> ‘Thematic Study | December 2023 IMU 28 ANNUAL WEALTH CREATION STUDY (2018-2023) Hockey-Stick Returns The power of Economic Profit HIGHLIGHTS = Economic Profit is a superior metric to Accounting Profit to understand true profitability of a company. = TEM (Trend, Endowment and Moves) is a sound strategy for companies to move up the Economic Profit Power Curve. = Successful TEM companies bought at reasonable price improve the chances of Hockey-Stick Returns. = Mid and small caps are favorably placed to deliver Hockey-Stick returns. = After two decades of sustained decline, PSU stocks are on a comeback. TOP 10 WEALTH CREATORS (2018-2023) BIGGEST FASTEST CONSISTENT. Wealth [Link] Syear Created years Price Rank Company (NRE) Company CAGR(%) Company outperformed _CAGR (%) 1 Reliance Industries 9,638 Uoyds Metals 7 Capri Global 5 50 2 Tes 674 —__AdaniEnterprises 78 Varun Beverages 5 50 3 Icict Bank 455 Tube investments 63 Grindwell Norton 5 30 4 Infosys 3618 Linde india 56 Icicl Bank 5 6 5 Bharti Airtel 2,808 dani Power 52 ‘Adan Enterprises 4 8 6 Hind, Unilever 2918 Capri Global 50 Tube Investments 4 6 7 State@ankof india 2,442 Varun Beverages so Linde india 4 56 a Bajaj Finance 2,285 Deepak Nitrite “3 ‘Adani Power 4 2 9 ‘Adani Enterprises 1,746 Persistent Systems 45 1 [Link] & Pharma 4 4s 30___HCLTechnologies __1,636 4 B Chem & Pharma 5 SRF 4 44 Raamdeo Agrawal (Raamdeo@[Link]) / Shrinath Mithanthaya ([Link]@ [Link]) We thank Mr Dhruv Mehta (Ohruv@[Link]) for his Invaluable contribution to this report Investors are advised to refer through important 1 Oswal research is avallable on [Link]/Insti Josures made at the last page of the Research Report iona-Equities, loomberg, Thomson Reuters, Factset and SBP CapitalMotiLat Oswalt 28th Annual Wealth Creation Study (2018-2023) Motilal Oswal 28th Annual Wealth Creation Study Page v Wealth Creation Study: Objective, Concept & Methodology 1 v Wealth Creation 2018-23: Highlights .. 23 v Theme 2023: Hockey-Stick Returns - The power of Economic Profit v Wealth Creation 2018-23: Detailed Findings .. 32-48 Vv Appendix 1: The 100 Biggest Wealth Creators .... 50-51 v Appendix 2: The 100 Fastest Wealth Creators .... o 52-53, > Appendix 3: The 100 Most Consistent Wealth Creators .. 54-55 v Appendix 4: The 100 All-round Wealth Creators 56-57 . 58-59 > Appendix 5: The 100 Wealth Creators (alphabetical) ... Abbreviations and Terms used in this report ‘Abbreviation [Term Description 2013, 2018, 2023, ete Reference to years for india are financial year ending March, unless otherwise stated AB ‘Average case Compound Annual Growth Rate INR bn Indian Rupees in billion LtoP /PtoL Loss to Profit / Profit to Loss. In such cases, calculation of PAT CAGR isnot possible Price CAGR In the case of aggregates, rice CAGR refers to Market Cap CAGR we ‘Weaith Created Wealth Created Increase in Market Capitalization over the ast 5 years, duly adjusted for corporate actions such as fresh equity issuance, mergers, demergers, share buybacks, etc Nate: Captaline database has been used for ths study. Source ofall exhibits is MOFSL analysis, unless otherwise statedMotILat Oswat 28th Annual Wealth Creation Study (2018-2023) Wealth Creation Study Objective, Concept & Methodology Objective The foundation of Wealth Creation is to buy businesses at a price substantially lower than their “intrinsic value” or “expected value”. The lower the market value compared to the intrinsic value, the higher is the margin of safety. Every