DSIJ 150 Wealth Creators

The year 2017 saw several wealth creators, with the realty sector surprising investors with its superlative performance. Yogesh Supekar analyses sector-wise wealth creation in the past one year, while Tanay Loya finds out the market outlook for 2018 from the experts

Many who have been investing in equity markets will agree that investing in equity markets is a tricky game. However, if one were a newbie investor who started investing since December 2016 or January 2017, then one would tend to believe that stock market investing is one of the easiest and fastest ways to create wealth. The global equity markets in 2017 have enriched majority of the investors who have played long in the markets with a long-term perspective.

So, how good was 2017 and how many stocks created how much wealth? 

If we filter all the listed stocks on the BSE by market capitalisation and consider only those stocks with market capitalisation greater than Rs 100 crore, we find that there are nearly 239 stocks which have more than doubled, i.e provided returns in excess of 100 per cent in one year, for the period between March 4, 2017 to March 4, 2018. For the same time period, there are almost 285 stocks which have delivered returns in the range of 50 per cent and 100 per cent, while the number of stocks is 297 for those stocks which have generated returns in the range of 25 per cent to 50 percent. That makes it 821 stocks which have generated returns in excess of 25 per cent in less than one year. During the same time period, Sensex was up by 16 per cent, BSE Mid-cap index gained by 20 per cent and the BSE Small-cap index advanced by 30 per cent. Thus, in the last one year, we saw performance of the broader market, with at least 821 stocks having market capitalisation in excess of Rs 100 crore managing to outperform not only the Sensex but also the BSE Mid-cap index.

Sectoral wealth creation:- 

If we consider the wealth creators in the past one year alone, we find that the outperformance has come from unexpected sectors and players. Retail stocks have on an average outperformed all other sectoral stocks. Retail stocks on an average delivered 144 per cent returns in past one year. The other sectoral stocks that managed to deliver superior returns came from the realty, chemical and capital goods and finance sectors. (Refer table below) 

The year gone by saw equity as an asset class growing in popularity as more and more investors preferred to take exposure to the asset class that is considered as volatile. According to research done by one of the leading private wealth managers, investments in direct equities grew by 26.8 per cent in FY17 and the share of equities in financial assets jumped by 177 basis points to 18.43 per cent. This jump in equity participation can be linked to the buoyant secondary equity market conditions and several wealth creating IPOs in FY17.

Market outlook 2018 :- 

The markets in 2018 have started on a volatile note in contrast to markets' movements in 2017. Low volatility was the highlight of 2017. The recent correction in stock prices have pushed the major benchmark indices into the red, with the Sensex reflecting negative 0.06 per cent returns on a YTD basis. Says Raghvendra Nath, Managing Director, Ladderup Wealth Management, "When the Dow Jones growth started getting compared with Bitcoin's growth, it was clear that we are nearing a peak. With the beginning of 2018, the fears around Fed rate hike have surfaced again. Most economist are bracing for two to three hikes in the remaining 10 months. This could push benchmark yields closer to 4%, leading to broad changes in asset allocation, which could mean money moving out of equities."

Going forward, the market is discounting fears of higher interest rates, both in global economy as well as in India. The earnings growth not matching the expectations is another fear in the minds of most investors. However, there is nothing in the Q3FY18 numbers that suggests investors need to worry about earnings growth. The positive IIP data and the lower inflation data that was recently announced hints at faster GDP growth in the coming quarter. While the valuations remain steep, Indian benchmark indices can expect to continue trading at a premium to its peers in the emerging market space.

The valuations in small-caps and mid-caps remain rich as compared to the large-caps, even though the retail investors' sentiments remain biased towards mid and small cap stocks, if we consider the money flow into the mutual funds that invest in mid-caps and small-caps. The year 2018 could well buck the multi-year trend, where the small-caps and mid-caps have outperformed large-caps. Also, the year 2018 could well be the year where the defensives such as IT and pharma stocks could outperform the markets.

Piyush Sharma
Co-founder, Metis Capital Management Ltd. 

What is your market outlook for 2018? 

While there is solid enough argument that we have a largely clear path ahead of ourselves, we are sitting on valuations that are pricing well more than a clear path ahead. Street expectations are for at least high-teens earnings growth in large-caps and well ahead of 20% earnings growth in mid-caps and small-caps. We believe that the single biggest risk to equities today comes from such overly optimistic expectations that are, in our opinion, relying on an unrealistic acceleration narrative. Our view is that small-caps and mid-caps (as a universe) could see substantial contraction in their multiples (>20%) and large-caps could see ~10-15% contraction to get valuations closer to underlying fundamentals.

