‘Consistent compounders’ create phenomenal wealth in the long run

Financial history tells us that stocks outperform all other asset classes in the long run. The BSE Sensex (100 in 1979) has appreciated to above 60,000 now (October 2021) giving a compound annual growth rate of around 16 percent. This is almost 8 percent more than the 7.35 percent CPI inflation during this period. Also, Sensex returns have clearly beaten the 8 percent risk-free return from government bonds during this period.

Within the Sensex and Nifty, there are many steady bluechips like HDFC Bank, HDFC, Kotak Bank, Infosys, Asian Paints, Nestle, Abbott India and others that have beaten the Sensex and Nifty returns. These ‘consistent compounders’, as the celebrated equity analyst Saurabh Mukherjea appropriately calls them, have handsomely rewarded patient investors and look set to create more wealth for investors in the years to come.

The big getting bigger

The economic reforms of 1991 created a vibrant market economy thata facilitated impressive growth of the corporate sector. An inevitable consequence of this economic freedom has been the big getting bigger. The top 20 companies accounted for only 14 percent of corporate earnings in 1991. This has been rising steadily and is now more than 85 percent. Most of these top 20 companies are highly efficient behemoths. Most of them are the bluechip darlings of the market. Investment in these bluechips has given handsome rewards to investors.

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VK Vijayakumar

Chief Investment Strategist|Geojit Financial Services

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Profit-churning bluechips

This Top 20 list includes many marquee names likes Reliance Industries, HDFC Bank, HDFC, ICICI Bank, Tata Consultancy Services, Infosys, Wipro, HCL Tech, ITC, Hindustan Unilever, Tata Steel, Larsen & Toubro and some public sector behemoths like Oil and Natural Gas Corporation, Coal India, NTPC and Indian Oil Corporation. The stranglehold of these top 20 on the total profit pool of India Inc is unlikely to change meaningfully in the immediate future. This means investors don’t have to focus on this Top 20 for good investment returns.

The performance of PSUs, from the investor perspective, has been below par. But most of the private sector bluechips have delivered handsome returns to investors. Some of them like HDFC Bank and the software majors have been incredible wealth creators.

The turnaround stories

While the highly profitable bluechips deliver consistent returns to investors, turnaround stories generate outsized returns in the short run.

The one-year return from Nifty (30 October 2020 to 29 October 2021) is 51 percent. But there is a huge variation in the returns from Nifty constituents (see table).

It is clear that turnaround stories create outsized returns in the short run. These turnaround stories may be cyclicals emerging from a long bear phase like metals or promising cases triggered by innovation. Tata Steel, Hindalco and JSW Steel are examples of the former while Tata Motors is a good example of innovation in the EV space triggering the re-rating of a beaten-down stock. State Bank of India is a case of a turnaround from non-performing asset stress to good profitability and the consequent rerating of the stock.

The challenge is in foreseeing the turnarounds and making the right moves. Early signals of a sector turnaround help in identifying the potential winners.

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