At a time when Indian banks and non-banking financing companies are going through a rough patch, the Motilal Oswal 24th Annual Wealth Creation Study 2019 says that financials as a sector created the most wealth over a five-year period for the third consecutive time. The rally in the sector was led largely by private-sector banks and non-banking financial companies.

The other sectors which created the most wealth in the past five years are consumer goods/retail, oil and gas, technology, and auto. The top five sectors accounted for 85% of the ₹49 lakh crore wealth created in the past five years. At the bottom of the heap were capital goods, utilities, and telecom.

IndusInd Bank proved to be the most consistent wealth creator in the last decade. Its stock price recorded a compound annual growth rate (CAGR) of 49% from 2009 to 2019. It was followed by Pidilite Industries (40% CAGR), Titan Company (40% CAGR) and Shree Cement (39% CAGR).

During 2014-2019, Reliance Industries has been the biggest wealth creator at ₹5.6 lakh crore. HDFC Bank and Tata Consultancy Services (TCS) stand at No. 2 and No. 3. Together the three created ₹13 lakh crore in wealth. Raamdeo Agrawal, chairman of Motilal Oswal, who personally oversees the work on the report, says that the three firms will continue creating wealth over the next five years, with market capitalisation of ₹20 lakh crore each.

The report, researched and prepared over a three-month period, is one of a kind which consistently tracks companies that have created shareholder wealth. The foundation of the Wealth Creation Study, which focuses on the top 100 companies, is to buy businesses at a price substantially lower than their “intrinsic value” or “expected value”.

Though the report primarily focuses on increase in market capitalisation, as Agrawal believes it is the best measure of wealth creation, every year the study picks a theme to make it relevant to the times. The themes are usually within four distinctive areas QGLP: Quality (of businesses), Growth in earnings, Longevity in quality and growth, and availability at a reasonable Price.

Agrawal says that this year’s theme, management integrity, is fundamental to business, but this aspect took the centre stage this year as issues of corporate governance have become more visible than in the recent past. Says Agrawal: “Manpasand [Beverages] happened and we decided to introspect if we can do something around the theme of how companies report their earnings and what should investors keep an eye for.” Manpasand Beverages, a hot stock once, was widely held by several mutual funds including Motilal Oswal’s schemes until it transpired that its management had cooked the books and inflated profits. The stock came crashing down and its promoters were eventually arrested.

In the last decade, the Indian corporate sector has seen several financial frauds such as the Satyam episode, where the Hyderabad-based software company’s founder Ramalinga Raju swindled money from the listed entity to invest in personal firms.

More recently, well-established businesses like Yes Bank and DHFL, too, have led to erosion of investor wealth. Says Agrawal: “In many instances, it is hard to pin point what is going wrong but you get a feeling that something is amiss. We never invested in Yes Bank as we could not believe its growth.”

However, to whittle down the extensive ways in which books can be cooked, the wealth report focusses on what it calls “sharp practices” that investors need to pay heed to. For example, if there is a massive difference between the pay of promoters/CEO and the senior most executives of the firm, it should raise a red flag. C-suite officers at Manpasand Beverages were being paid ₹15 lakh- ₹17 lakh per annum, a low amount for a company that had a turnover of over ₹1,000 crore. In Satyam’s case, the study admits that the scam was well managed though the company posted a meagre other income despite having huge cash and bank balances of over $1 billion. Says Agrawal: “It’s necessary to know how to read accounts but even those who can’t, should train themselves to see anything abnormal in the business.”

This edition of the study has dealt with seven examples of misreporting at length which include recent cases like Jet Airways and Gitanjali Gems. In each case, it points out what the sharp practice was and the modus operandi thereof.

The report’s conclusions include: relying more on cash flows rather than the profit-and-loss statement and a recommendation to make the cash flow statement a statutory requirement.

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