ONGC & Matrix Laboratories fastest wealth creators according to Motilal Oswal Securities’ 9th Wealth Creation Study & Awards

Company release, January 25, 2005

Mumbai

Motilal Oswal Securities, India’s leading research-based broking house organized the 9th Wealth Creation Study and Awards Function. While Mr. Raamdeo Agrawal presented his findings on the Wealth Creation process for the period 1999-2004, Mr. Ajay Piramal, the chief guest at the event handed out the Biggest and the Fastest Wealth Creator Awards to Mr. Subir Raha of ONGC and Mr. N Prasad of Matrix respectively.

The total wealth created by ONGC during the study period was Rs 1029.7 bn, while Matrix Laboratories the fastest wealth creator had a staggering CAGR of 75.5 % in its market capitalization. Not too far behind in the biggest wealth creation category was Reliance Industries Ltd. which bagged second place with 516 bn and Indian Oil Corporation Ltd with 466.2 bn stood third. In the fastest wealth creator category Sterling Biotech bagged the second place with a CAGR 44.9% and Amtek Auto Ltd stood third with a CAGR 42.5%.

Speaking at the Most 9th Wealth Creation Study & Awards presentation function, Mr. Motilal Oswal, CMD, said, "Going through this exercise every year has been a very enriching experience for us. It has greatly improved our stock picking abilities. Every successive study has thrown some similar but many different patterns, characteristics and insights. It has also thrown in many surprises. You will remember around 4-5 years ago, the most hated sectors were the commodities and the PSUs, but today they are the darlings of every investor. We also find in the study that the companies which are thriving on innovation, create the fastest wealth. Companies like Matrix Lab which is the fastest wealth creator this year is really a testimony to this aspect. The study is not an academic one since we are able to practice it successfully. For e.g. Raamdeo Agrawal presented his study last year where the theme was creation of multi-baggers in the stock market. I am sure our clients will vouch this year that we have been able to deliver many multi-baggers. Again two years ago when we presented our study, the focus was on the impact of the low interest rate on stock valuation. We had clearly predicted that the stock market had overlooked the fact that if stock prices are the present value of the future stream of dividends then the market was grossly underpriced, given the low prevailing interest rate. The result is that the market has roughly doubled from those levels."

Speaking on the Best Creation study Mr. Raamdeo Agrawal, Jt. Managing Director, MOSt said, “ Overwhelmingly, the right Purchase Price is the key factor of wealth creation, be it commodity, PSU, Multinational company or the most coveted high growth IT company. Also, it is not the majority opinion that determines the Purchase Price, it is the marginal opinion."

Commenting on the 9th Wealth Creation Study & Awards, Mr. Agrawal underlined the following trends:

Market created a history by dropping for three consecutive years in 2000-01 (-27.9%), 2001-02 (-3.7%), 2002-03(-12.1%). 83% rise in 2003-04 is a reflection of the compression, which the market went through. Wealth creating companies fell only in one year. The wealth-creating group as usual did outperform the sensex by 22%.

Nature of business

Oil and gas, and banks have emerged as the dominant wealth creators. Eight businesses have created wealth at least 5% of the wealth signifying broad basing of the stock market boom. The contribution of IT companies, which has been at least 30% of the wealth created by the Most Inquire wealth creators group in the last 5 studies, has come down to just 7% this year. Probably time has come for cement, FMCG, textiles and fertilizers to assert their presence in a much more conspicuous fashion.

Management: MNC vs Indian

Sun seems to have set on the performance of MNCs. In early 90s, wealth creation by MNCs used to be almost 40% of total created. But probably Hindustan Lever's performance was overwhelming. 2.3% contribution by MNCs is a signal that either one should pile on to these companies, or they have lost their relevance in overall context. We think that the former is more likely to happen.

PSU vs Non PSU

The dominance of PSUs with 28 entries is very exhilarating. The lead has clearly been taken by ONGC and other oil and gas companies, which have been the main contributors to the wealth creation process. Despite being very large and handicapped by government controls, public sector companies have delivered very respectable 25% earnings growth as compared to 29% by private companies. Market seems to be still skeptical about the long-term sustainability of these earnings and has not fully rewarded in terms of valuation.

