wealth creation study 2002-2007

www.motilaloswal.com12th Annual Wealth Creation Study

12th Annual Wealth Creation Study2002-2007

By Raamdeo Agrawal

December 14, 2007


Concept

Wealth Creation:The process by which a company enhances market value of the capital entrusted to it by its shareholders


Wealth Creation Study Methodology

Wealth Creators:Companies which created at least Rs100 croresof wealth between 2002 and 2007

(adjusted for corporate events such as mergers,de-mergers, equity issues, etc)


The 10 Biggest Wealth Creators

Rank Company Net Wealth Created Price Price

Rs crores % share Apprec. (X)

7.7

4.8

19.9

4.3

6.9

13.4

23.3

17.9

4.5

2.0

CAGR (%)

1 Reliance Inds. 185,551 11.4 50

2 O N G C 149,020 9.1 37

3 Bharti Airtel 136,578 8.4 82

4 Infosys Tech. 85,471 5.2 34

5 ICICI Bank 56,564 3.5 47

6 B H E L 51,201 3.1 68

7 S A I L 45,104 2.8 88

8 Larsen & Toubro 43,277 2.7 78

9 S B I 40,688 2.5 35

10 Wipro 39,361 2.4 15

Total of above 832,815 51.0

Total of 100 cos. 1,632,267 100.0


The 10 Fastest Wealth Creators

Rank Company Price Appre- Price MCap 2002

ciation (X) CAGR (%) (Rs cr)

1 BF Utilities 665 267 132 Unitech 497 246 633 Anant Raj Inds. 401 232 44 Praj Inds. 274 207 95 Aban Offshore 144 170 446 Kirl. Brothers 110 156 357 Guj. Flouro 76 138 438 Sesa Goa 70 134 959 Areva T&D 57 124 76

10 Pantaloon Retail 51 120 59


The Most Consistent Wealth Creators

Rank Company Appeared In 15-yr Price

WC Study (X) CAGR (%)

241447362320191210

8

1 Hero Honda Motor 122 Ranbaxy Labs. 123 Wipro 114 Cipla 115 Dr Reddy's Labs. 116 H D F C 117 Asian Paints 108 ITC 109 Nicholas Piramal 10

10 GSK Pharma 10


Wealthex v/s Sensex (2002-2007)

Year ending March 2002 2003 2004 2005 2006 2007 5-Year CAGR (%)

BSE Sensex 3,469 3,049 5,591 6,493 11,280 13,072 30YoY change (%) -12 83 16 74 16

Wealthex-rebased 3,469 3,529 7,706 9,590 16,671 19,261 41YoY change (%) 2 118 24 74 16

Sensex EPS (Rs) 201 272 348 450 523 718 29YoY change (%) 35 28 29 16 37

Sensex PE (x) 17 11 16 14 22 18

Wealthex EPS (Rs) 284 442 564 761 860 1,174 33YoY change (%) 56 28 35 13 37

Wealthex PE (x) 12 8 14 13 19 16


Wealth Creation by Industry

Industry (No. of cos.) Wealth Created (Rs cr) Share of WC (%)Oil & Gas (7) 398,056 24

Banking & Finance (11) 208,313 13

Engineering (13) 171,086 10

IT (6) 168,659 10

Metals (10) 148,465 9

Telecom (2) 142,690 9

Auto (10) 96,116 6

FMCG (7) 65,405 4

Pharma (10) 60,118 4

Cement (5) 45,359 3

Others (8) 42,209 3

Constn / Real Estate (3) 37,691 2

Ultility (4) 25,307 2

Media (2) 14,652 1

Retail (2) 8,141 0

Total 16,32,267 100


Wealth Creation by Mcap (Base Year)

Price CAGR by MCap : The rise of Indian Entrepreneurship

2002 Mid-Cap Range (Rs crores)

136

76

51 51

3325

69

34

< 200 200-500 500-1000 1000-2000 2000-5000 5000-10000 10000-20000

>20000

Avg Price CAGR: 41%


Wealth Creation by Earnings Growth

Earnings Growth Range (%)

28 28

4652

70

32

68

0-10 10-20 20-30 30-40 40-50 50-70 >70

Avg Price CAGR: 41%

Price CAGR by Earnings Growth Range : Higher the better


Wealth Creation based on ROE

?

