Trishul Of Wealth

Wealth in its narrowest term as defined by Investopedia is the ‘accumulation of resources, where people are said to be wealthy when they are able to accumulate many valuable resources or goods’. Wealth, however, to us is an all-inclusive concept and especially for corporates. It should encompass the three fold dimensions of wealth: The Trishul of Wealth that is creating, sustaining and understanding wealth. To arrive at Trishul of wealth we have taken only market cap in consideration and their movement in different time frame. The reason we have considered market cap to categories the Trishul of wealth is because it is assumed that market cap most of the times with few exception captures the true nature of the performance of the company. According to Kisan R Choksey, Chairman, KRC Shares & Securities says that, “wealth creation happens with the increase in market capitalisation of company”.

Creating wealth

 As the rising tides lifts all the boats, rising market tends to increase the market cap of all the companies. Therefore in a cyclical bull market even the company without sound fundamentals can see their market cap rising exponentially. However, when the reality sets in these companies and their stock prices come crashing down, in the process destroys the wealth of their shareholders. Therefore it becomes important to separate the men from the boys and find companies with strong performance. 

These companies have either created wealth or protected the wealth of their shareholders in bull market and bear market respectively. Going a step further we tried to find the real wealth creators that have consistently beaten their peers. And our quest to find such companies led us to DSIJ ‘Super 50’ and ‘Elite 100’.These are the companies that have consistently created wealth for one of their most important stakeholders that are shareholders. 

The total market cap of DSIJ ‘Super 50’ and ‘Elite 100’ together forms little more than 42 per cent of the total market cap of BSE listed companies at the end of FY13. These same companies formed 27 per cent of the total market cap of BSE at the end of FY08. This clearly shows that the market cap of these companies has increased faster than rest of the pack. The market cap of these companies’ has increased on an average by 12 per cent every year since the start of FY09 till the end of FY13. In the same period, however, BSE’s listed company’s average market cap has gone up by mere two per cent every year. On absolute basis the market cap of the ‘Super 50’ and ‘Elite 100’ has increased by 75 per cent in last five year ending FY13, whereas BSE listed company’s market cap has increased by mere 10 per cent in the same period.

 One may argue that we have selection bias, wherein we have considered rise in market cap as one of the factor for arriving at the ‘Super 50’ and ‘Elite 100’. Nonetheless, we have given only one-tenth weightage to the increase in market cap and rest 90 per cent weightage is given to other financial performance of the company. What this means is that in the longer run it is the financial performance which plays an important role in creating wealth for the stakeholders and is reflected in the rise of market cap of a company. Regardless of all the companies that have created wealth in our list, there are some companies that clearly stand out in terms of wealth creation and are the true wealth creators for their investors as well as promoters. To arrive at these companies we have used the movement in the market cap percentile of the companies among its group. At the end of every financial year we have calculated at what percentile the market cap of a company is lying, and for us true value creators are those who have continuously improved their percentile.
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For example a company likes Symphony, which is present into domestic appliances sector, was having market cap of mere Rs 5.1 crore at the end of FY08 and was lying at zero percentiles among its peers. Nonetheless, as it moved forward, its market cap kept on increasing along with its percentile among its peers. Between FY08 and FY13, market cap of the company had moved up by 253 times whereas its share price has increased at an eye popping CAGR of 167 per cent. Therefore, every one lakh rupee invested at the end of FY08 in the shares of the company would have become more than Rs 44 lakh by the end of FY13. As expected, the fastest wealth creators are from the mid and small cap companies. The other companies that fall in this league are in the above graph.

Sustaining Wealth

 Creating wealth for their shareholders is definitely one of the most important roles of the corporations but sustaining that wealth is equally important function to be played by the corporate. The history of equity market, whether in India or abroad is full of examples where wealth created by companies through years of hard labour gets eroded in no time. The companies that were the darling of the investors in one cycle lose their significance in next cycle.

This is despite the beginning of new bull cycle and market touching new highs. Some of the prominent names that have destroyed the wealth of their investors since FY08 are Reliance Communication, Reliance Power, DLF, Unitech etc. There are also many public sector units that fall under this category.

