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Wealth creators over the decade: A few myths busted

As usual, Moneylife’s annual study of wealth creators throws up many surprises. It stresses the need to buy cheap & avoid falling into the trap of purchasing ‘popular’ stocks and points out the role of excessive speculation in pushing up obscure stocks

Moneylife’s annual study of wealth creators of 1999-2009, rubbishes myths about value creation, stresses the need to buy cheap & avoid falling into the trap of purchasing ‘popular’ stocks and points out the role of excessive speculation in pushing up obscure stocks.

The study also emphasises the misplaced notion of buying and holding indefinitely. It points out that the much hyped technology stocks that caught everybody’s fancy in 1999, have actually yielded insipid returns over the 10-year period. Software giants like Wipro and Infosys are nowhere to be found among the top 500 wealth creators, a clear indication that management quality and earnings growth have little to do with wealth creation if stocks have already run up and have turned into market favourites. The simple fact is that if you had bought software services companies in 1999, you would have bought them high and regretted. The wealth creation study appears in the current issue of Moneylife which has hit the stands.

Moneylife’s study also points out that real-estate companies have now already captured the potential for growth, and are slowly on the decline in the wealth creation charts. This is despite the fact that four such companies stand out among the top 10 wealth creators. Their performance has more to do with the lunatic, frenzied spike in realty prices in 2007-08, than management efficiency or company fundamentals over the last decade. Prices shot up too high too quickly, without a foundation to support the upsurge.

Despite the lacklustre show from the pharmaceutical industry, certain pharma companies have made their mark on the charts. Sun Pharmaceutical has done very well with an extremely high compounded return of 76%. Among the smaller stocks, Alchemist recorded a huge return of 84% and Vimta Labs returned 52%.
However, the most notable performance was from the steel, steel products and related sub-sectors. From this sector, 13 companies have emerged among the top 100 wealth creators on our list. Sesa Goa has reaped the benefit of China’s insatiable demand for iron ore which accounted for more than 84% of its volumes in the previous fiscal. Among others, Orissa Sponge Iron & Steel (20th) and Nava Bharat Ventures (12th) have also made much of the boom in the entire steel chain and related products like ferro-alloys.

Engineering companies have gained in the past few years from capacity creations in core sectors like power, infrastructure, mining, telecom and oil & gas. Indeed, 17 engineering and allied sector companies have found their way to the top 100 wealth creators. Kirloskar Brothers (72%), Praj Industries (72%) and Bharat Bijlee (69%) emerged among the top 20 wealth creators.

This year’s list is also witness to the emergence of small- and micro-cap companies, which have trumped some of their larger counterparts. Companies like Shanthi Gears, Orient Abrasives and Electrotherm India have given shareholders a lot to cheer about. On the other hand, many blue-chips are languishing at the bottom of the wealth-creators’ list. India Cements, Tata Tea, Zee Entertainment Enterprises and GTL have provided disappointing returns. Several multinationals have also emerged among the notable value destroyers.

Among these smaller, obscure companies are names that have caught us by surprise. These companies don’t boast great earnings growth, superior management quality or productivity efficiency. Their presence among the top wealth creators is only driven by one thing—intense speculation. Many among these are little known penny stocks that have emerged in the frenzied bull market a couple of years ago. Companies like Ashirwad Capital, Poddar Developers and Master Trust have created robust shareholder returns despite the fact that their sales haven’t even touched Rs1 crore.
 

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