Price CAGR by ROE in 2002 :Bargains are found when the markets are blind to change

72 69

45

30

39

27 25

17

<5 5-10 10-15 15-20 20-25 25-30 30-40 >40

Avg Price CAGR: 41%

Return-risk balance

Bargains

2002 ROE Range (%)


Wealth Creation by Age Group

Price CAGR by Age Range : Young companies have speed

Age range in years

100

49

106

3945

35313134

0-10 11-20 21-30 31-40 41-50 51-60 61-70 71-80 81-90 >90

Avg Price CAGR : 41%


PSUs v/s Private Companies

Value Migration from Public to Private sector

49

2528 30

26

18

36

51

1999-2004 2000-2005 2001-2006 2002-2007

% Wealth Created No. of PSUs


“There is absolutely no substitute for paying right price.In the Bible, it says that love covers a multitude of sins.

Well, in the investing field, price covers a multitude of mistakes.

For human beings, there is no substitute for love. For investingthere is no substitute for paying right price – absolutely none.”

— Van Dan Berg, OID, April 2004

Wealth Creation by Value Parameters


Wealth Creation by Value Parameters

Purchase price is critical

BASE YEAR P/E2002 P/E (x) No of Cos. Share of WC (%) Price CAGR (%)< 5 23 21 565-10 29 40 4410-15 14 15 43

15-20 14 8 37

> 20 20 16 28

Total 100 100 41

BASE YEAR PRICE/BOOK2002 Price to Book (x) No of Cos. Share of WC (%) Price CAGR (%)< 1 45 28 651-2 29 48 43

> 2 26 24 28

Total 100 100 41


Top Wealth Destroyers (2002-2007)

Even Blue Chips can turn Red !!

Company Wealth Destroyed PriceRs Crores % Share CAGR (%)

Hindustan Unilever 4,442 31 -2

Pentamedia Graphics 3,289 23 -47

H P C L 1,495 11 -3

Silverline Technologies 317 2 -4

Mascon Global 252 2 18

Morepen Labs. 245 2 -4

LML 219 2 -14

Rashel Agrotech 213 2 -61

Baffin Engg. 205 1 -50

Total of above 10,676 75 -3Total Wealth Destroyed 14,155 100 -4


Theme 2008

India :The Next Trillion $$$ Opportunity !!


101

136 184

198

210

246

293

317

260 32

4 386

414

461

509 69

6

1,00

6

2,00

3

1,35

5

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

E

2011

E

First US$ Trillion

Second US$ TrillionCAGR of 14.8%

CAGR of 6.2% for 25 years

CAGR of 16% in 5 years

US$100 bn to US$1,000 bn - 30 Years

US$1,000 bn to US$2,000 bn - 5 Years

India’s Journey – 1977 to 2012


India Shining … in the world too!

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

1.9% of World GDP of $11 Trillion



1.0

2.0

3.0

4.0

5.0

1980

1985

1990

1995

2000

2005

Following the Chinese trail …

India

China

India: Share of World GDP (%)


Exponentiality in the NTD Era

• Macro-economic exponentiality

• Exponentiality in key industries

• Corporate profit exponentiality

• Valuation exponentiality


Macro economic exponentiality— Consumption— Government— Investment— External Sector


73.9 75.1 71.0 67.3 66.2 65.256.4 56.4

18.8 19.0 22.620.4 18.3 19.5

18.7 22.6

6.7 8.4 8.2 12.3 16.6 16.2 27.7 23.8

-2.8-2.8-0.9-1.2-1.8-2.5

0.5

1977 1982 1987 1992 1997 2002 2007 2012

Consumption (%) Govt (%) Pvt Invt (%) Net exports (%)

GDP( US$ b )

101 190 246 268 386 480 1,006 2,003

The Big Picture

India’s GDP breakdown (exp. approach) – C + G + I + X


Consumption exponentiality


Accelerating Per Capita GDP, but …

451

357

897

1,65

7

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Per Capita GDP expected to grow to US$1,657 in 2012 from US$897 in 2007

Acceleration in Per Capita GDP from 2000

CAGR of 2.4%

CAGR of 10.3%

CAGR of 12.8%


14.6 15.4 17.1 18.7 20.6 23.3

45.139.8

35.030.8

27.0

64.162.8

61.8

59.757.9

56.9 56.8 56.8 56.7 56.6 56.4

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Private final conspn. exp. (Rs lakh cr)

PFCE (% to GDP)

… Consumption Lagging GDP Growth

PRIVATE FINAL CONSUMPTION EXPENDITURE TO GDP (%)


… Consumption Lagging GDP Growth

Consumption & Saving pattern determined by income distribution

60

30

10

Population (mln)

30

36

34

Share of Income

33

37

30

Share of Cons. Exp.