Some of that has already occurred YTD but it's not enough. The key driver that took small and mid-cap valuations to such levels was the skewed liquidity last year — When we disaggregated SIP allocation by capitalization, we noted that about 45% of equity SIP allocation last year went outside large-caps even as that space collectively accounted for just 30% of total market capitalization and even less of total free float capitalization. While this liquidity isn't large enough to drive disconnects in much more ‘institutionalized' and liquid large-caps, it disproportionately contributed towards taking small and midcap indices higher, while also artificially contributing towards performance of supposedly ‘large-cap' domestic funds, which clearly had a very generous exposure to mid and small caps. With SEBI introducing further clarity into how funds should allocate, that skewed liquidity wouldn't be a tailwind this year, as capital shifts towards large-caps.

While, as a universe, small and mid-caps are clearly stretched, the best opportunities almost always lie within those and micro-cap parts of the size spectrum. Here in lies the basis of our view that 2018 would be the ideal market for bottom-up managers to distinguish themselves. At Metis, our focus is to own names where earnings expectations for our book aren't dependent on a wide economic turnaround to outpace broader markets in FY19, with company/industry idiosyncrasies driving abovemarket earnings growth.

Where (sector/midcap etc) do you see maximum wealth creation happening in coming years? 

We are a bottom-up team and has never had a ‘blanket' view on a particular industry or sector, much less a view simply based on size of a company. While industryspecific factors certainly come into evaluation, our experience suggests that neither everyone successfully (and equally) capitalizes on an industry-wide opportunity nor does everyone manage industry-specific headwinds in a similar fashion. All that said, we do believe that certain themes are likely to work better than others over the next decade. In particular, we expect solid traction within scale businesses that operate within highly unorganized/ informal industries (Diagnostics services, Textiles etc.). Impact of GST within many such industries cannot be overstated and we expect some of the names to gain significant share without compromising profitability within such fragmented industries. Elsewhere, from a longer-term perspective, select names within consumer discretionary space look appealing, despite optically high headline multiples.

Will Indian equities outperform? 

India is certainly a tale of 2 different markets, if not more. On one hand, large-caps can potentially support ~20x multiples on mid-teens earnings growth. On the other end, broader markets are unequivocally pricing unrealistic expectations. We believe that intrinsically Nifty should certainly trade at 30%+ premium over MSCI EM. That said, given that India's institutional capital ownership is heavily tilted towards foreign capital, FPI liquidity does play a part in how valuations move around in the short term. Given that a vast majority of allocators deploy a top-down approach to EM allocations, optically high headline multiples don't necessarily help make a case for India. From our point of view though, we fail to see the rationale of owning say Dow 30 over Nifty 50 if you are paying essentially the same price for every dollar of earnings.

Nalini Jindal
Chief Investment Advisor, Intellistocks Securities 

What is your outlook on markets for 2018? 

The outlook on the Indian market remains positive and bullish in 2018 and years to come. If the index sustains above 10,000 for a week or so and we don't have any negative global cues, we expect buying to resume and the index to move forward towards 11,000. That said, the markets can slip further and correction looks almost certain, whether sooner or later, we can't say. In this scenario, investors will get individual stock opportunities that could fetch much higher returns. We advise our investors to stay invested and make the best of the opportunities if a meaningful correction takes place and keep some cash parked for now to add some good quality stocks in their portfolio later.

At what levels of index do you see buying coming in? 

As of now, we are looking at the range of 9,000-12,000. However, the likelihood of testing 9,000 is higher if Nifty breaks 10,000 substantially. One can never predict a precise number for that, but individual investors must sit on some cash that can be deployed at every dip. The current scenario might be an indication towards correction and whether or not this correction will deepen, we'll get to know in the coming weeks. This is the time to invest and not book profits and individual investors must stay focused on investing in good quality large-cap stocks which have a proven history under their belly.

Dhruv Desai
Director & COO, Tradebulls Securities 

There is a consensus view among market majors globally that stocks might not perform on similar lines in 2018 on the back of rising interest rates globally. The year 2018 will see a major change in fund portfolios as the interest rate cycle is expected to reverse due to headwinds of higher inflation. Investors will refrain from investing in companies where returns depend on higher borrowings. 2018 being a pre-election year, the government's focus will be on social spending and spending that specifically leads to employment generation.

There are specific risks associated to the global economy that could have some turbulent swings in the financial markets, one being the rising interest rates globally. The US Federal Reserve is expected to raise rates thrice in 2018. However, if inflation gets uncomfortably entrenched on the upside, chances are there may be more than three rate hikes in 2018. Rising interest rates too fast could lead the global economy into recession.

The second risk being specific to domestic economy will be a rise in crude oil prices internationally. So far, the government has managed to balance the excess income from taxing higher crude oil products. However, prices above $70 will be a risk as fiscal deficit slippage second time in a row might not bode well in view of international investors.

Conclusion :- 

Most of the investors try to find answers to how the stock looks in the short term and whether the stock is good for long term investing. In the short run, investors and traders focus on quarterly results and seek support from the technical parameters, whereas for the long term, it is valuations and the quality of the company that matters most.

