The consistent outliers of D-Street

The usual parameters of measuring corporate success such as sales, profits, return on equity, and market capitalisation, are good but not good enough to pick winners. For investors, the ideal situation is to pick up a stock cheap, which then provides multi-fold returns, stocks commonly called multi-baggers.

If these words seem familiar, you are not a stranger to the concept of Fortune India’s Top 100 Wealth Creators. And you came across these words when we presented the first edition of the Top 100 Wealth Creators in 2019. Then, when we were drawing up the criteria to pick the first-ever list, we had decided to focus on consistency. And the consistency of the list is validated two years later, with 32 companies from the first edition making the cut.

Just as in 2019, in 2021 as well, we began the data exercise using the annual average market capitalisation of listed companies at the end of March 2021, which gave us a shortlist of 1,545 companies. Annual averaging ensures that investor sentiment is gauged over an entire year and does not focus on a company’s market value on a particular date, which could be swayed for reasons beyond the control of investors, and the companies that they invest in.

We used five-year data—from FY17 to FY21—to do the math because true wealth is built by staying invested over the long term. Using compound annual growth rate (CAGR) for the five-year period gave us 514 companies with positive growth, before we applied the consistency filter.

Unlike in 2019, when we shortlisted companies with a CAGR of 10% and above, this time around we lowered the bar to 7.5% and above. There were 243 companies with a five-year CAGR above 10%, but the list expanded to 307 when we considered 7.5% CAGR over five years. The bar was lowered this year to ensure that the top 100 list was fundamentally strong.

With this filter applied, we had to bid goodbye to big names such as Marico (6.5%), Ultratech Cement (6.2%), Godrej Consumer Products (5.8%), Maruti Suzuki India (5.7%), Axis Bank (5.4%), Grasim Industries (4.5%), Bajaj Auto (2.8%), Larsen & Toubro (2.5%), and State Bank of India (2.1%).

The absence of these behemoths, and many of their peers from the Fortune India 500 and Fortune India Next 500 lists, is testimony to the fact that the Top 100 Wealth Creators will celebrate the ability of companies to make investors rich, and not their scale of business.

Next, we looked at how the companies performed in terms of their top line and bottom line. For the sake of consistency, we applied the same 7.5%-plus five-year CAGR filter to revenue and profit as well, which brought down the shortlist to 127. Further, we eliminated companies that had incurred a net loss in any of the five fiscals from FY16 to FY20, bidding adieu to four firms. At last we had our final 100 shortlist based on a minimum revenue of ₹300 crore in FY20.

Why, you may wonder, are we using FY20 numbers in the middle of 2021. That’s because we are adhering to Fortune India’s philosophy of considering audited annual reports. In the case of the Fortune India 500 and Fortune India Next 500 lists, we do not list subsidiaries where consolidated financials of the parent organisations are used. But for the Top 100 Wealth Creators, we consider subsidiaries and their parent companies at par and use the lens of wealth creation alone to shortlist them. For example, Bajaj Finance (No. 10 in 2021; No. 4 in 2019), and its parent company, Bajaj Finserv (No. 53; No. 16), have happily coexisted on the Top 100 Wealth Creators lists.

The rigour of applying the filter of no loss in each of the past five fiscals ensured that the fundamentals of the companies on the list were strong. For example, Ruchi Soya Industries had a CAGR of 90.8%—its annual average market value soared from ₹775 crore at the end of March 2017 to ₹19,631 crore at the end of March 2021— but it posted losses in four of the last five fiscals (FY16- FY19), and, hence, did not make the cut this year.

A loss in one or more fiscals also meant the absence of big names such as Tata Consumer Products, Jindal Steel and Power, Bharti Airtel, and Union Bank of India whose market values recorded a five-year CAGR of 40.5%, 24.2%, 16%, and 15.3%, respectively. Similarly, applying the filter of top line and bottom line five-year CAGR of 7.5%-plus led to the absence of Reliance Industries, whose revenue grew at 16.8% CAGR but profit grew at just 5.8% CAGR, while its market value grew by 30.5%. Same was the case with ICICI Bank (market value: 14.6%, revenue: 8.1%, and profit: -1.2%); Tata Consultancy Services (market value: 14.5%, revenue: 6.5%, and profit: 4.3%); and Infosys (market value: 12.1%, revenue: 7.5%, and profit: 6.2%), among others.

Interestingly, the total market value of the Top 100 Wealth Creators grew at a five-year CAGR of nearly 19.3% from ₹14.03 lakh crore at the end of March 2017 to ₹33.86 lakh crore at the end of March 2021. When seen through the lens of 29 sectors to which these 100 companies belong, banking (akin to 2019) emerges as the largest contributor to the list. Given that public sector banks (PSBs) had been leading loss makers within the previous five fiscals, their absence on the wealth creators list is justified despite many of the PSBs clocking strong market value growth. Among private lenders, Kotak Mahindra Bank (No. 63 in 2021; No. 55 in 2019) and HDFC Bank (No. 66; No. 65) saw their aggregate market value grow by 16.4% CAGR in the five years from ₹4.54 lakh crore to ₹9.73 lakh crore. However, in terms of the value share, the banking segment saw a decline, from 32.4% in 2017 to 28.7% in 2021.

Seven non-banking finance companies (NBFCs), with a total market value of ₹1.31 lakh crore in 2017, saw a 26.8% five-year CAGR growth to ₹4.28 lakh crore in 2021. Their share of the total value grew by around 3.3%, from 9.3% in 2017 to 12.6% in 2021. Similarly, retail trade—with three companies—saw its share of total market value rise from 3.3% in 2017 to 5.5% in 2021, primarily driven by D-Mart operator Avenue Supermarts, which debuted on this year’s list at No. 15 with a five-year CAGR of 32.2%. The retail sector as a whole recorded a 31.6% CAGR from ₹46,957 crore in 2017 to ₹1.85 lakh crore in 2021.

There were a few other key sectors which logged substantial five-year CAGR, such as power with 50.8%, auto (32.3%), food and agri products (30.7%), and plastic products (30.3%). The sectors with the largest number of companies were basic materials (16), information technology (10), and drugs and pharmaceuticals (9), which recorded a five-year CAGR of 26.2%, 11%, and 20.1%, respectively.

While this year’s list, based on FY20 data, does not reflect the fundamental challenges because of the Covid-19 pandemic, the use of 365-day average market value also mellows down the pain that the share prices witnessed in the last week of March 2020, when the lockdown was announced to tame the spread of the virus. But, this year’s Top 100 Wealth Creators have withstood the Covid-19 challenges with returns ranging from 16% to 1,143% in the 14 months from March 24 last year to May 21 this year. Turn to Page 54 to see the daily price movement of the top 10 performers—since the pandemic hit the country—within the universe of the Top 100 Wealth Creators.

Companies such as Housing Development Finance Corporation (HDFC, No. 87; No. 88) and HCL Technologies (No. 82), along with banking giants such as HDFC Bank and Kotak Mahindra Bank endorse the fact that large companies with a strong focus on consistent growth have the potential to make their investors rich. In the following pages you will read how Honeywell Automation India (No. 26), Avanti Feeds (No. 50), Syngene International (No. 69), Sonata Software (No. 76), and Apollo Hospitals Enterprise (No. 96) possess a strong focus on their business and are continuously competing with themselves. At the cost of being repetitive: consistency pays. After all, 32 wealth creators remaining on the list even after two years is consistency of a kind. And consistency rewards investors too, only if they stay invested for the longer term.

(This story originally appeared in Fortune India's July 2021 issue).