year, as in the past 28 years, we endeavor to cull out the characteristics of businesses that create value for their shareholders. ‘As Phil Fisher says, "It seems logical that even before thinking of buying any common stock, the {first step is to see how money has been most successfully made in the past.” Our Wealth Creation Studies are attempts to study the past as a guide to the future, and gain insights into the various dynamics of stock market investing, Concept & Methodology 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. For listed companies, we define Wealth Created as the difference in market capitalization over a period of last five years, duly adjusted for corporate events such as fresh equity issuance, mergers, demergers, share buybacks, etc. We rank the top 100 companies in descending order of absolute Wealth Created, subject to the company’s stock price at least outperforming the benchmark index (BSE Sensex in our case). These top 100 Wealth Creators are also ranked according to speed (i. price CAGR during the period under study) We define Consistent Wealth Creators based on the number of years the stock has outperformed in each of the last 5 years. Where the number of years is the same, the stock price CAGR decides the rank. We define All-round Wealth Creators based on the summation of ranks, under each of the 3 categories — Biggest, Fastest and Consistent. Where the scores are tied, the stock price CAGR decides the All-round rank Report structure We present the 2018-2023 Wealth Creation Study highlights in pages 2-3. The detailed findings are presented in pages 32-48. Appendix 1 (pages 50-51) ranks the top 100 Wealth Creators by size, Appendix 2 (pages 52-53 ranks the same 100 Wealth Creators by speed, Appendix 3 (pages 54-55) lists the Consistent Wealth Creators, Appendix 4 (pages 56-57) presents the All-round Wealth Creators, and Appendix 5 (pages 58-59) provides an alphabetical listing of the Wealth Creators. This year’s theme study titled “Hockey Stick Returns: in pages 4-31, fhe power of Economic Profit” is featured December 2023MorILat Oswat 28th Annual Wealth Creation Study (2018-2023) Wealth Creation 2018-2023: Highlights Reliance emerges as the largest Wealth Creator for the 5® time in a row = For the fifth time in succession, Reliance Industries has emerged the largest Wealth Creator over 2018-23. This takes Reliance’s overalll No.1 tally to 10 in the last 17 five-year study periods. Exhibit 1 Top 10 Biggest Wealth Creators (2018-23) Rank Company ‘Wealth Created CAGR (Xe) P/E) ROE (%) INRbn %share Price PAT ——-2023—«2018+~=—=«2023 «2018, 1 Relianceinds 9,638=—«13.7 2 13 24 15 9 2 21s 6774 96 1810 2821 4730 3 ICICI Bank 415559 2% 35 w 23 16 7 4 Infosys 3618 Sa 2 9 2516 37 5 Bharti airtel 2808 4.0 1645 495 m2 6 Hind. Unilever 2,718 3.9 4 5955 2 72 7 sei 2442 35 16 LtoP a8 NA wv 2 8 BajajFinance 2,285 3.2 2% 36 30 41 a 16 9 Adani Enterprise 1,746 2.5 7334 8130 7 4 10 HCL Tech 163623, wo 2016 224 Total of Top 10 37,819 54 a 22 2325 16 Total of Top 100 70488100 2 2 2627 1611 Lloyds Metals has emerged the Fastest Wealth Creator A low-profile company, Lloyds Metals, has emerged the Fastest Wealth Creator with 2018- 23 Price CAGR of 79%. INR 1 million invested in 2018 in the top 10 Fastest Wealth Creators would be worth INR 10 million in 2023, a return CAGR of 59% vi/s 12% for the BSE Sensex. Exhibit2 Top 10 Fastest Wealth Creators (2018-23) Rank Company Price Appn. Price. PAT Mkt Cap(INRbn) P/E