Each year Mr. Raamdeo Agrawal conducts multi-month study targeting different themes and presents it to the investor community. This year’s theme was coming up with a set of 25 questions which investors could use to identify good Companies using a bottom of research. This blog post covers the presentation for 2020 and has been compiled from our twitter handle @banyanfa where we tweet frequently on personal finance topics. The sentences could hence be brief.
This year’s theme is coming up with a checklist of 25 questions (checklist) to identify bottom-up stock picking. The full pdf of the Wealth Study can be downloaded here.
Infosys in 25 years has compounded its profit from 13 cr in 1995 to 16450 cr
In 25 years, Indian GDP grew by 13% CAGR. From 10 lakh cr to 200 lakh crores. Future growth is perhaps going to stay ! Events like COVID can create a blip and impact the Stock Market values. But eventually it matches the growth.
This year’s methodology continues to be earlier, except a change, instead of 5 yr, it is a 25 yr period period. It studied Fastest, Biggest, Consistent and All Round Wealth Creators.
Top 10 Fastest Wealth Creators. The top on the list is Infosys which grew from 345 cr to 2.72 lakh cr in 25 years, followed by Pidilite and Eicher Motors.
Top 10 Biggest Wealth Creators – No prizes here for guessing Reliance Industry. Loved the phrase been quoted ‘Elephants can dance’
This is my favourite – Companies could have erratic or front / back ended growth. However, the most consistent wealth creators grew consistently over 3 years rolling period. Top of the chart is Kotak growing at a staggering rate of 21% CAGR, growting consistently in 21 of 25 yrs
All rounders who grew consistently and grew fastest are below. Kotak, Pidilite and Asian are the top players here.
Top 5 Sectors created 2/3rd of the wealth
The darlings of 1995 were mostly missing. SAIL, MTNL were the top 1 & 3 companies of India in 1995. This is example of wealth erosion.
Most profitable companies of 25 years were led by Lever, Nestle and Colgate. Profits were driven by their high Return on Equities.
Top Fastest growing Profit growth Companies. Vedanta in this list surprises me.
And then the Companies which have most cumulative profit earning companies.
Top Dividend Giving Companies. It is amazing to see the top of the chart is ITC at 70K crores in last 25 years.
This chart amazes me. Back in 95, 26 sectors were above 13% ROE vs in 2020 where only 10 Sectors are earning ROE greater than 13%
Same chart with a different lens – Corporate Profit to GDP is almost at all time low now and how the same was swinging across 25 years
Sensex earnings too are flat in last few years, but compounding at 9% for 25 years.
Valuations are looking stretched using the PE indicator.
Another valuation indication is all time high at 100. In March it was at 56%. From here onwards, markets should trail the GDP growth rate.
What was the broad framework of Companies which made it big in last 25 years.
So if the growth is in Mid size Companies, the search begins here in consumer focusing Companies which are market leaders. In case of financials they are sticking with Financials.
Study ignores valuations as over long term this may not be material.
The list comes across with these names. Important disclaimer is that these should not be considered as a buy advice. But would market ignore such a disclaimer 🙂
The checklist for identifying growth stocks is key to consider that all investment variables are looked into and avoid errors. The study now goes into an investment checklist that could be considered by the investors.
Longevity of compounding is as important growth rate in compounding.
E.g. 25% compounding rate in 10 years will make 9.3x. But same in 30 years will become 800x.
First part of checklist starts with Business background
It digs into the details of the Co, how long they have been in existence, competence, management / owner’s competence, its infrastructure, financial performance.
#2 – can you understand the business of Company. If it takes quite a lot of time, then perhaps it is showing negative traits. Is it a local vs global business, is it a cyclical business, its customers are end consumers or businesses, i.e. B2B.
#3 – Great, Good, Gruesome
20% of business are Great & Good, i.e. Cost of Equity is above 13%. 80% are the rest Gruesome.
Good business will continue to grow with incremental Capital. Great Businesses will not require incremental capital. And Gruesome – inefficient !
Post identifying Great & Good Companies > look into the Cash flows of Company to check if it gets cashflows.
#5 – look into Common Size Analysis > Look into the trends of cost & margins. An increasing margin adds to the growth. This could lead from lower labour cost to raw material.
#6 – Du Point Analysis
Look into the breakup of ROE. Profit Margin, Sales to Assets and Assets to Networth
#7 – Competitive Landscape of the Company.
Even a profitable Company can go bust in a highly competitive or regulated industry.
Loved the analogy – a wada pav guy on a street having no other person doing so may make more money than a highly competitive Airlines Company.
Best example is Telecom, where the scope of profitability was so high, but intensive rivalry killed the players.
#8 How long can Competitive Moats last for a Company.
#9 Here comes the growth part of the Checklist.
How big is the opportunity to make money.
After a point, discretionary products growth faster than others.
#10 – What plans does the Company have to grow and importantly – it should be sustainable.
#11 – Management Integrity – this is a very key part of overall analysis. A bad management can easily eat into the growth of the Company.
#13 – Is the management competent ?
#14 – Is the management having a growth mindset ?
#14 – Does the mgt have a good capital allocation policy. This going wrong can result in haunting a Companies finances in years to come.
#15 – Organisation Structure and Depth. Delegation and independence to make decisions is key.
#16 – Culture – very fuzzy, but very key. V difficult to know unless one talks and sniffs around. From employee relations to vendors.
#17 – Does it have a good succession plan ? It ends up being the biggest source of longetivity of a Company.
18 – Skin in the game
19 > Pledging of shares
#20 – Have you done financial modeling of the earnings of the Company ? > Revenues, Costing, Cashflows, Asset / Liabilities, Valuation, efficiency ratios
#21 Is it a Quality & Growth Company with Longevity ?
#22 > Now comes the Valuations. Often company which passes all above fails here. PEG ratios tends to be at help here.
#23 – Outcome of paying less on valuations, more is the margin of safety for an investor.
Considering growth and valuations are about future forecasts, the only thing which can be of help if the forecasts go wrong is how much margin of safety one had by paying lesser.
#24 Liquidity of the stock helps to understand if one may not get stuck if one would like to exit. This may not be of paramount importance for long term investors.
#25 – Look into the risks. I believe this is summary of all what we saw in other points so far. If any of the 24 go wrong, it could result in these risks.
Conclusion of the Study
Good Companies which growth at high rates over longer duration of times result in tremendous generation of wealth. Good managements behind such Companies are of paramount importance.