities
4. Opto Circuits
21
21
84
84
9. Sterling Intl 10. Chettinad
11 10
62 58
5. NMDC
14
71
Unitech Fastest Wealth Creator for the 2nd time in a row
Most Consistent Wealth Creators

Rank, Company 1. H D F C 2. Sun Pharma
3. Reliance 4. Hero Honda Appeared 10-Year in WC Price Study (x) CAGR %
Rank, Company
6. Asian Paints 7. Nestle India 8. HDFC Bank
Appeared 10-Year in WC Price Study (x) CAGR %

9 9 9 18 17 16
10 10
10 10
25 24
22 21
9. ITC
10. Ambuja Cem
9
9
16
11
5. Infosys
10
Non-cyclicality of business is key for consistent wealth creation
Wealthex v/s Sensex (2004-2009)

Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 5 Year CAGR % BSE SENSEX YoY (%) Wealthex YoY (%) Sensex EPS (Rs) 348 16 5,591 5,591 6,493 16 7,050 26 450 11,280 74 12,600 79 523 13,072 16 14,759 17 718 15,644 20 20,877 41 833 9,709 -38 14,206 -32 820 19 21 12
YoY (%)
Sensex PE (x)
29
14
16
22
37
18
16
19
-2
12
Wealthex EPS
YoY (%)
381 15
533
40
616
16
840
36
1085
29
1126
4
24
Wealthex PE (x)
13
21
18
19
13
Wealth Creators higher EPS growth, lower P/E, higher appreciation

14th Annual Wealth Creation Study 8 www.motilaloswal.com
Wealth Creation by Industry

Industry (No of Cos.) Oil & Gas (4) Metals (10) Engg. (13) WC (Rs cr) 212,589 145,755 116,709 2009 2004 (%) (%) 22 15 12 43 7 5 Industry (No of Cos.) Auto (8) Others (7) Cement (6) WC (Rs cr) 35,680 19,812 18,566 2009 (%) 4 2 2 2004 (%) 6 4 2
FMCG (16)
Telecom (4)
104,424
101,211
11
11
1
0
Ultility (3)
Constn / RE (1)
14,320
5,584
1
1
4
0
Banking (12)
IT (5)
88,857
49,240
9
5
15
7
Media (1)
Retail (1)
5,277
2,930
1
0
0
0
Pharma (9)
42,749
Total
963,702
100
100
Telecom and FMCG have gained share at the cost of Oil & Gas and Banking
Categories like Retail which are small now can grow big
Wealth Creation by base year P/E

2004 P/E (x)
<5
5-10 10-15 15-20 20-25 >25 Total
No. of Cos. 9 22 21 19 13 16 100
Price CAGR % 30 25 18 18 28 20 21
High margin of safety in single digit P/Es

Wealth Creation & Payback ratio

Payback in 2004 < 0.25 0.25-0.5 0.5-1 1-1.5 1.5-2 >2 Total No. of Cos. 9 13 19 18 25 16 100 Price CAGR % 74 39 25 19 21 11 21
Payback of less than 1x creates fastest wealth

14th Annual Wealth Creation Study www.motilaloswal.com
11
Wealth Creation & Purchase Price

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 Den Berg, OID, April 2004
12
Wealth Creation & Entry Barriers

Companies
With Entry Barriers
No. of cos.
66
Wealth Created (Rs crores)

8,31,400
% of total
86
Others TOTAL
34 100
1,32,302 9,63,702
14 100
Companies with Entry Barriers will continue to enjoy disproportionate share of wealth in future as well
13
Theme 2010
14
Theme Outline
Winner Categories = Indias NTD Era + Scalability Category Winners = Winning Categories + Entry Barriers + Great Management Great Investments = Category Winners
+ Reasonable Valuation
15
Recap of Indias NTD Era

60 years for first US$ 1 trillion of GDP
6 years for the NTD

2.5 2 2.0 1.5 1 16% CAGR 1.0 4% CAGR 0.5 0.0 0.5 12% CAGR 1.3
FY10E
FY11E
FY12E
FY13E
16
FY14E
FY90
FY91
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
The Chinese Experience

