| 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:
Ø The fall in interest rates on long-term bonds will have
a deep impact on the valuations of other financial assets, particularly
stocks
Ø 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
Ø Value is, however, not immediately reflected in market
prices as "Investors are habitually guided by recent experiences
and extrapolate them into the future"
Ø 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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