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Motilal Oswal 24th Annual Wealth Creation Study 2019

Mumbai 19-Dec-2019


Motilal Oswal 24th AnnualWealthCreation Study 2019/

Management Integrity –Understanding Sharp Practices

Getting Management Integrityright is the critical first step in equity investing

Reliance Industries, IndiabullsVentures & IndusInd Bank - Biggest, Fastest & Most Consistent Wealth Creators

Mumbai,18th December 2019:Motilal Oswal Financial Services Ltd. today announced the Motilal Oswal 24th Annual Wealth Creation Study, 2019.

Every year for 24 years now, Mr. Raamdeo Agrawal, JointManaging Director of Motilal Oswal Group, commissions an Annual Wealth CreationStudy.

The Motilal Oswal 24thAnnual Wealth Creation Study has two parts
1) Findings on Wealth Creation during the period 2014-19, and
2) Theme 2020:  Management Integrity – UnderstandingSharp Practices

Key Conclusions of Motilal Oswal 24th Annual Wealth CreationStudy

·        Reliance Industries, Indiabulls Ventures and IndusIndBank –Biggest, Fastest & Most Consistent Wealth Creator, respectively, between 2014 and 2019.

·        Financials sector is the largest wealth creatingsector between 2014 and 2019.

·        State-owned companies have become marginalized inWealth Creation with their share collapsing from 51% in 2005 to 6% in 2019.

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

·        In equity investing, management is 90%, industry 9% and 1% everythingelse. Hence, getting Management Integrity right is the critical first step.

·        There’s only one way of writing honest accounts, and infinite ways ofmanipulating them.

·        Most Sharp Practices are to inflate profits and stuff the “financialtrash” in the Balance Sheet (Credit P&L, Debit Balance Sheet).

·        Profit & Loss statement is easier to manipulate; hence, managementsmust be statutorily asked to present a simplified Free Cash Flow statement.

·        Auditors must be made more accountable to minority shareholders to avoidSharp Practices by the management.

·        As an investor, have a forensic mindset to get management’s explanationfor all the perceived Sharp Practices.

·        Finally, interact with various stakeholders – customers, employees,suppliers, competitors, etc – till you arrive at a moment of ManagementIntegrity.

Part1) Wealth Creation Study findings

The Motilal Oswal 24th Annual WealthCreation Study 2019 analyzes the top 100 wealth creating companies during theperiod 2014-19. Wealth created is calculated as change in the market cap ofcompanies between 2014 and 2019, duly adjusted for corporate events such asmergers, de-mergers, fresh issuance of capital, buyback, etc. The Study identifiesthe Fastest, Biggest and Most Consistent wealth creators. Further, it analyzes key trends inwealth creation, provides insights into winning companies and distillsstrategies for successful equity investing.

Study Highlights –Wealth Creation

Top 100 WealthCreators created INR 49 lakh crores wealth during 2014-19

This is the highest ever quantum ofWealth Created. During 2014-19, Sensex CAGR was only 12%, but pace of WealthCreation was healthy at 22% 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.

Reliance Industries is theBiggest Wealth Creator after a gap of 7 years

After a gap of 7 years, RelianceIndustries has once again emerged the biggest Wealth Creator over 2014-19. TheINR 5.6 lakh crores wealth created by Reliance is the highest ever so far by ahuge margin. Five of the top 10 biggest Wealth Creators are from the Financialssector.

Indiabulls Ventures is theFastest Wealth Creator for the second time in a row

IndiabullsVentures has emerged as the Fastest Wealth Creatorover 2014-19 with stock return at a whopping 78% CAGR. Bajaj Finance has the unique distinction of being in the top 10Biggest as well as Fastest Wealth Creators. INR 10 lakhs invested equally amongthe top 10 fastest Wealth Creators in 2014 would have grown to INR 110 lakhs in2019; return CAGR of 61% v/s barely 12% for the Sensex.

IndusInd Bank is the MostConsistent Wealth Creator

IndusInd Bank has emerged the Most Consistent Wealth Creator by virtue of –

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

2.      Recording thehighest Price CAGR of 49% over the 10-year period 2009 to 2019, ahead of Pidilite Industries’ 40%.

 Other keytakeaways:

·        Wealth CreationClassification by Industry: Financials Sector hasemerged as India’s biggest Wealth Creating sector over 2014-19 for the thirdconsecutive year. The surge in Wealth Creation in the sector has been led byprivate banks and NBFCs. Wealth Creation during 2014-19 was highly concentrated– top 5 sectors accounted for a high 85% of total Wealth Created.

·        Wealth Creation byOwnership – PSU v/s Private: PSUs'' (public sectorundertakings) Wealth Creation performance remained weak during 2014-19: (1) Thenumber of PSUs in the top 100 Wealth Creators is only 9, and (2) Wealth Createdby these 9 PSUs is only 6% of the total. The 9 Wealth Creating PSUs are IOC,BPCL, HPCL, Power Grid Corporation, Petronet LNG, Indraprastha Gas, LIC Housing,Bharat Electronics, and NBCC.

