About Motilal Oswal Financial Services Limited.
Motilal Oswal Financial Services Ltd. (NSE :MOTILALOFS, BSE :532892, BLOOMBERG : MOFS IN) is a well-diversified, financial services company focused on wealth creation for all its customers, such as institutional, corporate, HNI and retail. Its services and product offerings include wealth management, retail broking and distribution, institutional broking, asset management, investment banking, private equity, commodity broking and principal strategies. The company distributes these products through 1,504 business locations spread across 591 cities and the online channel to over 666,633 registered customers. MOFSL has strong research capabilities, which enables them to identify market trends and stocks with high growth potential, facilitating clients to take well- informed and timely decisions. MOFSL has been ranked by various polls such as the Best Local Brokerage 2005, Most Independent Research - Local Brokerage 2006 and Best Overall Country Research - Local Brokerage 2007 in the Asia Money Brokerage Polls for India. In the StarMine India Broker Rankings 2009 from Thomson Reuters, we won awards in 3 out of 4 categories and also bagged the No. 1 Broker Award in the ET Now – StarMine Analyst Awards 2009.
Key Conclusions of Motilal Oswal 15th Wealth Creation Study
- Reliance Inds, Unitech & Hero Honda - Biggest, Fastest & Most Consistent Wealth Creators respectively.
- Metals/Mining sector has dominated this year’s Study.
- Low payback ratio (Market cap/Next 5 years’ profits) remains the most reliable indicator of fastest wealth creation.
- UU(UNknown & UNknowable) situations offer asymmetric payoffs; these can be exploited only by investors with complementary skills, unusual judgement, and no fear of hindsight criticism.
- India’s high linear economic growth will create exponential business situations – the perfect backdrop for UU investing.
- TTS – Ten Trillion Dollar Savings through 2020 – will throw up many UU investing opportunities in Indian financial services.
Part 1) Wealth Creation Study findings
The Wealth Creation Study analyzes the top 100 wealth creating companies during the period 2005-10. Wealth created is calculated as change in the market cap of companies between 2005 and 2010, duly adjusted for corporate events such as mergers, de-mergers, fresh issuance of capital, buyback, etc. The Study based on research data for the period 2005-10 analyses capital market behavior, plots key trends in wealth creation, provides insights into winning companies and examines the reasons behind their success. This in-depth analysis is thereafter crystallized in the form of a study to identify the Fastest, Biggest and MostConsistent wealth creators.
Study Highlights – Wealth Creation
- Reliance Industries has emerged as the biggest wealth creator for the fourth time in a row.
- India’s top 100 wealth creating companies created over Rs 26 lakh crores of wealth in the last 5 years. Reliance Industries contributed Rs 2.6 lakh crores to the pool.
- For the last seven years, the biggest wealth creator in India has emerged from the Oil & Gas sector – ONGC in the first three years and Reliance in the next four.
- Wealth creation in India is getting dispersed. The share of top 10 wealth creators is on a secular declining trend - from 76% in FY03 to as low as 41% in FY10.
- Unitech is the Fastest Wealth Creator during 2005- 10, for the third time in a row. It has featured among the Top 10 fastest wealth creators for the last five years in a row.
- Unitech appreciated 28 times in the last 5 years.
- Five out of the top 10 fastest wealth creators had base market cap of less than Rs10b, and seven had less than Rs15b.
- Hero Honda is ranked as the most consistent by virtue of its 10-year price CAGR being the highest at 34%. This is an appreciation of 17.5 times versus the Sensex appreciation of only 3.5 times over the same period.
- Long-term wealth creating companies defy the investing maxim of "higher-risk-higher-return". Their stock prices outperform markets without trading at significant valuation premiums.
- PSU share of India's market capitalization is set to increase due to: (1) listing of mining companies led by Coal India, and (2) recapitalization of PSU banks.
- Age may well have no bar on size and speed of wealth creation, but small is still beautiful. Companies with base market cap of less than Rs50b in FY05, handsomely outperformed their larger peers, both in terms of PAT CAGR and Price CAGR.
- Contrary to popular perception, rather than absolute RoE markets give more importance to change in RoE as it is an indicator of things to come.
- Stocks with P/Es in excess of 15x have delivered higher returns than stocks with P/Es less than 10x; stocks with high P/B have delivered higher than stocks with lower P/B.
- Stocks with lower P/E and P/B have not necessarily delivered superior returns over FY05-10. Chances are high that this is an aberration.
- During FY05-10, total wealth destroyed at Rs650b is about 2% of the total wealth created of Rs26,500b. This reflects the significant recovery of the Indian market over FY09.
Part 2) Theme 2011: UU Investing: Creating wealth from the UNknown and UNknowable
- What is UU investing? UU Investing is investing in the unknown & unknowable (UU i.e. the “world of ignorance”). It is the process of “identifying good investments when the level of uncertainty is well beyond traditional levels”.
- The difference between Known (Risk), Unknown (Uncertainty) and Unknown & Unknowable (Ignorance) needs to be understood.
- Past examples of UU investing include –
- Infosys: at the time of IPO in 1994, which got undersubscribed
Payoff: stock appreciated 890x over 7 years post IPO listing - Bharti Airtel: in FY03 when it had a net loss of Rs1.8b
Payoff: stock appreciated 37x in 4.5 years from March 2003 - Pantaloon Retail: early stage investing
Payoff: stock appreciated 109x in < 5 years from March 2003 - Unitech: pioneer of organized real estate
Payoff: stock appreciated 64x in 2 years beginning 2006 - Tata Motors: recent turnaround
Payoff: stock is up over 7x in 2 years beginning early 2009 - In traditional investing, portfolio return in excess of benchmark is called "Alpha". We call the very high excess return from UU situations “Omega”.
- How to go about UU investing? 3 steps -
Step 1: Know the Success Principles (SP)
Step 2: Look for UU situations
Step 3: Be aware of UU pitfalls. - Step 1: Know the Success Principles (SPs)
SP #1: Asymmetric payoff
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SP #2: High level of complementary skills
(Domain knowledge of businesses, Past experience in other situations or geographies, Management assessment skills, Imagination & unusual judgement, Conviction and courage to commit the investment)
SP #3: Portfolio approach to diversify risks
SP#4: Non-aversion to hindsight criticism
SP #5: Long-term outlook and patience - Step 2: Look for UU situations in (1) Business, (2) Management, (3) Valuation
- Step 3: Be aware of pitfalls: (1) Overconfidence, (2) Hindsight criticism
- Case study of UU investing: NTD to TTS and impact on Indian banking sector
TTS by 2020 – Ten trillion dollar savings (cumulative) spell huge opportunity
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Asymmetric payoff possibility: Banking sector profits to grow 6x by 2020; Value migration from PSU to private banks
Which bank to choose? Based on unusual judgement -
(1) Buy one small/medium high-growth bank – YES BANK
(2) Buy one large, unpopular bank – CENTRAL BANK
Part 3) Market Outlook
Highlights:
- Sensex earnings are in a new growth cycle (24% CAGR over FY10-12), but face headwinds of rising commodity prices and inflation
- Liquidity is tight, interest rates are rising, and market valuations are fair at 10% premium to long-period average valuations
- Political and corporate governance has emerged as a whole new concern
- All things considered, we expect Indian markets to remain range-bound in 2011. Downside is limited given the bedrock of steady earnings growth, but upside is capped given no valuation triggers.
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