150 Wealth Creators 2023

After a rather volatile 2022 for equity markets given the negative circumstances, the year 2023 looks like yet another year where the outlook is not clear and headroom is visible in terms of geopolitical tensions and the rising interest rates owing to stubborn inflation. Yogesh Supekar discusses the market outlook for the current year 2023 while celebrating the success stories (stocks) of 2022 

The year 2022 was full of contradictions in the sense that the equity prices behaved quite opposite to the conditions on ground. If you thought the corona virus-triggered pandemic was bad, the Russia-Ukraine conflict which is still going on by the way disrupted the global supply chain and ensured that global economy suffers. The tough and unfriendly decision for equity markets on tightening interest rate was seen necessary by the central banks of most countries to tame inflation in 2022. Growth was put on the backburner and the focus globally was to tame the monster of inflation.  [EasyDNNnews:PaidContentStart]

The outlook for 2023 now hinges on how the economy evolves from the tough decisions undertaken in 2022 to calm rising prices. While a majority of the market participants agree that inflation may have already peaked, there are no indications by the US Federal Reserve that are done with increasing the interest rates. The bull story for the equity market is unlikely to start without indication of interest rates getting soft. India, however, is a different story when compared to the other economies and India could be one of the first countries to not increase the interest rates any further and may actually start reducing the interest rates earlier than most of the other emerging countries at least. 

According to Summet Sonawane who owns an SME manufacturing unit in Maharashtra and is also the chairman of Dhansampada Patsanstha which lends money for commercial purpose and housing, “I have seen the wages rise in the past 2-3 years for the manufacturing sectors and I do not see the wage rate growth coming down soon. Workers are demanding higher wages and in 2023 also the wage rate may rise. The reason workers give is the rise in cost of living and inflation. I think the inflation is quite sticky and it may not ease in 2023 at least. As far as interest rates go, I think given the inflationary environment we are seeing on ground, we should be lucky if the interest rates are reduced in 2023 even by 25 basis points.” 

Sticky inflation is not great news for the equity markets. However, we have seen in the past that rising inflation levels do not always mean it is the end of story for most businesses. In fact, there are some businesses which thrive in an inflationary environment and we have seen metals and commodity-based businesses do well in the present rising inflationary environment. Despite the sticky inflationary environment, it is possible that the focus will shift toward growth in 2023. The recent budget has been an expansionary one and helps us understand the priorities of this government – i.e. stimulating growth by increasing government spending.

Wealth Creators in Turbulent Times 

The market indices will tell a positive story of 2022 as the key benchmark indices made all-time highs in December 2022. To be precise, on December 1, 2022 we saw Nifty trading at 18,887.60 and BSE Sensex at 63,583.07 levels. In the past one year we have seen several growth stocks take a beating. Some of the speculative growth segment stocks have crashed anywhere from the highs by 50-70 per cent. EKI Energy is one of the finest examples of underperformance in recent months. However, those stocks supported by higher earnings have managed to create wealth in the past one year. 

Mufin Green Finance, Apar Industries, Praveg, Cressanda Solutions, Mold-Tek Technologies, Marathon Nextgen Realty, Jupiter Wagons, Titagarh Wagons, Sterling Tools, Refex Industries, Permanent Magnets, Data Patterns and KPI Green Energy are some of the outperforming stocks that have gained more than 100 per cent and up to 330 per cent in the past one year on the back of above average growth in earnings. 

"Consumers with a cushion of savings from lockdown have mostly exhausted their post-pandemic excess cash and for the first time are getting hit by a broadening negative wealth effect from all assets simultaneously — whether that’s housing, bonds, equities, alternative, private investments or crypto." 

-Dubravko Lakos-Bujas, Global Head of Equity Macro Research, J P Morgan. 

Growth slowing down will be a bigger concern than the inflation in 2023!

Conclusion

Looking at the current stock prices’ behaviour it looks like we are in a price and time consolidation phase where the market is moving in a range. As an investor in 2023, one needs to keep an eye on the trade deficit figures, persistent FII outflows, volatile currency fluctuations and easing liquidity owing to stiff interest rates which is a by-product of rising inflation. These key factors may create some selling pressure if the earnings fail to deliver. It is also important to track the US’ markets more closely and the global and the US’ economic cycles will remain the primary drivers for EM assets in 2023. 

Historically, we have seen the worst market moves for EM risky asset class when the US is in recession with widening credit spreads and slipping stock prices. However, what investors need to keep in mind is that the negatives are known and may have already been discounted. All said and done, the market mood will then be shaped by the core earnings and its growth outlook. The year 2023 earnings are also important because we will know how the higher interest rates have impacted the bottom-line for a majority of the listed companies. 