Top 10% income

Next 30% income

Bottom 60%


Consumption Exponentiality – Comforts & Luxuries

% TO GDP

CAGR (%)

2000-06 2006-15

Nominal GDP 10.6 14.2

Consumption Exp. 8.7 13.8

Luxuries 15.9 16.6

Comforts 13.8 15.6

Necessities 4.6 11.3

High-growth categories

Beverages 25.3 19.5

Communication 18.4 19.5

Educ. & Recreation 12.3 18.6

Personal transport 17.5 18.1

Hotels & restaurants 13.0 17.2

Healthcare 16.3 17.2

42.136.3

30.223.9

11.9

13.6

14.1

15.7

10.312.8

13.616.4

2000 2003 2006 2015

64.2 62.857.9

56.0

Necessities

Comforts

Luxuries


Government finance exponentiality


Tax Buoyancy Boosts Government Finance

India’s Tax Collection to GDP is rising

10,56,100

7,34,200

4,66,500

1,87,1001,71,7003,04,900

13.4

8.2

11.610.3

8.8

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Direct Tax Indirect Tax Tax % to GDP


Revenue Deficit As % Of GDP : down to zero in 2008-09

4.43.6

2.5

7.0

5.8

2.7

1.2

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Centre

Combined Centre & State

Exponential Impact of Tax Buoyancy


Combined Fisc capped at 6% of GDP : thrust on capex

6.2

4.53.7 3.0 3.0

9.9

8.5

6.76.0 6.0

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Centre

Combined Centre & State

Exponential Impact of Improved Govt Finance


Investment exponentiality


Exponential thrust on infrastructure

Infrastructure Spend rising to 9.2% of GDP by end of XI Plan

7,38,049

4,43,606

2,50,490

1,75,0891,14,053

5.6

9.2

7.2

6.0

5.0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Infra. spend (Rs cr)

% to GDP

CAGR of 17%

CAGR of 24%


Exponential growth in private sector investment

Housing and corporate capex drive capital formation

12,69,50011,42,700

9,40,000

7,65,900

6,00,5004,71,200

3,64,800

26.727.426.4

24.5

21.7

19.2

16.0

2002 2003 2004 2005 2006 2007 2008

Private Capex (Rs cr)

Private Capex (% to GDP)


External Sector exponentiality


India’s Foreign Trade

17 18 18 19 22 26 32 33 35 33 37 44 44 5364

84103

126

-21 -24 -20 -22 -23 -29 -37 -39 -42 -42 -50 -50 -52 -62-78

-111

-149

-190

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Exports - $ B

Imports - $ B

2002-07 CAGR : 23%

2002-07 CAGR : 30%


-1.0-1.3

-0.4

2.5

1.4

0.8

-0.6-1.1-1.1

-1.5-1.3-1.8

-1.2

-0.5

-1.6

-0.5

-3.4

4.5

3.2

4.4

3.0

2.31.92.1

2.52.1

2.5

3.1

0.7

2.5

3.6

2.42.0

3.0

200720052003200119991997199519931991

Current Account Balance (% of GDP)

Foreign Capital Inflow (% of GDP)

Forex capital flows higher than CAD


199

152141

110

75

544238

322622172115662

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

Exponential Rise in Forex Reserves

Figures in US$ billion


Exponentiality in key industries


Financial Services

High Level Of Domestic Savings

113 134179

216261

313

384437

498

567

646

32.332.332.4

23.5

29.7

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Gross Domestic Savings (US$ B) Gross Domestic Savings / GDP (%)