OW) (x) CAGR% cAGR% 2023 201820232018, 1__Uoyds Metals 19 73125 aw 3 “22 2 Adani Enterprises 18 8 34 1995 172 a1 30, 3 Tube Investments un 63 53 4g 42 377 4 Linde india 9 56 1 34a 38 65179 5 Adani Power 8 52 LtoP 73992 7 NA © Capri Global 8 50 26 13416 66 25 7 Varun Beverages 8 50 50 go. 113 5753 8 Deepak Nitrite 7 49 59 2134 30 aL 9 Persistent Systems 7 46 25 35255 388 10 JB Chem & Pharma 6 45 31 15326 3724 December 2023 2MorILat Oswat 28th Annual Wealth Creation Study (2018-2023) Capri Global is the Most Consistent Wealth Creator We define Consistent Wealth Creators based on the number of years the stock has out- performed in each of the last 5 years. Where the number of years is the same, the stock price CAGR decides the rank. Based on this, over 2018-23, yet another low-profile company, Capri Global, has emerged as the Most Consistent Wealth Creator. It has outperformed the BSE Sensex in all the last 5 years, and has the highest price CAGR of 50%. Exhibit 3 Top 10 Most Consistent Wealth Creators (2018-23) [Link] 201823 «2018-23 RoE (%) P/E ts) Rank Company ‘outperformance Price CAGR(%) PATCAGR(%) 2023 201820232018, 1_Capri Global 5 50 26 65 66S 2 Varun Beverages 5 50 50 uD 5753 3. Grindwell Norton 5 30 19 9 15 5939 4 ICICI Bank 5 26 35 67 123 5 Adani Enterprises 4 8 34 74 8130 6 Tube Investments 4 63 53 3 OR 37 7 Linde india 4 56 31 woo 65179 8 Adani Power 4 52 Ltop 36-233 7 NA 9 J8Chem 4 45 31 167 37a 10_ SRF 4 44. 36 2B 334 Adani Enterprises is the Best All-round Wealth Creator for the second time in a row We define All-round Wealth Creators based on the summation of ranks, under each of the 3 categories ~ Biggest, Fastest and Consistent. Where the scores are tied, the stock price CAGR decides the All-round rank. Based on the above criteria, Adani Enterprises has emerged as the Best All-round Wealth Creator. Exhibit4 Top 10 All-round Wealth Creators (2018-23) ‘Allround Rank Total of 2018-23 Rank Company iggest Fastest Consistent __Ranks __Price CAGR (6) ‘L___Adani Enterprises 9 2 5 16 78 2 Varun Beverages a 7 2 30 50 3. Adani Power 23 5 8 36 52 4 ‘Tube Investments 30 3 6 39 63 5 ICICI Bank 3 37 4 44 26 6 SRr 25 a 10 46 44 7 Linde India 49 4 7 60 56 8 Adani Energy 19 15 32 66 39 9 LTiMindtree 24 30 18 R 29 10 Reliance industries 1 50 2 2 2 Detailed findings page 32 onwards. December 2023MorILat Oswar 28th Annual Wealth Creation Study (2018-2023) Theme Study December 2023 aMoTILat Oswat 28th Annual Wealth Creation Study (2018-2023) Hockey-Stick Returns The Power of Economic Profit “You can shift the odds of strategy by capi and most important, making a few big moves.” = From the book “Strategy Beyond The Hockey Stick” ing on your endowment, ri ing the right trends, 1, What does Hockey-Stick Returns mean? ‘Sharp and sustained rise in stock price For the purposes of this report, Hockey-Stick returns refers to a sharp and sustained rise in the price of a stock. This leads to a hockey-stick formation of the price chart, translating into handsome returns for the stockholders. Exhibit 1 Examples of Hockey Stick Returns (2013-22) 10,000 3,000 soo T#t# Ens Stock Price (INR) 3,500 SRF Stock Price (INR) sy 2,000 £000 65% CAGR 11500 63% CAGR_-— 4,000 M 1,000 2,000 500 ° ° 2222222222 2222222222 8,000 2,000 Bajaj Finance Stock Price (INR) Astral Stock Price (INR) 6,000 1,500 58% CAGR 1,000 53% CAGR 4,000 2,000 0 S333 55535 SSS553 5558 3,000 i . 