Product attribute

Dominance of commodities among the wealth creating companies has further strengthened in this study. It appears as if the march of commodities, which started in 1999 may become even more powerful in the years to follow. Technology has clearly taken a backseat in terms of the number of companies participating in the wealth creation process. But brands/franchises have been able to maintain their share at around 40%.

New Economy vs Old Economy

Despite superior earnings growth for the new economy companies, the market capitalization growth has been pulled down by the handicap of its purchase price. Despite having earnings growth of 26%, old economy has created wealth at a rate above 30%, because the modest growth was purchased at a reasonable valuation of about 10 times. "Purchase price decides the rate of return."

Speed vs size

If you want speed of wealth creation, it has to necessarily have market capitalization below Rs 1000cr at the time of purchase. But larger institutions have to be backing more steady larger companies, where speed is sacrificed for the size of wealth created.

Classification by Sales and Earnings Growth Fastest wealth has been created by companies whose sales grew between 10% -20%, and earnings grew by about 25%, clearly signifying expansion of margins.

High growth companies (above 30%) are only 19 and have created wealth at about 40%, though the earnings growth probably was much higher. This tells us that stock market tends to value richly the high growth stocks.

High earnings growth need not be associated with high sales growth. High earning growth companies have clearly been the fastest and biggest wealth creators. Almost 2/3rd of the wealth has been created by companies growing faster than 25%.

Highlights

Commodity companies were not expected to create wealth, but the facts are otherwise.

Commodities make money only when there is a demand supply mismatch.

Commodity prices rise sharply when there is squeeze, but profits and share price rise exponentially.

Stock prices are determined by “marginal opinion” not by “majority opinion”

Purchase price discipline is paramount, because it covers multitude of errors committed while investing.

About Wealth Creation Study & Awards

Wealth creation means the amount of extra equity value created by the company over and above the amount of capital invested by the shareholders in that company, rationally and persistently. The Wealth Creation Study throws light on the common traits of the companies that have been successful wealth creators in the past. It helps identify the tell-tale signs that help the companies that have the potential to become future wealth creators. Basically, it helps investors gain insights into ‘how to value a business’.

All those companies that show a compounded annual growth rate of atleast 25% i.e., have added a minimum 100cr to their existing market capital (adjusted after dilution) are taken into account for this study. This year 100 companies have fulfilled this criterion and they have been termed as the 'MOSt-Inquire 100'.

This study, which is conducted annually, analyses the records of the companies under study for the previous five years and has till date covered a period of 14 years beginning 1991 to 2004. The current study conducted is for the period 1999-2004. The study then culminates into Wealth Creation Awards and is awarded to those companies that emerge winners in their respective categories. There are two categories in this award, for the ‘Biggest Wealth Creator’ and for the ‘Fastest Wealth Creator’ for the period of study.

There are no judges for these awards. The companies are ranked according to their compounded annual growth rate for the period of study and the first rankers in the respective categories are awarded.

About MOSt:

Motilal Oswal Securities Ltd (MOSt) is a leading world-class equity research and broking house in India. It is known for its strong belief in Value-Investing ideas, which forms the core of its investment philosophy. MOSt provides end-to-end equity solutions to institutional and individual investors.

More popularly known by its acronym "Inquire", the research team at MOSt, staunchly practices value-investing philosophy and advises investors to take a mature and long-term view of equity investments. Asia Money Broker's Poll 2002 has rated MOSt as one of the best Indian broking house for research, for the second time since 2000.

The MOSt sales team, comprising top equity professionals, translates the research findings into actionable advice for customers, based on their specific needs. MOSt has distinguished itself by its close relationship with some of the leading Foreign and Domestic Institutional Investors.

MOSt provides its investors a combination of products and services that includes Advice-based broking on BSE/NSE (Cash and derivatives), Portfolio Management Services (PMS), Internet trading, Timely and researched investment and trading ideas, depository services. MOSt is currently present in 170 cities and has 300 outlets.

For further information, kindly contact:

Ms. Kanika Khanna

LINOpinion

Tel: 0154: 5150200

Email:kanika.khanna@lintasindia.com