Stock Fundamentals

How they created wealth consistently

Bavadharini KS | Updated on December 26, 2020

The gist of the Motilal Oswal study is that stock prices in the long run faithfully track earnings

Motilal Oswal’s annual wealth creation study , which has been coming out for the last two decades, usually have interesting takeaways for investors who like to follow the QGLP (quality, growth, longevity at a reasonable price) style of investing. This year’s study, the 25th in the Annual Wealth Creation series, focusses on the factors that contributed to some companies being the fastest, biggest and most consistent wealth creators over the 25 years from 1995 to 2020. This is based on stock price CAGR, PAT (profit after tax) CAGR and net wealth created (increase in market capitalisation). Here are some takeaways from it for DIY investors.

Top wealth creators

The study identified that the average market cap of the top 25 fastest wealth creators was ₹400 crore in 1995 which is now over ₹75,000 crore. If an investor who had invested ₹10 lakh equally in these 25 stocks in 1995, his/her investment would have grown to ₹16.2 crore, delivering CAGR of 23 per cent over 25 years.

Infosys emerged as the top stock in the fastest wealth creator category, with a price CAGR of 30 per cent and PAT CAGR of 33 per cent. This was closely followed by Pidilite Industries and Eicher Motors with 25 per cent price CAGR each. The PAT CAGR for the same stocks was 20 per cent and 23 per cent, respectively, during the same period. The numbers of the fastest wealth creators reiterate that stock prices in the long run do faithfully track earnings even if they do swing far from fundamentals in the short run.

Kotak Mahindra Bank had been the most consistent wealth creator in the last 25 years. Consistent performers measures the number of 3-year rolling periods from 1995 to 2020 in which the stock outperformed the Sensex. In the 23 three-year rolling periods between 1995 and 2020, Kotak Mahindra outperformed in 21 periods. This was closely followed by Berger Paints and HDFC with 20 periods of outperformance.

 

All the top wealth creating companies registered strong PAT growth. Apart from Infosys with a 33 per cent PAT CAGR, others with high PAT growth were Vedanta (29 per cent) and Motherson Sumi (27 per cent). But among companies that witnessed the biggest absolute PAT jump since 1995, the top one is Reliance Industries at ₹41,800 crore PAT increase.

According to the study, companies that managed the consistent PAT growth with high return on equity (ROE) were mostly consumer-facing. This includes, Hindustan Unilever (68 per cent ROE from 1995 to 2020), Nestle India (62 per cent), Colgate Palmolive (61 per cent), and Castrol India (56 per cent).

The companies with highest profit growth witnessed highest sales growth as well, reveals the study. For instance, Infosys tops the list again with sales CAGR of 34 per cent, or 1,638 times increase in sales in 25 years. This was followed by Motherson Sumi and Mphasis with 32 and 30 per cent CAGR sales, respectively. Reliance Industries saw the biggest sales increase of ₹5.92 lakh crore between 1995 and 2020, followed by BPCL, HPCL, Tata Motors and L&T. This suggests that investors hunting for wealth creators cannot afford to ignore sales growth.

Dividend payouts

Ultimately for an investor, it is not only important that a stock rallies but the company should also share surpluses with him. The study lists 25 companies that have paid highest cumulative dividends in the last 25 years. Topping the list is ITC, a whopping ₹70,800 crore as dividend between 1995 and 2020, with Infosys (₹63,300 crore) and Hindustan Zinc (₹ 50,300 crore) following.

Finally, the study used a few parameters to arrive at 25 stocks it believes will be top wealth creators for the next 25 years. It looked for mid-cap companies with consumer-facing business models, five-year ROE greater than 15 per cent, market leadership and potential for value migration. Stocks such as Bajaj Finance, AU Small Finance Bank, Bata India, Alembic, Ajanta Pharma, Indiamart Intermesh were some that made to the list.

 

Published on December 26, 2020

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