Top firms that created wealth of Rs 49 trillion in five years

Top 100 Wealth Creating companies created a staggering wealth of 49 trillion in India during the five-year period from 2014-2019. Significantly, this is the highest ever in any 5-year span in the past. Reliance Industries smashes all records as the biggest wealth creator over 2014-19. The 5.6 trillion wealth created by Reliance is the highest ever so far by a huge margin.  However, five of the top 10 biggest wealth creators are from the financials sector.

According to the 24th “Annual Wealth Creation Study” (2014-2019) by Motilal Oswal Financial Services Limited, the Reliance Industries, HDFC Bank, TCS, Hindustan Unilever, Kotak Mahindra, Bajaj Finance, Infosys, Maruti Suzuki, Axis Bank are the top performers. Indiabulls Ventures is the fastest wealth creator for the second consecutive year.

Bajaj Finance is the only company with a unique distinction of being in the top 10 list of both, biggest and fastest.  The IndusInd Bank is the most consistent as wealth creator. IndusInd Bank has emerged the most consistent wealth creator by recording the highest price CAGR of 49 per cent over the 10-year period 2009 to 2019, ahead of Pidilite Industries, which delivered 40 per cent.

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

Financial sector

At a time when Indian banks and non-banking financing companies are going through a rough patch, the Motilal Oswal 24th Annual Wealth Creation Study 2019 says that financials as a sector created the most wealth over a five-year period for the third consecutive time. Largely private-sector banks and non-banking financial companies led the rally in the sector.

The other sectors, which created the most wealth in the past five years, are consumer goods/retail, oil and gas, technology, and auto. The top five sectors accounted for 85 per cent of the Rs 49 lakh crore wealth created in the past five years. At the bottom of the heap were capital goods, utilities, and telecom.

The study points out that financial sector companies topped wealth creation, whereas telecom sector companies performed poorly with only one company successfully creating wealth. March 2019 over March 2014, Wealthex is up 177 per cent whereas the Sensex is up 73 per cent that is 104 per cent out performance over 5 years. Indeed financials is the biggest wealth-creating sector for the third consecutive year. Another fact that has emerged is that private banks and NBFCs have led the surge in wealth creation in the sector. In terms of share of wealth created, IT is the biggest loser over the last 5 years, and Oil & Gas is the biggest gainer.

PSUs disappoint

When we analyze wealth creation in Private v/s PSU, we find that the PSUs remain insignificant in wealth creation.  The number of PSUs in the top 100 wealth creators is only 9 and the wealth created by these 9 PSUs is just 6 per cent 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. The only positive is that wealth- creating PSUs’ 2014-19 profit after tax (PAT) compound annual growth rate (CAGR) at 22 per cent is higher than private sector’s 13 per cent. This has led to PSUs’ price CAGR of 20 per cent almost matching that of the private sector.

Alongside wealth creators are wealth destructors and the total wealth destroyed during 2014-19 is 8.6 trillion, 18 per cent of the total wealth created by top 100 companies.

Wealth destroyers

Ironically, financials sector leads the wealth destruction pack.  The financials sector has the unusual distinction of being the biggest wealth creator (thanks to private banks and NBFCs) and also the second biggest wealth destroyer (thanks to state-owned banks). Vodafone Idea was the biggest wealth destructor followed by Tata Motors, ONGC and Sun Pharma. Reliance Communication, Adani Enterprises and Reliance Power also featured in the list of wealth destructors.

Management integrity

Given the corporate governance issue faced by Indian companies in the last few years, this study attempts to gain some insights into management integrity. Motilal Oswal’s approach to equity investing is called ‘QGLP’ (Quality, Growth, Longevity, reasonable Price). QGL is the value component, which is then juxtaposed with P i.e. reasonable Price. The recent past wealth creation studies have probed into various aspects of QGLP. This study attempts to gain some insights into management integrity.

The report states that management integrity typically gets compromised when a weak board of directors fails to challenge the senior management on issues like accounting policy, related-party transactions, senior management compensation, etc. Other conditions are when there are management teams, devoid of checks and balances, invariably led by an alpha leader who takes all major corporate decisions and auditors lacking objectivity, independence and due diligence.

The report mentioned “Auditors must be made more accountable to minority shareholders to avoid Sharp Practices by the management. As an investor, have a forensic mindset to get management’s explanation for all the perceived Sharp Practices. Interact with various stakeholders — customers, employees, suppliers and competitors till you arrive at that moment of Management Integrity.” It said that sharp practices may be defined as “ways of behaving, especially in business, that are dishonest but not illegal”.

Rohini Kute Head — Corporate Communication Motilal Oswal Financial Services said that Study of Management Integrity Motilal Oswal’s approach to equity investing is called “QGLP” — Quality, Growth, Longevity and reasonable Price.  The study attempts to gain some insights into Management Integrity.

As investment guru Philip Fisher has said, “In evaluating a common stock, the management is 90 per cent, the industry is 9 per cent, and all other factors are 1 per cent.“ The Management Integrity can be defined as dealing with all company stakeholders honestly and with a sense of trusteeship.

If companies demonstrate only competence without integrity, there is enough evidence to suggest that for such stocks it’s a race to zero! The management integrity gets reflected when bogus revenue is recorded, expenses are shifted to a future date, revenues are recorded too soon and certain items are taken off the balance sheet.

The way out

Raamdeo Agrawal, chairman of Motilal Oswal Financial Services observed that the lack of integrity of the management is hurting a lot of investors. He said that top quality business is run by top quality management, and then growth, longevity and valuation. So all the four components — quality, growth, longevity and price have been covered in the study. 

He said that “This time we are hurt by a few accidents in our own portfolio and we realized that despite all the intelligence, lack of integrity of the management is hurting a lot of investors and this is an opportune time to study that.’

Also tracking of accounts was a good way to understand management integrity. “There is only one way of writing honest books and there are infinite ways of writing bad books. You cannot have a foolproof system to figure out, so you have to focus on how to find the honest guys and to figure out honest guys you got to have a forensic mindset.

Agrawal says that this year’s theme, management integrity, is fundamental to business, but this aspect took the centre stage this year as issues of corporate governance have become more visible than in the recent past. The report’s conclusions include: relying more on cash flows rather than the profit-and-loss statement and a recommendation to make the cash flow statement a statutory requirement.