After ruling the charts for about half a decade as the biggest wealth creator, Reliance Industries has been toppled by ITC to become the largest value creator for its shareholders. In its 17th edition, the Motilal Oswal Wealth Creation Study comes up with some interesting insights into some of India’s top corporates.

Wealth creation is the process by which a company enhances the market value of the capital entrusted to it by its shareholders.
It is a basic measure of success for any commercial venture.
Wealth creation is achieved by the rational actions of a company in a sustained manner.

ITC is the Biggest Wealth Creator:
ITC has emerged as the biggest wealth creator for the first time ever, significantly improving its seventh rank in last year’s study.

This breaks the eight-year stranglehold of Oil & Gas companies with Reliance Industries topping the list in the last five years, and ONGC in the three years prior to that.

Interestingly, both Reliance and ONGC did not make it to the top 100 wealth creators due to market underperformance (2007-12 stock price CAGR was four percent for ONGC and two percent for Reliance v/s six percent for the Sensex).
TCS has held on to its position as close runner-up while HDFC Bank is in the third place, jumping three spots from its last year’s rank of sixth. The study says that the, Indian banking is the sector to watch out for, and HDFC Bank is a serious contender for the top spot sooner rather than later.

TTK Prestige, the Fastest Wealth Creator:
TTK Prestige has emerged as the fastest Wealth Creator between 2007 and 2012, during which period, its stock price multiplied 24x, translating into annualized return of 89 percent. Yet, this stunning performance is one of the slowest among all the Fastest Wealth Creators since 1998.

The study says that akin to Hindustan Unilever’s re-entry into the Top 10 Wealth Creators list, four consumer goods companies including TTK have made it to the Top 10 Fastest Wealth Creators list.

Kotak Mahindra is the Most Consistent Wealth Creator:
Kotak Mahindra Bank has retained its place as the Most Consistent Wealth Creator.
“Given low cyclicality, consumer facing companies (both goods and services) are better placed to appear in the list of Most Consistent Wealth Creators,” says the study.

Notable exceptions are Holcim Group companies, ACC and Ambuja Cements, which appear in the top 10 list both this year and last. “Clearly, Holcim’s presence has made the behavior of these companies more predictable to investors, leading to better and stable valuations,” says Motilal Oswal.
Wealth Creators (Wealthex)
v/s BSE Sensex:
The study compared the performance of Wealthex (top 100 Wealth Creators index) with the BSE Sensex on three parameters — (1) market performance, (2) earnings growth, and (3) valuation.
Market performance: Over the last five years, wealth creating companies have delivered point-to-point return CAGR of 20 percent against only six percent for the BSE Sensex.

Earnings growth: Over the last five years, wealth creating companies clocked earnings
CAGR of 21 percent compared to benchmark earnings CAGR of only nine percent.
Valuation: Wealth creating companies’ aggregate P/E in March 2007 was at a discount to the Sensex, but over the next five years ended up at a premium to the Sensex. Higher than benchmark earnings growth led to valuation re-rating, combined leading to superior returns over benchmark.

Financials maintain top spot as the largest Wealth Creating sector:
Financials sector has retained its top spot of the largest Wealth Creator. In the 2011 study, Financials emerged as the largest Wealth Creating sector for the first time ever, hitherto a stronghold of commodity sectors, mainly Oil & Gas and Metals/Mining.

Size apart, Financials has also outperformed in terms of price with 24 percent CAGR, second only to Metals/Mining (27 percent). This is on the back of robust 25 percent CAGR in PAT, second only to Auto (27 percent).
“Even after a huge run-up in stock prices, Financials sector valuations remain lower than average, arguably on concerns regarding asset quality and the impact of fresh competition by way of new banking licenses,” says the study.

Wealth Creation by Ownership — PSU v/s Private:
PSUs’ (public sector undertakings) share of wealth creation continues to be on a secular decline with their share of wealth created more than halving from 50 percent in 2004/2005 to about 20 percent in the current study. “This is one of the classic cases of value migration from the public sector to private sector in almost every single erstwhile stronghold of PSUs – banking, oil & gas metals/mining, capital goods, etc,” says the study.

As of end-FY12, markets valued Wealth Creating PSUs at about 10x trailing earnings, almost 50 percent discount to 18x for the private sector Wealth Creating companies. “If these multiples are any indication, the markets expect PSUs’ share of Value Creation to remain low, implying lower wealth creation as well,” says the study.

Wealth Creation by Age and Market Cap:
Pace of wealth creation is fairly agnostic to age of companies. Younger companies start off on a low base and manage to deliver high rates of growth.

However, markets are reasonably efficient in pricing these growth rates upfront. As a result, although PAT growth rates vary across age groups, the price CAGR is, much more homogenous, and hovering around average overall return of 20 percent. “Unlike younger companies, smaller companies (i.e. small- and mid-caps based on market cap of 2007) seem to have an edge in faster wealth creation. But as is the case with age-based classification, the divergence in market performance of small and large cap companies is much lower than that in earnings growth larger ones create wealth a bit slowly, but with low level of risk,” says the study.

Wealth Destroyers:
The 2007-12 period saw about Rs. 5.7 trillion of wealth destruction, a high 35 percent of the wealth created by top 100 companies (the figure in last year’s study was 15 percent, whereas during the peak of the market boom in 2007-08, the figure was as low as two percent).

This year’s data is a classic case study on how change in the competitive landscape of an industry drastically affects value and wealth creation.

Barely four years ago, the Indian telecom sector was the fifth largest wealth creator and sector leader Bharti Airtel was the third largest Wealth Creator.

Four years later, the telecom sector leads the Wealth Destruction list, and top 4 of 10 Wealth Destroyer companies emerging from the sector (including RCom, Bharti and MTNL).