There are various reasons that a company falls out of investor’s favour. This is especially true for those companies who operate in cyclical business. In last five year ending FY13 we have seen that after the crash of commodity prices in year 2008-09, the investors in shares of companies like Tata Steel, NMDC and other commodity companies lost fortune. Then there are certain sectors where disruptive innovation makes certain product redundant. Beside these, sometimes sudden and unexpected change in governmental regulation leads to the destruction in the shareholder’s value. For example increase or decrease in certain direct or indirect taxes may greatly influence the share price of those sectors and hence the shareholders value.

 This leads us to the logical question as to which are the companies and sectors that have sustained values throughout the business cycle. To arrive at such companies we have included those companies who have remained at the top deciles among its group in last five year ending FY13. For example Infosys which had remained constantly above the 95 percentile among its peers in terms of market cap in last five year ending FY13. Similar is the case with Reliance Industries that had remained above 98 percentile in the same period. If we try to find out the sectors that have sustained the wealth created by them, it is dominated by software and FMCG. Creating and sustaining wealth is the sole objective of enterprise and in the context of a developing economy like India that objective gets even more accentuated in importance.

 Understanding Wealth 

Understanding wealth is the first step towards accomplishing true value creation. One look at the history of wealth creation in India will tell you that most of the companies have failed to understand what wealth is all about. Higher the market cap of a listed entity, higher is considered to be the wealth created by that entity. Good companies create market caps, great companies create wealth. The journey from being good to great begins with the ability to understand what wealth is. The best examples of wealth and value creators in the Indian context are the larger corporations and business houses who have not only managed to create and grow their wealth, but have also sustained in the face of every kind of difficulty to remain on top.

If you look at the record of wealth creation in India, the post independence period has seen the emergence and sustenance of only a handful of business houses. Most of these have been family owned businesses which were driven by management principles handed down over the generations. Right from the Tata’s to Reliance some of the biggest business houses have seen growth through self-learned management principles.
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if you look at the record of wealth creation in India, the post independence period has seen the emergence and sustenance of only a handful of business houses. Most of these have been family owned businesses which were driven by management principles handed down over the generations. Right from the Tata’s to Reliance some of the biggest business houses have seen growth through self-learned management principles.

 The best examples of new generation entrepreneurs to have understood wealth in the true sense of the term are the Indian software companies. For most of those who have understood what wealth is, it has come through a holistic approach where every stakeholder matters. So while most of them have created immense wealth for the shareholders through capital appreciation and corporate actions including issuance of bonuses, they have also taken care of their employee needs benchmarking their performance against their profitability per employee. 

The circle of wealth creation just does not end within the confines of the company. Corporate Social Responsibility has emerged as the new mantra entailing service to society and completing the circle of holistic wealth creation for companies today. The benchmarks are changing and so have the dynamics of doing business. With time, the landscape will change even more and only those companies which understand the changing needs of the society and the environment within which they operate will be able to create long-term sustainable wealth. After understanding the concept of creating, sustaining and understanding wealth let us try to figure out what are the characteristics that define such companies. Although, at each stage of wealth creation, sustaining and understanding a different set of skill sets are required, there are some characters that are common to all. First and the foremost is the quality of the management, which is responsible for the key decisions with regard to corporate governance, strategy, lines of business, capital allocation etc. Second is the nature of business and company’s position in that particular sector. We have seen that market leader in the FMCG sector continue to create and sustain wealth for their shareholders.

The Method

 The success of any study, academic or otherwise, depends on the methods and processes that are employed. We, at DSIJ, have always been recognised for the rigorous standards and methodologies employed in our financial analysis. It is this rigour and exactitude in our approach which has helped us in devising the most profitable investment options for our readers and patrons. 

The study which has culminated in the selection of the top 50 corporate sultans of India Inc. is also a result of such a meticulously laid-out process. What follows, is a detailed description of the various steps that have been followed in order to arrive at this most coveted list of toppers of India Inc.

 For the purpose of this study, we began with the entire Indian listed space. Since our objective was to get to companies which have been super achievers over the past five years, we then narrowed down the list to include only those companies which have been listed for more than six years.

The Six-Year Rationale

 The reason why we have considered a six-year period as the cut-off for the selection criteria is that this period between 2008 and 2013 included major business cycles. Between these years, the global economic landscape went through its fair share of ups and downs. While on one hand we saw a secular bull run across economies right upto the start of 2008, on the other, we also witnessed a financial meltdown experienced by the global economy, which was billed to be the worst since the Great Depression of the 1930s.

