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Last Updated : Dec 19, 2019 01:53 PM IST | Source: Moneycontrol.com

IndusInd Bank among 3 stocks that created wealth for investors during 2014-19

The study showed that financials sector was the largest wealth creating sector between 2014 and 2019 led by private banks and NBFCs, and five of the top 10 biggest wealth creators were from the same space.

S&P BSE Finance | 2019 return: 16.67 percent | Price as on 31 Dec 2018: Rs 5928.97 | Price as on 13 Dec 2019: Rs 6917.05
S&P BSE Finance | 2019 return: 16.67 percent | Price as on 31 Dec 2018: Rs 5928.97 | Price as on 13 Dec 2019: Rs 6917.05
 
 
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In the six-year period, 2014-2019, the BSE Sensex doubled and hit a record high of 41,614.77. Reliance Industries, Indiabulls Ventures and IndusInd Bank were the biggest, fastest and most consistent wealth creators, respectively, of Dalal Street in that period.

In fact, oil-retail-to-telecom major Reliance Industries was the biggest wealth creator after a gap of seven years, Motilal Oswal said in its Wealth Creation report on December 18.

"The Rs 5.6-lakh crore created by Reliance is the highest ever so far by a huge margin," it added. The stock rallied from Rs 440 levels to Rs 1,575.70 currently during six-year period and it became the first company on Dalal Street to cross Rs 10 lakh crore in market-cap, largely backed by consumer businesses, including retail and Jio.

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Motilal Oswal's 24th Annual Wealth Creation Study 2019 analysed the top 100 wealth creating companies during 2014-19, which created Rs 49 lakh crore in that period, the highest ever quantum of wealth created.

"Wealth Creation was highly concentrated – top 5 sectors accounted for 85 percent of total wealth created," said the brokerage.

Wealth created is calculated as change in the market-cap of companies between 2014 and 2019, duly adjusted for corporate events such as mergers, de-mergers, fresh issuance of capital, buyback, etc.

"During 2014-19, Sensex CAGR was only 12 percent, but pace of wealth creation was healthy at 22 percent CAGR. This reinforces the point that wealth creation happens in all kinds of market conditions. So, investors are better off focusing on which stocks to invest in, rather than timing the markets," the brokerage said.

The study showed that financials sector was the largest wealth creating sector between 2014 and 2019 led by private banks and NBFCs, and five of the top 10 biggest wealth creators were from the same space.

Motilal Oswal said Indiabulls Ventures has emerged as the fastest wealth creator over 2014-19 with stock return at a whopping 78 percent CAGR and Bajaj Finance has the unique distinction of being in the top 10 biggest as well as fastest wealth creators.

In percentage terms, these stocks rallied 687 percent and 2,556 percent in the six-year period. Hence, Rs 10 lakh invested equally among the top 10 fastest Wealth Creators in 2014 would have grown to Rs 110 lakh in 2019; return CAGR of 61 percent against barely 12 percent for the Sensex.

"Private sector lender IndusInd Bank has emerged the Most Consistent Wealth Creator by virtue of appearing among top 100 Wealth Creators in each of the last 10 studies; and recording the highest price CAGR of 49 percent over the 10-year period 2009 to 2019, ahead of Pidilite Industries' 40 percent," the brokerage said.

Among sectors, public sector undertakings' wealth creation performance remained weak during 2014-19.

"The number of PSUs in the top 100 Wealth Creators is only 9, and wealth created by these 9 PSUs is only 6 percent of the total, which are IOC, BPCL, HPCL, Power Grid Corporation, Petronet LNG, Indraprastha Gas, LIC Housing, Bharat Electronics, and NBCC," the brokerage said.

However, total wealth destroyed during same period was Rs 8.6 lakh crore, partly by state-owned banks, it added.

Hence, Motilal Oswal study clearly stated that PEG (P/E to Growth ratio) less than 1x and payback ratio (market cap divide by 5-years forward PAT) less than 1x are very reliable indicators of superior Wealth Creation across market cycles.

Their approach to equity investing is called 'QGLP – Quality, Growth, Longevity, reasonable Price; and QGL is the value component which is then juxtaposed with P i.e. reasonable Price.

As investment guru Philip Fisher has said, "In evaluating a common stock, the management is 90 percent, the industry is 9 percent, and all other factors are 1 percent."

Hence, getting Management Integrity right is the critical first step, said Raamdeo Agrawal, Joint Managing Director at Motilal Oswal Financial Services.

He believes tracking every company's accounts is a good way to understand management integrity. "Satyam is the real example of accounting fraud. Its actual profit margin was 3-4 percent which was inflated to compete with Infosys."

Profit & Loss statement is easier to manipulate; hence, managements must be statutorily asked to present a simplified Free Cash Flow statement and auditors must be made more accountable to minority shareholders to avoid Sharp Practices by the management, the brokerage said.

Management may also resort to Sharp Practices by way of related party transactions and also misleading earnings guidance. Other issues to monitor Management 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, it added.

The purpose of all the above due diligence is to arrive at that moment of integrity regarding the management, before which no investment in the company should be done.

Therefore, Raamdeo Agrawal advised buying stocks where managements have highest and unquestionable integrity. In fact, he believes investors should have a forensic mindset to get management's explanation for all the perceived sharp practices.

Disclaimer: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.

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First Published on Dec 19, 2019 01:53 pm
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