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Motilal Oswal 23rd Annual Wealth Creation Study 2018 Valuation Insights – What works, what doesn’t

Mumbai 05-Nov-2018



MotilalOswal 23rd Annual Wealth Creation Study 2018

Valuation Insights – What works,what doesn’t


HDFC Bank, Indiabulls Ventures &Titan Company –

Biggest, Fastest & MostConsistent Wealth Creators

Mumbai, 1st November 2018: Motilal OswalFinancial Services Ltd. today announced the Motilal Oswal 23rd Annual Wealth Creation Study, 2018.

Every year for 23years now, Mr. Raamdeo Agrawal, Joint Managing Director of Motilal Oswal Group,commissions an Annual Wealth Creation Study.

TheMotilal Oswal 23rd Annual Wealth Creation Study has two parts
1) Findings on Wealth Creation during the period 2013-18, and
2) Theme 2018:  Valuation Insights – Whatworks, what doesn’t


Key Conclusions of Motilal Oswal 23rd Annual Wealth CreationStudy

·        HDFC Bank, IndiabullsVentures and Titan Company – Biggest, Fastest & Most ConsistentWealth Creator,respectively, between 2013 and 2018.


·        Financials sector is thelargest wealth creating sector between 2013 and 2018.


·        State-owned companieshave become marginalized in Wealth Creation withtheir share collapsing from 51% in 2005 to 9% in 2018.


·        PEG (P/E to Growth ratio) < 1x and Payback ratio(Mkt Cap ÷ 5-years forward PAT) < 1x are very reliable indicators of superior WealthCreation across market cycles.


·        The two key drivers of Intrinsic Value are Return onEquity (RoE) and Earnings growth.

·        Companies create Intrinsic Value only when they earnRoE higher than Cost of Equity.

·        Low RoE companies must focus on increasing RoE, highRoE companies on increasing

·        Growth.

·        Both high RoE and high Earnings growth are difficultto sustain.

·        PEG (P/E to Growth ratio) less than 1x is anear-infallible formula for healthy outperformance.

·        Current market valuations imply robust earningsgrowth, which remains elusive. Hence, expect market to remain soft.







Part1- Wealth Creation Study findings

The Motilal Oswal 23rdAnnual Wealth Creation Study 2018 analyzes the top 100 wealth creatingcompanies during the period 2013-18. Wealth created is calculated as change inthe market cap of companies between 2013 and 2018, duly adjusted for corporateevents such as mergers, de-mergers, fresh issuance of capital, buyback, etc.The Study identifies the Fastest,Biggest and Most Consistent wealth creators. Further, itanalyzes key trends in wealth creation, provides insights into winningcompanies and distills strategies for successful equity investing.

StudyHighlights – Wealth Creation


Top100 Wealth Creators created INR 44.9 lakh crores wealth during 2013-18

This is the highest everquantum of Wealth Created. During 2013-18, Sensex CAGR was only 12%, but paceof Wealth Creation was healthy at 23% CAGR. This reinforces the point that WealthCreation happens in all kinds of market conditions. So, investors are betteroff focusing on which stocks to invest in, rather than timing the markets.


Ø  HDFCBank is the Biggest Wealth Creator for the first time ever

After consistently hugging the second and third rank for the last 6studies, HDFC Bank has finallybroken through to emerge the biggest Wealth Creator over 2013-18. Its WealthCreated is INR 3.2 lakh crores. RelianceIndustries is a close No.2 with INR 3 lakh crores of Wealth Created.


Ø  IndiabullsVentures is the Fastest Wealth Creator

Indiabulls Ventures has emerged as theFastest Wealth Creator over 2013-18 with stock return at a whopping 97% CAGR. Eicher Motors is among the top 10Fastest Wealth Creators in the last 7 studies, and Bajaj Finance in the last 5. BajajFinance has the unique distinction of being in the top 10 Biggest as wellas Fastest Wealth Creators.


Ø  TitanCompany is the Most Consistent Wealth Creator

Titan Company has emerged theMost Consistent Wealth Creator by virtue of –

1.      Appearing among top 100 Wealth Creators in each of the last 10studies; and

2.      Recording the highest Price CAGR of 33% over the 10-year period 2008 to2018, fractionally ahead of GodrejConsumer.


 Other key takeaways


·        Wealth Creation Classification by Industry: Financials hasemerged as India’s biggest Wealth Creating sector during 2013-18. The surge inWealth Creation in the sector has been led by private banks and NBFCs. TheFinancials sector has the unusual distinction of being the biggest WealthCreator (thanks to private banks and NBFCs) and the biggest Wealth Destroyer(thanks to state-owned banks).