 A long-term study of six years tends to even out any aberration in the results of any particular year and helps in giving a fair idea of the long-term performance. Another reason why a six-year period makes more sense is that many infrastructure companies (like power and road construction) and even the strategies of IT & FMCG companies (such as Infosys’ 3.0 and GCPL’s 3x3) get executed over a longer period to reflect on the financials of the company.

The Base Of The Study

Following the steps as described above left us with a list of 3196 companies. Out of these, there were only 1546 companies whose data for the last six years was available in totality. The data for the remaining was either scattered or was not available at all, and hence, these companies were excluded from the list.

Considered Exclusions

We have deliberately left out certain categories and companies from our study. These include:

Banking Companies: The reason for excluding banking companies from our study is rather special. One, the banking sector in India has evolved very strongly over the past many years. In fact, it has been among the sturdiest of its global peers.

This is evident in the very fact that this sector was the least affected one during the financial crisis that emanated in the US and spiralled to hit the world in early 2008. We feel that the banking sector holds special importance in the overall economic scenario, and hence, has to be given a separate slot to be evaluated for its worth.
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Restructured Enterprises: We have also left aside those companies which are a part of the groups that have gone through any major restructuring exercises over the period of our study. This was in order to avoid any anomalies that would have cropped up owing to such restructuring initiatives, whether on the capital or any other front.

The Next Step Our study then proceeded with 1546 companies as the base for our ranking. We analysed these 1546 companies based on various parameters of objective and subjective judgement to come out with the list of India Inc.’s super achievers.

Parameters

Broadly speaking, we have sought to analyse and rank companies based on the following parameters: •

•  Growth
•  Efficiency 
• Safety 
• Wealth Creation

The most critical among these are the topline as defined by the sales/revenues of the company, the operating profit which defines the operational efficiency of the company, the net profit which defines the eventual benefit to the stakeholders of the company and the Net Worth which defines the composite growth of the company and in turn the benefit that accrues to the shareholders of the company. Of the above, three reflect the profit & loss (P&L) side and one captures the balance sheet character. The P&L pointers capture the financial health of the company at three different levels, while the Net Worth reflects the correct picture of growth in shareholder value.

Wealth Creation: The ultimate objective of any organisation is wealth creation. Obviously, this had to be one of the criteria that we employ in our study. In order to evaluate companies on this front, we have looked at the movement in share prices between FY2007 to FY2012 (our core study period). The impact that this has had on the market capitalisation is what has determined the wealth creation of companies.

The Ranking Method

After having laid out the data according to the various parameters as discussed above, we then embarked on the final step of ranking these companies. Although all the parameters described above play an important role for a company to excel, they differ in importance of the quantum. We have carefully measured this requirement and accordingly assigned weights to each of the parameters. Even within that, companies in different stages of their evolution have been assigned weights according to the requirement.

This led us to the creation of two broad categories. One, where we considered companies with a market capitalisation in excess of `10000 crore and the second, where we considered companies with a market capitalisation of less than Rs 10000 crore but exceeding `1000 crore. For this classification, we have taken the market capitalisation of companies as at the end of FY2013.

Weight Allocation The tables alongside are self-explanatory for the weightage that we have assigned to come  our final list and the rankings done thereafter. Accordingly, a higher weight has been assigned to the growth factor in case of companies with a market capitalisation of more than Rs 10000 crore, the reason being that these companies are far ahead on the safety curve. These have been in the business for a greater duration and have achieved a critical mass by now. What is important in their case is the growth factor, which will propel them into the next orbit. Safety and efficiency have been assigned an equal weightage for the same reasons as mentioned above. 

On the other hand, growth and safety have been weighted at an equal level in case of companies with a market cap of less than `10000 crore but over `1000 crore. Shareholder returns carry the same weightage in both the categories.

 Based on all these factors, a final composite ranking of companies in both the categories was arrived at. This gave us a list of top 50 companies in the first category (market capitalisation in excess of Rs 10000 crore), which is our ‘Super 50’ club. The top 100 companies in the second category make up our ‘Elite 100’ group.

 As mentioned at the outset of this exercise, it has been our perpetual endeavour to research and provide the best of the best to our readers and patrons. We, at DSIJ, are committed to continue improving upon our methodology and research metrics to further strengthen the quality of the results. 

In the pages that follow, we bring to you the DSIJ list of ‘Super 50’ companies. We hope this compilation helps you to put a finger on the DS truly ‘valuable’ shining stars of India Inc.