·        Wealth Creators byValuation Parameters: Every study invariablysuggests that Payback Ratio less than 1x is a highly reliable valuation metric.(Payback is a proprietary ratio of Motilal Oswal, defined as current market capdivided by estimated profits over the next five years. For 2014, we calculatethis ratio based on the actual profits reported over the next five years.) PEG(P/E to Growth in Earnings) than 1x also delivers staggering results. (PEG isobtained by dividing trailing 12-month P/E by future 3-to-5 year earningsCAGR.)

·        Wealth Destroyers: The totalWealth Destroyed during 2014-19 is INR 8.6 lakh crores. Similar to last year’sstudy, the Financials sector has the unusual distinction of being the biggestWealth Creator (thanks to private banks and NBFCs) and also the second biggestWealth Destroyer (thanks to state-owned banks).


Part2) Theme 2020: Management Integrity – Understanding Sharp Practices

Backdrop: Study of ManagementIntegrity

Motilal Oswal’s approach to equity investing is called “QGLP” – Quality,Growth, Longevity, reasonable Price. QGL is the Value component which is thenjuxtaposed with P i.e. reasonable Price. The recent past Wealth CreationStudies have probed into various aspects of QGLP. This Study attempts to gainsome insights into Management Integrity. As investment guru Philip Fisher hassaid, “In evaluating a common stock, the management is 90 per cent, theindustry is 9 per cent, and all other factors are 1 per cent.“

What is Management Integrity?

Management Integrity can be defined as dealing with all companystakeholders honestly and with a sense of trusteeship.

Why ManagementIntegrity is critical?

There are two broad elements to company management – Integrity andCompetence. If companies demonstrate only Competence without Integrity, thereis enough evidence to suggest that for such stocks it’s a race to zero!

Why ManagementIntegrity gets compromised

Management Integrity is mainly compromised to present a favorable view ofthe company to the equity markets. Such attempts to “manage stock prices”, inturn, is motivated by several reasons such as raising equity capital,management compensation linked to stock prices, personal wealth enhancement,etc.

How does compromisedManagement Integrity get reflected – Sharp Practices!

Sharp Practices may be defined as “ways of behaving, especially inbusiness, that are dishonest but not illegal.” However, once the managementstarts resorting to Sharp Practices, it’s — what Satyam Computer founder BRamalinga Raju wrote in his fraud confession letter — “like riding a tiger, notknowing how to get off without being eaten.”

Common AccountingSharp Practices

It’s important to know that there’s only one right way of presenting atrue and fair view of a company’s affairs and infinite ways of not doing so.Hence, our examples of Sharp Practices mentioned here will be more illustrativethan comprehensive.

·        Recording bogus revenue

·        Shifting current expenses to a future date

·        Recording revenue too soon

·        Boosting income using one-time activities

·        Sharp Practices during acquisitions

·        Taking items off-balance sheet

The key double-entry accounting guiding principle is – Credit P&L,Debit Balance Sheet.

Other Sharp Practicesand monitorables

Management may also resort to Sharp Practices by way of Related PartyTransactions and also misleading Earnings guidance. Other issues to monitorManagement Integrity are auditors’ report, top management chances, Promoters’pledged shares, and a 360-degree feedback of as many stakeholders as possible –customers, employees, dealers, suppliers, even competitors.

The purpose of all the above due diligence is to arrive at that Moment ofIntegrity regarding the management, before which no investment in the companyshould be done.


     Thisstudy is primarily an analysis of economic data, company financials and stockprices.

     Thecompanies mentioned here should not be construed as our investmentrecommendations or opinions.


About Motilal Oswal Financial Services Limited.

Motilal Oswal FinancialServices Ltd.  (MOFSL) is a diversifiedfinancial services company. Its offerings include capital markets businesses(Retail broking, Institutional broking & Investment banking), Asset &Wealth Management (Asset Management, Private Equity & Wealth Management),Housing Finance & Equity based treasury investments.


MOFSL’s core purpose is to bewell respected and preferred global financial services organization enablingwealth creation for customers. Research is the solid foundation and theinvestment advisory at Motilal Oswal Financial Services is based on the research.MOFSL’s research has received wide media coverage and consistently won awards,showcasing company''s strong research capabilities. This includes being awarded''''Best Performing National Financial Advisor - Equity Broker'''''''' for six yearsat the UTI-CNBC TV18 Financial Advisor Awards, Moneycontrol Wealth CreatorAward –Best Broking Business Of The Year -2018. MOFSL won “Broking Houseof the year” at MCX awards2019.


The company has diversifiedclient base of ~1.3 million. MOFSL’s core purpose is to be a respected andpreferred global financial services organization enabling wealth creation forits customers.


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For any query please contact:

Rohini Kute

Head – Corporate Communication

Motilal Oswal Financial Services

Ph - +91-22-7199 2340