Below are Views On Motilal Oswal 25 Annual Wealth Creation Study 2020 By Raamdeo Agrawal, Motilal Oswal Financial Services Ltd
Mumbai, 22nd December 2020: Motilal Oswal Financial Services Ltd. today announced the Motilal Oswal 25thAnnual Wealth Creation Study, 2020.
Every year for 25 years now, Mr. Raamdeo Agrawal, Chairman of Motilal Oswal Group, commissions an Annual Wealth Creation Study.
The Motilal Oswal 25thAnnual Wealth Creation Study is a special Study with several sections:
1) Findings on Wealth Creation during the 25-year period 1995-2020
2) 25-for-25: A logical approach to shortlist stocks for the next 25 years
3) Theme 2021: The QGLP Checklist – 25 questions, 25 frameworks
4) Summary of the previous 24 Wealth Creation Studies and
5) The regular section - Findings on Wealth Creation during the last 5-year period 2015-2020.
Key Conclusions of Motilal Oswal 25thAnnual Wealth Creation Study
* Infosys, Reliance and Kotak Mahindra–Fastest, Biggest, & Most Consistent Wealth Creator, respectively, between 1995 and 2020. Kotak Mahindra is also the top All-round Wealth Creator.
* Consumer/Retail sector is the largest wealth creating sector between 1995 and 2020.
* In the last 5 years, Tasty Bite Eatables is the Fastest Wealth Creator, Reliance is the Biggest and Pidilite is the Most Consistent.
* Time is a friend of good companies and enemy of bad companies. In 25 years, successful companies grow to unimaginable levels in sales, profits and market cap
* Of the 1,300 companies listed in 1995, only 100 companies have created meaningful wealth.
* Stock returns are slaves of earnings power and growth. In the very long run, valuations matter less.
* The future always holds a lot more promise. Over 50% of current market cap is made up of listings post 1995.
* Equity investing is complex. A checklist is an excellent tool to bring discipline to the process.
* The 25 questions and the 25 related frameworks covered in the report are a good starting point for an investor to eventually arrive at their own checklist over time
Having studied how wealth got created in the last 25 years, we thought it an interesting idea to attempt shortlisting 25 stocks likely to deliver handsome returns over the next 25 years. We describe the approach below and stick our neck out with the names.
The 25-for-25 approach
Step 1: Observe the top 25 Wealth Creators of the last 25 years
Our observations here are follows. Almost all companies …
- Were small to mid in size in the base year 1995
- Were consumer-facing, bestowing them a secular business model
- Were very profitable (average base RoE was a robust 17%)
- Grew to emerge as market leaders (among top 3) in their respective business
- Had management with high integrity and competence.
Step 2: Build a portfolio of the potential 25 Wealth Creators for the next 25 years
Based on the learnings above, we used a logical approach to build a portfolio of 25 stocks which are potential Wealth Creators over the next 25 years.
* SIZE: We started with a list of 150 midcaps i.e. companies ranked 101 to 250 by current market cap.
* BUSINESS MODEL: We preferred consumer-facing, secular business models. So we eliminated cyclical businesses like Auto ancillaries, Capital Goods, Chemicals, Oil & Gas and Realty. This reduced the list of companies from 150 to 114.
* VERY PROFITABLE: To ensure this, we chose companies with last 5-year average RoE greater than 15%. This reduced the list from 114 to 63.
* BUSINESS POTENTIAL & MANAGEMENT POTENTIAL: Next, to the best of our ability, we judged the business potential and management potential of the companies, and selected only those which qualified on both counts. This reduced the list from 63 to 28.
* MARKET LEADERSHIP: We flagged off market leaders from the 28 companies to arrive at a list of 13 companies.
* VALUE MIGRATION: We have observed that in situations of Value Migration, all companies benefit irrespective of market leadership. So, of the 28 in Point 4, we selected 5 beneficiaries of Value Migration, taking the total list of shortlisted stocks to 18.
* LARGE CAPS FOR FINANCIALS: We believe Financial Services is quite a risky business, and here size begets size. So, we mainly resorted to large caps for financials, and roped in 6 leader names for the portfolio, taking the total to 24.
* DIGITAL PLAY: Finally, we opted for a pure digital play, even if it didn’t meet some of the above filters, taking the total to 25.
* VALUATION: We believe in the very long run, valuations matter less. So we ignored the same in the shortlisting process.
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