4.5
GDP in US$ trillion

4.0 3.5 3.0 2.5 2.0 1.5 1.0
1 year
3
3 years
6 years 6 years
0.5
1
0.5
6 years
0.5 0.0
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
17
2008
Indias NTD Era
Consumption Boom Savings & Investment Boom
18
Consumption boom in NTD Era

We have drawn heavily on McKinsey Global Institutes Report The Bird of Gold: The Rise of Indias Consumer Market
19
Poverty will fall from 93% in 1985, 54% in 2005 to 22% by 2025
20
Middle class will swell 12x from 50m in 2005 to 583m in 2025
21
Per household consumption in rural India will reach present urban levels by 2017
22
Aggregate consumption will quadruple in 2025 over 2005
23
Discretionary spend will rise from 52% in 2005 to 70% in 2025
24
Food will remain the biggest category
(Rs B)
25
Communication will grow the fastest
(Rs B)
26
Savings boom in NTD Era

At 35% of GDP, Indias savings could hit US$1 tn in 7-8 years
India GDS (Rs t) 34 36 33 34 % of GDP 36 25 21 18 15 12 10 18
33 31
2005
2006
2007
2008
2009
2010E
2011E
27
Huge financial intermediation opportunity for banks

Deposits (Rs t) Deposit CAGR: 19% 38 Credit CAGR: 24% 26 21 16 9 18 15 11 19 32 28 24 31 Credit (Rs t) 44
FY04
FY05
FY06
FY07
FY08
FY09
FY10 YTD
28
Huge opportunity for insurance

Insurance Prem ium (Rs b) ~5x increase in First Year prem ium (FYP) over FY04-10E 1,174 937 756 993 870 1,389
388 169 198 262
FY10E
FY11E
29
FY12E
FY03
FY04
FY05
FY06
FY07
FY08
FY09
Investment boom in NTD Era

Huge opportunity for Engg, Construction, Real Estate, Infrastructure, Cement, Steel, Electricals, etc
India's GFCF (Rs trillion) 33 % to GDP 34 35
31 28 25
19
CAGR 22%
13 11 9 7
16
FY04
FY05
FY06
FY07
FY08
FY09
30
Corporate profit boom in NTD Era

Future corporate profitability should be better than past
Aggregate profits of 100 highest profit companies
18% CAGR 1,981
21% CAGR 332
861
FY99
FY04
FY09
31
Indias NTD Era
Finding Winner Categories
32
Winner Categories - Insights

Value migrates from basic spend to discretionary spend categories
Passenger Cars 1,800 Motorcycle - Re-based
1,400
1,000
600 FY04 FY05 FY06 FY07 FY08 FY09 YTD FY10
33

Winner Categories see hockey-stick demand curves
Hockey-stick demand curve occurs when product price meets affordability for a large section of customers
Price, Demand, Affordability
Time
34

Falling product price accelerates demand in wireless telecom
Revenue Per Minute (Rs.) 2.3 583 1.9 1.5 1.2 0.9 165 0.8 261 0.6 0.5 391 Total Subscriber base (m)
99 13 FY03 36 57
FY04
FY05
FY06
FY07
FY08
FY09
FY10
35

Categories with size and scalability are potential winners
Retail sales of major listed players
Retail (Rs cr) % of GDP 0.2% 10,320 0.1% 8,354 0.1% 5,580 0.1% 0.0% 2,083 1,326 3,426 0.2%
FY04
FY05
FY06
FY07
FY08
FY09
36

Categories with growth and consolidation are winners
Consolidation
37
Winner Categories Final list
All our Winner Categories will grow at least 1.5x GDP growth rate
Indias NTD Era
Finding Category Winners
39
Category Winners
Characteristics to find Category Winners Entry Barriers Great Management
40
What are Entry Barriers?