Cumulative$900 b

Cumulative$2,500 b


Financial Services

India’s Credit / GDP (%) among the lowest in the world319

224

206

185

168

144

136

133

111

110

86

83

71

57

51

136

51

Japan

USA

Canada

South Africa

UK

Malaysia

China

Germany

New Zealand

Thailand

France

Chile

Brazil

Singapore

Turkey

Philippines

India


Wireless Telecom

Mobile Penetration (% Of Population) - India Vs China

35.1

30.1

25.8

20.9

11.4

16.0 14.3

8.6

5.03.2

1.20.6

2001 2002 2003 2004 2005 2006

CHINA

INDIA


Cars

Cars ('000 nos.) - India Vs China

571

507 607704

1,092

2,0712,276

2,770

3,870

410

639

591 558 612819

981 1,0521,269

1998

1999

2000

2001

2002

2003

2004

2005

2006

CHINA

INDIA


Engineering & Construction

Beneficiary of huge spend in infrastructure

7,38,049

4,43,606

2,50,490

1,75,0891,14,053

5.6

9.2

7.2

6.0

5.0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Infra. spend (Rs cr)

% to GDP

CAGR of 17%

CAGR of 24%


Cement

Cement Production (Million Tonnes) - India Vs China

536512573 597

661725

862967

1,069

1,240

77 82 94 94 102 111 117 126 142 155

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

CHINA

INDIA


Steel

Crude Steel Production (Million Tonnes) - India Vs China

283

222

353

420

32 32 39 43

2003 2004 2005 2006

CHINA

INDIA


Market Outlook


High Corporate Tax Buoyancy

Past Corporate Tax Buoyancy – multiple of nominal GDP growth

Financial Year Corporate Tax Buoyancy1995-96 2.19

1996-97 2.21

1997-98 2.18

1998-99 2.22

1999-00 2.25

2000-01 2.26

2001-02 2.29

2002-03 2.29

2003-04 2.33

2004-05 2.29

2005-06 2.31


Healthy Corporate Sector Profit Growth

Corporate Profits To GDP (%) : At all time highs

1.3

1.62.2

3.5

2.4

1.8

2.1

5.0

3.1

5.8

6.7

7.8

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012


Interest Rate scenario benign-to-favourable

10-year GSec yield : seems to have plateau-ed

11.7

5.1

7.9

14

4.0

6.5

9.0

11.5

14.0

Nov

-92

Nov

-93

Nov

-94

Nov

-95

Nov

-96

Nov

-97

Nov

-98

Nov

-99

Nov

-00

Nov

-01

Nov

-02

Nov

-03

Nov

-04

Nov

-05

Nov

-06

Nov

-07


Earnings yield to bond yield < 15-year average

0.6

1.8

0.20.0

0.3

0.6

0.9

1.2

1.5

1.8

Nov

-92

Nov

-93

Nov

-94

Nov

-95

Nov

-96

Nov

-97

Nov

-98

Nov

-99

Nov

-00

Nov

-01

Nov

-02

Nov

-03

Nov

-04

Nov

-05

Nov

-06

Nov

-07

15 Year Average: 0.74x


Market Cap to GDP (%) - All Time High

19

54

24

43 43 44

29

51

26 26 23

43

54

85 86

136

3437

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Nov

-07


Sensex EPS & PE

Future EPS growth of 20% - slower than 30% of last five years

201

1,772

1,4771,231

1,026

523348

272450

718876

2002 2003 2004 2005 2006 2007 2008E 2009E 2010E 2011E 2012E

CAGR of 29%

CAGR of 20%

0

5

10

15

20

25

30

35

40

45

Nov-07Nov-04Nov-01Nov-98Nov-95Nov-92

15 Year Median: 15.7x

P/E higher than 15-year median


• Bargains are made when markets are blind to large opportunities, positive changes or sustained growth

• Losses are guaranteed when one grossly overpays

• India's next trillion dollar journey will see distinctly buoyantcorporate profits; boom in savings & investment

• At current market valuations, margin of safety is low

• High liquidity could lift the market to rich valuation levels for quite some time

In Conclusion


Thank You &

Happy Wealth Creatingin the NTD era !!

wealth creation study 2002-2007

Business

wealth destroyers

rs100 crores of wealth

avg price cagr

price price rs crores

right price

yr price wc study x

age group price cagr

year cagr