·        Wealth Creation by Ownership – PSU v/s Private: PSUs'' (public sectorundertakings) Wealth Creation performance remains weak during 2013-18: (1) Thenumber of PSUs in the top 100 Wealth Creators is only 11, and (2) WealthCreated by these 11 PSUs is only 9% of the total. However this is higher than2-4% in the recent previous studies, suggesting early signs of potentialrevival in PSU fortunes.

·        Wealth Creators by Valuation Parameters: Every studyinvariably suggests that the highest return is generated when Payback Ratio isless than 1x. (Payback is a proprietary ratio of Motilal Oswal, defined ascurrent market cap divided by estimated profits over the next five years. For2013, we calculate this ratio based on the actual profits reported over thenext five years.) PEG (P/E to Growth Ratio) less than 1x

·        Wealth Destroyers: The total Wealth Destroyed during 2013-18 is INR 4.9 lakh crores. Thebroader theme of Wealth Destruction is banking crisis (led by PSU banks) andCyclical downturn (led by Metals/Mining sector).



Part2 - Theme 2018: Valuation Insights – What works, what doesn’t


Backdrop:Study of “reasonable price”

Motilal Oswal’s approach to equity investing iscalled “QGLP” – Quality, Growth, Longevity, reasonable Price. QGL is the Valuecomponent which is then juxtaposed with P i.e. reasonable Price. The recentpast Wealth Creation Studies have probed into various aspects of QGL. ThisStudy attempts to gain some insights into what constitutes reasonable Price.


Whatis Value?

The most irrefutable definition of Intrinsic Valuefor any asset is – present value of its lifetime cash flows. For equities, thisis achieved through the Discounted Cash Flow model. The study uses a simplifiedDFCFE model (Discounted Free Cash Flow to Equity) to obtain the followinginsights into valuation –

·        RoE and Earnings growth are the key drivers ofIntrinsic Value.

·        All growth is not good; growth adds value only whenRoE exceeds Cost of Equity. (Cost of Equity is the broader market’s returnexpectation on any stock.).

·        Low RoE companies should focus on raising RoE; highRoE companies should focus on raising growth.

·        Both high RoE and high Earnings growth are difficultto sustain.

·        Buying High-RoE-High-Growth stocks is a soundstrategy to outperform the market.


Somepricing heuristics – what works, what doesn’t

Valuation essentially is a fundamental assessment ofa stock’s intrinsic value, based on the expected cash flows arising from thesame. In contrast, pricing is more empirical and heuristic. The basis of suchpricing is usually based on applying appropriate multiples – P/E, Price/Book,Price/Sales, EV/EBITDA, etc. Pricing is also likely to be relative rather thanabsolute i.e. depending on what comparable stocks or benchmark is priced.


The Study analyses the alpha track record over 20years (1998 to 2018) of four pricing techniques – P/E, P/E relativeto market, PEG and Payback Ratio. Based on the same, itconcludes what potentially works and what doesn’t, as summarized in the tablebelow.


Pricing heuristic











< 1x


> 3x



< 1x



> 3x



< 10x



> 50x


P/E relative to market

< 1x



> 2x



Oncurrent market valuations

Current market valuations are significantly higherthan long-period averages. The current Sensex P/E of 21x demands robustearnings CAGR of at least 16% for the next five years. However, this remainselusive (last 5-year CAGR of Sensex EPS is 3%). Hence, the Study expects the marketto remain soft.




       This study isprimarily an analysis of economic data, company financials and stock prices.

       The companiesmentioned here should not be construed as our investment recommendations oropinions.



AboutMotilal Oswal Financial Services Limited.


MotilalOswal Financial Services Ltd. is a financial services company. Its offeringsinclude capital markets businesses (Retail broking, Institutional broking &Investment banking), Asset & Wealth Management (Asset Management, PrivateEquity & Wealth Management), Housing Finance & Equity based treasuryinvestments. Motilal Oswal Financial Service won the ‘Brand of the Year’ awardat the IBLA CNBC TV 18. . MOPWM won the prestigious ‘Best Boutique WealthManager India’ at the Asset Triple A Award 2018. MOAMC won ‘Best PortfolioManagement Service Product’ at India Wealth Awards 2018. MORE won ‘Best RealEstate Product’ at India Wealth Awards 2018. Motilal Oswal Securities won the‘Best Performing National Financial Advisor Equity Broker'' award at the CNBCTV18 Financial Advisor Awards for the 6th time. Our Institutional brokingbusiness ranked the Best in Events/Conferences at the Asia Money Awards 2018.”. The ABBY awards are the Oscars of India ad awards to honor creativeexcellence in advertising. Motilal Oswal TV Ad, Think Equity Think MotilalOswal, won 3 awards at ABBY. MOFSL was awarded Top-15 Best Places to Work inthe BFSI space. Mr. Oswal was awarded Outstanding Institution Builder at theAll India Management Association awards. These, and several other awards, arerecognition of Motilal Oswal as a preferred consumer and employee brand in thefinancial services space.



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