On the positive side of the markets, the Chinese economy is expected to do well after reopening post the pandemic-driven shutdowns. This should ease the global supply chain and may dictate the global money flow. We have already seen some of the institutional money being withdrawn from the Indian markets and parked in the China market. This trend may continue for a little longer. One of the positives for the Indian markets and the emerging markets in general remains the possibility of the USD weakening owing to the strong economic data in the US economy. Given the expectation of recession and the Indian economy expected to be the fastest growing nation amongst the large economies, the Indian markets may find themselves in sweet spot in 2023. 

The urban demand has been slow in recent quarters. However, there are expectations of reviving this demand curve. For 2023 a revival in consumption could create investing opportunities in banking and automotive sectors. The rise in demand for credit growth triggered the positive outlook for banking sector in 2022. The momentum can be expected to continue in 2023 despite the rise in interest rates. The real estate sector is also expected to do well in the coming years given the rising demand. A cyclical upturn in the real estate sector is expected to create opportunities for investors. Given the underperformance in pharmaceutical stocks, there is some value in select pharmaceutical stocks. Investors should not ignore opportunities in this space.
 

METHODOLOGY 

DSIJ 150: The Method and The Logic 

Extensive research has led to the selection of India’s top 150 companies which have created wealth for their promoters, shareholders and the society at large. We have applied a professional approach and method in this selection process as explained below. This year’s list marks Dalal Street Investment Journal’s ninth year ranking of India Inc. and presenting the DSIJ 150. This is a result of a meticulously laid out process. What follows is a detailed description of the various steps that have been followed. For this study, we began with all the listed companies in India. Since our objective was to focus on companies that have been superachievers, a ‘short period’ study would not have been justified. Therefore, we spread our period of study over the past five years. A long-term study evens out any aberration in the results of any particular year and helps in providing a fair idea of long-term performance. We have deliberately left out certain categories and companies from our study of Elite 100. These include - Banking and Non-Banking Finance Companies. The reason for excluding banking and NBFCs from our study is due to the difference in the nature of their business and the way they should be evaluated.
 

THE PARAMETERS

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

◼ Growth
◼ Efficiency
◼ Safety
◼ Wealth creation
 

Growth:

The most important criterion for determining a company’s success is, naturally, the growth that it achieves over a period of time and also its capacity for growth in the future. Growth for a company can be defined in many ways. The most important and critical among these is the top-line which is defined by the sales or revenues of the company. The next growth factor is the operating profit which defines the operational performance of the company. Then comes the net profit which defines the eventual benefit to stakeholders either to be used this year in the form of dividends or can be invested to reap its benefit in the coming years. 

Efficiency:

It is not only the growth that matters but also how effectively and efficiently this is achieved. The more efficiently an organisation uses its resources, the higher the value that it creates for its stakeholders. Having said that, we have measured efficiency based on the following factors. Operating profit margins (OPM) Net profit margins (NPM) and Return on capital employed (RoCE). The OPM and the NPM together capture the efficiency of a company at the operating and the net levels, respectively. The RoCE, on the other hand, indicates how good a company is in utilising its funds. ROCE is a good indicator of a company's efficiency because it measures the company's profitability after factoring in the capital used to achieve that profitability. These parameters are evaluated on a relative basis for the current year. 

Safety:

Our recent experience shows that debt has become a big pain for many companies with the servicing cost escalating over a period of time. Therefore, we have used the debt-toequity ratio to measure the safety of capital of the company’s shareholders. 

Wealth Creation:

The ultimate objective of any organisation is maximising the shareholder’s return. Hence, this had to be one of the criteria for our study. To evaluate companies on this front, we have looked at the movement at share prices in the last five years after adjusting for splits and bonuses. We have considered a total return given by these companies and not just a simple price return. This is because total return captures both the capital gains and the income generated from dividends. The latter provides a much more complete picture of performance — especially for stocks that have high dividends. 

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. We have carefully 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 over ₹ 10,000 crore and another, where we considered companies with a market capitalisation of less than ₹ 10,000 crore but exceeding ₹ 1,000 crore. Accordingly, a higher weight has been assigned to the growth factor in the case of companies with a market capitalisation of more than ₹ 10,000 crore, the reason being that these companies are far ahead on the safety curve. They have been in the business for a greater duration and have achieved critical mass by now. What is important in their case is the growth factor that 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 the case of companies with a market cap of less than ₹ 10,000 crore but over ₹ 1,000 crore. Shareholder returns have been given due consideration for both categories. Based on all these factors, a final composite ranking of companies in both categories was arrived at. This gave us a list of the top 50 companies in the first category (market capitalisation above ₹ 10,000 crore), which is our ‘Super 50’ club. The top 100 companies in the second category make up our ‘Elite 100’ group.
 

Click here to download list of the top 50 companies 
 

Click here to download the top 100 elite companies
 

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