Zee Telefilms ranks high in wealth creator list - Motilal Oswal study

MUMBAI: A study on wealth creation (1997-2002) by Motilal Oswal Securities' Inquire Research (MOSt) has placed Zee Telefilms as the sixth fastest growing listed company with an adjusted market capitalisation CAGR of 80.3 per cent. Motilal Oswal analysts point out that Zee Telefilms has appreciated in multiples - nearly 19 times for the period of the study.

According to the study, media industry was ranked eight amongst the wealth creators with a net wealth of Rs 32.43 billion and the speed CAGR (1997-2002) value at 111 percent.

The ROE (return on equity) for Zee Telefilms varied from 30.7 per cent in 1997 to 2.4 per cent in 2002. The market capitalisation of Zee Telefilms stood at Rs 69.22 billion in 2002 as compared to 1.64 billion in 1997. The PE multiple for Zee Telefilms increased to 51 in 2002 as compared to 0.6 in 1997. The payback ratio increased in multiples of 0.6.

The media sector's contribution to wealth creation was 1.6 per cent as compared to IT sector's 38 per cent. The values for ROCE 2002 and 1997 were 24 per cent and 32.5 per cent respectively. The values for CAGR net profit and sales for the period 1997-2002 were 27.5 per cent and 35.4 per cent respectively.

Motilal Oswal Securities joint MD Raamdeo Agrawal states: "For the purposes of its study, we identified companies that have the distinction of having added at least Rs1 billion to their market capitalization after adjusting for dilution during 1997-2002. Only 85 companies fulfill this criterion. We have termed the group of Wealth Creators (WC) as the 'MOSt-Inquire 85'. Ranks have been accorded on the basis of "speed of wealth creation", that is, the compounded growth in wealth created during the period under study."

The MOSt study pertains to the period from April 1997 to March 2002. During this period, the BSE Sensex rose at a modest CAGR of 0.64 per cent while the WC's Index appreciated at a CAGR of 46.4 per cent. Despite having fallen by 61 per cent from the peak of 1,745 in March 2000, the WCs' Index managed to outperform the sensex by 477 per cent during the study period.

The following are some important conclusions of the study that could be relevant to all the companies in the media and entertainment sector.

New economy stocks still rule: The MOSt study claims that the new economy companies such as those in technology, media and telecom sectors have grown at a CAGR of 62 per cent as compared to 22 per cent for old economy companies.

The P/E multiple of new economy stocks has expanded from 13x in 1997 to 29x in 2002 while that of old economy companies has contracted from 15x to 11x over the same period. The CAGR in market capitalization for new economy companies has been 96 per cent compared to 17 per cent for old economy companies during the study period. New economy companies continue to score handsomely over old economy companies despite the meltdown in technology stocks, the study concludes.

Nature of business: The MOSt study says that the trio - IT, FMCG and pharmaceuticals -continues to dominate the WC list. Combined, these sectors have contributed 73 per cent to the wealth created in the 1997-2002 study compared to 70 per cent in the 1996-2001 study. The fastest WC has been the IT sector, comprising of 16 companies, creating Wealth at 99 per cent CAGR during the study period.

MNC management versus Indian management: The MOSt study says that percentage of MNCs figuring as WC declined from a high of 50 per cent in the 1993-1998 study to a low of 19 per cent in the current study. The homegrown IT and pharmaceutical companies have displaced the MNCs as a major wealth creating class.

Speed to size: The MOSt study mentions that the speed of WC is correlated to the size of market capitalization. Thus, if one wants speed in WC, then it is imperative to buy companies with modest market capitalisations and whose businesses have the potential to create value for shareholders on a consistent basis.

The study claims that the mean size of the wealth creators in 1997 and the pace at which wealth has been created are Rs14.03 billion and 38 per cent CAGR, respectively. Wipro, the biggest and fastest WC had Rs 5.73 billion as its market capitalization. Bigger size requires bigger incremental investment opportunities, which are few and difficult to harness, the study adds.

Business activity: A common feature across all the WC studies, including the current one, is that companies, which have consistently created wealth for their shareholders, have adopted an extremely focused business policy. The current study also displays a similar trend, as 96 per cent of the wealth created was by companies that adopted a focused business approach.

Product attribute: The study adds that all the current and past successful WCs have erected high entry barriers through superior technology or strong brand building. In the current study period, 73 per cent of the wealth creating companies have one of these attributes as the differentiating factor.

Capital allocation: The MOSt study mentions that the change in the value of a company is strongly influenced by the superior rate at which invested capital has been deployed. The large capital input in Reliance Industries stands out. The future productivity of capital would decide the value of the company.

Age group of WCs: Wipro, belonging to the 51-60 age group, has contributed 19 per cent of total wealth created while HLL, belonging to the 61-70 group, has contributed 15 per cent of total wealth created. Barring these two exceptions, the MOSt analysts observe that most of the wealth (46 per cent) has been created by companies that are less than 30 years old.

The maximum wealth (29 per cent) has been created by companies in the 11-20 age group. The maximum number of companies also exist in 11-20 years group. The analysts infer that most of the wealth has been created by relatively young companies.

Return on equity: In contrast to the new economy companies, the old economy companies have displayed steady improvement in RoE, the MOSt study claims. After reaching a peak of 23.6 per cent during the study period, the RoE of new economy companies has almost converged with the RoE of the old economy companies in 2002.

Net Profits/Sales: The MOSt study states that 2002 has been a year of correction. After four years of a one-way journey upwards for the net profit margins of new economy companies the net profit margins fell by almost 200bp from their peak levels in 2001. Though at less than half the new economy companies, net profit margins of old economy companies have been showing signs of gradual improvement, the study adds.

Future outlook: The MOSt study states that the Indian conditions in 2002 appear very similar to the American conditions in 1981. Indian corporate profits are depressed because of high interest cost and this is reflected in low P/E multiples. The MOSt analysts believe that after four years of continuous decline, India Inc's net profit margin (NPM) should show a strong improvement. The best net profit margin of 6.8 per cent was achieved in 1995, the study adds.

Other insights: The MOSt study shows that the tiniest change in interest rates changes the value of every financial asset at all times, in all markets in all parts of the world. The following are the other salient features of the study:

? The fall in interest rates on long-term bonds will have a deep impact on the valuations of other financial assets, particularly stocks

? Corporate earnings are likely to be positively impacted by the sustained drop in interest rates - not only through own interest cost reduction but also through suppliers' interest cost reduction

? Value is, however, not immediately reflected in market prices as "Investors are habitually guided by recent experiences and extrapolate them into the future"

? If viewed as a disguised bond, the BSE Sensex is a far superior compounding instrument than the 10-year Government bond

The report states that the foundation of wealth creation is in buying businesses at a price substantially lower than their intrinsic value. The lower the market value than the intrinsic value, the higher is the margin of safety, it adds. The MOST study's endeavour was to cull out the characteristics of businesses, which create value for their shareholders.

The MOSt report quotes Phil Fisher: "It seems logical that even before thinking of buying any common stock, the first step is to see how money has been most successfully made in the past." It hopes that the study is an attempt to study the past as a guide to the future and gain insights into "How to value a business"!

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