For stock traders, the year 2020 has been a true roller-coaster ride: from the worst selloff in equities in more than a decade triggered by the coronavirus pandemic to the benchmarks scaling new peaks. And as the year-end nears, Motilal Oswal sees “a lot more promise” in the future.
The brokerage recommended 25 stocks, including Ajanta Pharma Ltd., Alembic Pharma Ltd., HDFC Bank Ltd., Bajaj Finance Ltd., ICICI Securities Ltd., Varun Beverages Ltd. and Page Industries Ltd., that are likely to be wealth creators—should outperform the S&P BSE Sensex—over the next 25 years. These companies, according to Motilal Oswal 25th Wealth Creation Study 2020, meet the ‘Quality, Growth, Longevity, (reasonable) Price’ parameters.
The process to identify the next wealth creators:
- Motilal Oswal started with a list of 150 mid caps.
- It preferred consumer-facing companies. Cyclical businesses like auto ancillaries, capital goods, chemicals, oil & gas and realty were eliminated.
- It chose companies with return on equity of the last five years being greater than 15%. This reduced the list from 114 to 63.
- Judged the business potential and management potential of the companies, and selected only those that qualified on both counts. This reduced the list from 63 to 28.
- Selected market leaders from the list of 28 companies to arrive at 13.
- Also from the 28 companies, it selected five beneficiaries of migration. That took the total list of shortlisted stocks to 18.
- The brokerage resorted to large caps for financial services as it’s a “risky business”. It chose six leader names for the portfolio, taking the total to 24.
- It opted for one pure digital play, even if it did not meet some of the above filters.
Valuations, the report said, were ignored in short listing as they matter less in the long run.
The complete list is as follows:
Looking Back
The Sensex rose from 3,200 levels in March 1995 to 29,500 by March 2020, a compounded annual growth rate of 9.2%. Exactly 100 companies, it said, delivered returns higher than 9.2%. “We call these 100 the fastest wealth creators.”
Infosys has emerged as the fastest wealth creator over the last 25 years, the report said. The nation’s second-largest software services provider clocked a price CAGR of 30% between 1995 and 2020. “This was backed by 25-year profit after tax CAGR of 33%,” the report said.
The brokerage identified Reliance Industries Ltd. as the “biggest wealth creator” over the last 25 years. Between 1995 and 2020, the Mukesh Ambani-owned oil-to-telecom conglomerate created wealth worth Rs 6.3 lakh crore. It’s significantly ahead of the second-ranked Hindustan Unilever Ltd. with Rs 4.9 lakh crore wealth created.
Kotak Mahindra Bank Ltd., according to the report, is the most consistent and the best all-round wealth creator. “In the 23 three-year rolling periods between 1995 and 2020, Kotak Mahindra has outperformed the corresponding benchmark in 21 of those periods.”
The billionaire Uday Kotak-founded private lender is closely followed by Berger Paints Ltd. and Housing Development Finance Corp. with 20 periods of outperformance. “Six of the top 10 consistent wealth creators are also among the top 10 fastest wealth creators — Berger Paints, Pidilite, Shree Cement, Honeywell Automation, Motherson Sumi and Sun Pharma.”
Read the full report here.
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