A majority of retail investors lack the understanding of valuation of a company and the quality of its fundemenatals. Even fewer have the patience and ability to hold on to stocks for the ultra-long term, i.e for 10 to 20 years or even more. This is the very reason why the retail investor's portfolio is not dominated by consistent wealth creators. The hard fact remains that real wealth in equity is created by remaining invested for the long term. Real wealth creators require that you hold them for years together, sometimes even decades. While it may be difficult for investors to locate such consistent performers YoY, the rewards of identifying such stocks are humongous, and hence, every investor should focus on identifying such investing opportunities. The year 2018 might be a volatile year ahead but by no means it is a year where one should book profits in equities and stay away from the markets. In fact, the current year is a year for accumulation and the volatility will present some investing opportunities for the long term investors.

RANKING DSIJ 150 The Method And The Logic

Dalal Street Investment Journal (DSIJ) Team's 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 sixth year of ranking of India Inc. and presenting of the DSIJ Top 150. Ranking provides a universally accepted benchmark of performance with an objective analysis. What is also important is that with time, experience and changing conditions, the method of ranking should also change with the times. The years gone by have made us a little wiser and we have tweaked the methodology to make it more robust, as will be explained in the following paragraphs. 

The study has culminated in the selection of the top 150 corporates of India Inc. and is a result of 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. For the purpose of this study, we began with all the BSE listed companies in India. Since our objective was to focus on companies which have been super-achievers, a ‘short period' study would not have been justified. Therefore, we spread our period of study over the past six years and then narrowed down the list to include only those companies which have been listed for more than six years. 

THE RATIONALE 

A long-term study of five years tends to even out any aberration in the results of any particular year and helps in providing a fair idea of the long-term performance. A long-term study weeds out ups and downs which are a natural part of any business. Another reason why a five-year period or long-term study makes more sense is that many infrastructure companies such as power and road construction and even the strategies of the service sector and manufacturing companies get executed over a longer period before they begin to reflect on the financials of the company. 

THE EXCLUSIONS 

We have deliberately left out certain categories and companies from our study of the 'Elite 100'. These include- - Banks and Non-Banking Finance Companies (NBFCs): The reason for excluding banks and NBFCs from our study is due to the difference in the nature of their business and the way they should be evaluated. Moreover, we will come out with a special issue on banking in the coming month wherein these companies will be comprehensively ranked. 

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. It could include anything and everything that goes to define a corporation as a whole. 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 the stakeholders, either to be distributed in the form of dividend for the year or to be ploughed back into the business to reap the benefits in the coming years. The capital employed by a company is an important ingredient that helps it to grow. Of the above four, three get reflected in the profit and loss (P&L) statement and one captures the character of the balance sheet. In other words, the P&L pointers capture the financial health of the company at three different levels, while the capital employed reflects the correct picture of growth in the balance sheet. 

Efficiency 

It is not only the growth that matters, but also how effectively and efficiently this is achieved. In fact, 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:
1.Operating profit margins (OPM)
2.Net profit margins (NPM)
3.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. This is evaluated on a relative basis for the current year. 

Safety 

The debt for a company is like a double-edged sword; if raised and utilised in an efficient manner, it can increase the shareholders' return, or else it can turn into a burden. 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-to-equity ratio to measure the safety of capital of the company's shareholders. It actually reflects on how much of your money in terms of shareholder equity could come back to you in the eventuality of repayment of the entire debt on the balance sheet. 

Wealth Creation 

The ultimate objective of any organisation is maximising the shareholder's return. Obviously, then, this had to be one of the criteria for our study. In order to evaluate the companies on this front, we have looked at the movement in share prices between FY11 to H1 after adjusting for splits and bonuses. The impact these factors have had on market capitalisation is what has determined wealth creation by these companies for their shareholders. 

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, their importance differ by the quantum of weightage assigned. 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 Rs.10,000 crore and second, where we considered companies with a market capitalisation of less than Rs.10,000 crore, but exceeding Rs.1,000 crore. The table is self-explanatory for the weightage we have assigned to arrive at 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.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 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 Rs.10,000 crore but over Rs.1,000 crore. Shareholder returns carry the same weightage in both the categories. 

Based on all these factors, we arrived at a final composite ranking of companies in both the categories. This gave us a list of the top 50 companies in the first category (market capitalisation in excess of Rs.10,000 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 constant endeavour to research and provide the best of the best to our readers and patrons. We at DSIJ are committed to improving upon our methodology on a continuous basis and upgrading our 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' and ‘Elite 100' companies. 

We hope this compilation helps you put a finger on the truly ‘valuable' shining stars of India Inc. Although these companies have performed superbly over the last five years and rightly deserve a place in DSIJ 150, these are not our recommendations. Nonetheless, these companies can be looked at for investment after applying your own judgement.

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