Entry Barriers is a simpler term for sustainable competitive advantage
The existence of barriers to entry means that incumbent firms are able to do what potential rivals cannot. Being able to do what rivals cannot is the definition of competitive advantage. Thus, barriers to entry and incumbent competitive advantage are simply two ways of describing the same thing. Bruce Greenwald and Judd Kahn in their book Competition Demystified
Horlicks v/s Milo
41
Analyzing Entry Barriers

Kinds of Entry Barriers Demand side
Customer Captivity, Differentiated Brands, Strong distribution network, High switching costs
Supply side
Patent protection for products and/or processes Privileged access to critical inputs e.g. captive ore mines
Economies of scale Category Winners tend to enjoy all 3 kinds of Entry Barriers
Analyzing Entry Barriers

Demand side Entry Barriers are intangible and generate huge returns on capital
43
Great Management
For the purposes of this discussion, great mangement is one which Successfully defends or even increases Entry Barriers and Manages growth at least in line with category
44
Indias NTD Era
Finding Winning Investments
45
Winning Investments
Category Winners at Reasonable Valuation

Dont buy into Bubble Valuation
46
Winning Investments
We are partial to putting out large amounts of money where we wont have to make another decision. If you buy something because its undervalued, then you have to think about selling it when it approaches your calculation of its intrinsic value. Thats hard. But, if you can buy a few great companies, then you can sit on your ass. Thats a good thing. - Charlie Munger, co-owner of Berkshire Hathaway, in his book Poor Charlies Almanack
47
Winning Investments Evaluation

Category Winners in the Invest Zone are winning investments
48
Model Portfolio for NTD Era
49
NTD Era Portfolio Performance

600 500 400 300 200 100 0
NTD Portfolio
Sensex
521
303
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Jun-09
* Sun TV and Mundra Port not included due to short listing history
Dec-09
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
The NTD Era portfolio would have outperformed if purchased any time in the last five years
50
Market Outlook
51
Corporate Profit / GDP to bottom out
7.5 6.4 6.0 4.5 3.0 1.5 0.0 Average of 3.4x 3.5 3.3 2.4 2.3 2.3 1.9 2.1 1.8 3.1 4.4 5.1 5.6
6.8 5.3 4.7
52
2010E
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Interest rates likely to stabilize
10.5 9.3 9.0 8.1 7.5
6.0 4.5 5.1
Apr-01
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
53
Apr-10
Sensex P/E at 12% premium to LTA

Sensex P/E ( LHS) 27 22 17 12 7 Sensex ( RHS ) 21,700 16,700 11,700 6,700 1,700
15 Year Average 14.3x
Apr-95
Apr-96
Apr-97
Apr-98
Apr-99
Apr-00
Apr-01
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
54
Apr-10
MCap/GDP close to all-time high

115 104 100 90 82 65 54 40 34 15 19 24 43 43 44 51 37 28 26 26 23 43 Average of 49% for the period 52 83
55
55
2010E
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Earnings Yield / Bond Yield

2.2
Low margin of safety
2.0
1.7
1.2 15 Year Avg is 0.88x 0.7 0.4 0.7
0.2
Apr-95
Apr-96
Apr-97
Apr-98
Apr-99
Apr-00
Apr-01
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
56
Apr-10
Earnings growth to see a new cycle
FY10-12: 27% CAGR FY08-10E: -2% CAGR FY03-08: 25% CAGR FY93-96: 45% CAGR 181 FY96-03: 1% CAGR 250 266 291 278 280 81 129 348 272 216 236 450 523 833 820 804 718
1295
1042
FY10E
FY11E
57
FY12E
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
In Conclusion
NTD Era will be marked by sustained boom in discretionary spend, savings and investment. Winner Categories and Category Winners will enjoy exponential growth in profits. Category Winners bought at reasonable valuation create significant wealth over the long term. Markets are likely to reward growth in earnings
Wishing you exponential returns in exponential times ! Thank You & Happy Wealth Creating !!
59

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Winner Categories + Category Winners Conclusions