2,000 2500 _P !Industries Stock Price (INR) Ratnamani Metals Stock Price (INR), ’ 1,500 2,000 41% CAGR 39% CAGR 4,500 3,000 2,000 00 500 a [a SSsS5S55558 Sis 3558 December 2023MorILat Oswat 28th Annual Wealth Creation Study (2018-2023) 1.1 What causes Hockey-Stick Returns The most basic equation of equity investing is — EPS (Earning Per Share) x P/E (Price-to-Earnings) = Stock Price or PAT (Profit After Tax) x P/E = Market capitalization The above makes it clear that Hockey-Stick Returns is caused by Hockey-Stick earnings and/or Hockey-Stick P/E (or any other relevant valuation metric). Exhibit 2 presents the 2013-22 earnings CAGR and valuation expansion for the 6 stocks charted earlier. Exhibit2_Hockey-Stick Returns are caused by Hockey-Stick Earnings and/or Hockey-Stick valuation 2013-22 CAGR PAT (INR bn) P/E (x) Company. Price PAT. P/E 2013 202220132022 Tata Elxsi 65% «37% ~——«20% 03 55 19 100 SRE 63% 26% 29% 23 189 4 42 Bajaj Finance 58% 32% 23% 59705 10 2 Astral 53% 26% 23% 06 48 u 85 P | Industries 41% 27% 12% 1084 18 S1 Ratnamani Metals 39% «10% 26%. 1432 5 38 Clearly, the way to engender Hockey-Stick Returns is to invest in companies with high earnings growth at reasonable valuation. Conventionally, earnings are associated with Accounting Profit. In Section 2, we discuss the concept of Economic Profit, and why we believe itis a superior metric to Accounting Profit 2. Identifying Hockey-Stick earnings Look for companies which will move up the Economic Profit Curve In this section, we draw upon concepts and insights from the book Strategy Beyond The Hockey Stick by a team of McKinsey authors, Chris Bradley, Martin Hirt and Sven Smit. The book is targeted primarily towards corporate managers. However, we unearthed quite a few insights for equity investors as well: 1. Economic Profit is (arguably) a superior metric to Accounting Profit 2. All companies can be mapped to an Economic Profit Power Curve 3. Companies which move up the Power Curve generate healthy returns to shareholders, and vice versa. 2.1 Economic Profit vs Accounting Profit Be it by business managers, bankers, equity investors or who have you, Accounting Profit (AP) is the most widely used metric for various kinds of financial analysis. Sure enough, AP is a highly homogenized metric as it is based on the prevailing accounting principles common to all companies in a given geography. However, one key demerit of AP is the fact that it does not take into consideration the amount of capital invested to generate a certain level of profit. December 2023MotILat Oswat 28th Annual Wealth Creation Study (2018-2023) Consider Exhibit 3. Indian Oil's PAT is 4 times higher than that of Nestle. And yet, its Market Cap is lower than Nestle’s. Such anomalies are better explained by the concept of Economic Profit. Exhibit 3 Accounting Profit anomaly INR bn Nestle Indian Ol (cv22) (Fv23) Indian Oil over Nestle ‘Accounting Profit 24 98 4 times higher profit Net Worth 25 1,397 56 times higher equity employed RoE 96% 1% translating to significantly lower RoE Year-end Market Cap 1,890 41,100 Lower market cap P/E (x) 79 a due to much lower valuation 2.1.1 Economic Profit - the concept and the math The main feature of AP is that it incorporates all explicit costs to determine a company’s profit and profitability. However, it excludes a key item, namely, the implicit cost of invested equity capital, or simply, Cost of Equity (CoE). ‘Academically, based on CAPM (Capital Asset Pricing Model), every company may have a different CoE based on the following formula: CoE = Rr + Beta x (Ru Re) where Ry is the Risk-free rate of return Ru~ Reis the equity risk premium where Ru= Equity market rate of return Beta is the volatility co-efficient of the company’s stock returns vis-a-vis market return (Mathematically, Beta = Covariance of the security's returns and the market's returns divided by Variance of market returns over the long-term) For the purposes of this report, we have considered a uniform CoE of 10% (more or less equal to the long-period return on Indian equity markets), Thus, based on our methodology — Economic Profit (EP) = Accounting Profit (AP) minus Equity Charge Equity Charge = Net Worth x CoE (10% in our case) Therefore, EP = AP —(Net Worth x 10%) |. Equation 1 Based on the Equation 1, the 3 determinants of EP are (1) AP, (2) Net Worth, and (3) CoE. Now, RoE = AP + Net Worth Therefore AP = Net Worth x ROE... Equation 2 Substituting AP in Equation 1, we get — EP = (Net Worth x RoE) ~ (Net Worth x 10%) i.e, EP = Net Worth x (ROE - 10%) .. Equation 3 Based on the Equation 3, the 2 determinants of EP are ~ (1) Net Worth, and (2) Spread between RoE and CoE. December 2023 7MorILat Oswat 28th Annual Wealth Creation Study (2018-2023) We can now revisit Exhibit 3 (see Exhibit 4 below). Nestle earns EP of INR 22 bn whereas Indian il actually has an EL (Economic Loss) of INR 42 bn. Thus, EP captures the true profitability of a company. Exhibit 4_Nestle's Economic Profit vs Indian Oil Economic Loss INR bn Nestle Indian Oil (cv22) (rv23) ‘Accounting Profit (1) 24 98 Net Worth (2) 25 4,397 Cost of Equity (3), 10% 10% Equity Charge (4) = (2) x (3) 3 140. Economic Profit (5) = (1) - (4) 2 a2 RoE (6) = (1) + (2) 96% Th Alternatively, Spread between ROE & CoE (7)=(6)-@) 86% 3% Economic Profit (8) = (2) x(7) 2 Az Based on the above methodology, we present below the EP of companies constituting Nifty 50. Exhibit § Economic Profit of Nifty 50 companies INR 2023 IWR 2023 ap NW EC | EP ROE AP NW EC EP ROE is 421904 90 381 47% ‘IndusindBank —74~=«SSO=OSSS a1 Coal india 28157257224 49% Bajaj Finserv 644645 B14 BL 557 3,589 359 198 16% __Adani Ports 6345746 714% HDFC Bank 459 2,894 289 170 16% __ Britannia Inds 2 35 4 SRK Infosys 240754 75464 «32% Eicher Motors «291501514 19% once 408 2,806 281 127 «15% _ Bharti Airtel a8 776 78S 11% Icicl Bank 340 2,145 214 425 16% HeroMotocorp_ «27-1677 18% imc 191 692-69_-—«122_—S—28% Larsen &Toubro 100 893 89 10 11% HCL Technologies 146 6546581 22%_—UPL 37-298 307 12K, PowerGridCorpn 156 830 83_~—«73.~—=—«19% —Hiindalcoinds. 101.9895 GSK Bajaj Finance 5544 S461 21% Maruti Suzuki 7 68 62 6 11% Hind. Unilever 302 50350 $1_~—-20% _—Divi's Labs 18128818 ‘Axis Bank 1811298 130° «$1 14% Cipla 2% 23428 12K Kotak Mahindra 149,123 «112,87 «13% —SBlLifeinsurance 17 130 13,0 @ 13% M&M 93 5645636 ~«16% —ApolloHospitals 8 62 6 2 13% Wipro 4777836 15% _HDFCLife 30 8k Bajaj Auto 60294 29 -80——-20% _—UltraTechCement 50 543 54 9% Sun Pharma 86 56056 «80-15% TataConsumer 1116316 SS 7% LTiMindtree 44165-1727 27% _AdaniEnterprises 27 331336 «8% Asian Paints 4116016 25-26% Grasiminds 6s 78879, NTPC 1701470 147 23——«12% ‘Tata Steel 86 1,031 103° 478% DrReddy’sLabs 46 2332323 20% Tata Motors 2 4534520 Nestle India 24287 CBPCL 3353554 20K, Titan Company «33191222 27%__—SSWSteel 38 65766 2B BH Tech Mahindra 48279 28_~——20——«17% Reliance industries 668 7,159 716 -@8_—«9% NW Net Worth; ECEquity Charge @ 10% of NW December 2023 3MotILat Oswat 28th Annual Wealth Creation Study (2018-2023) 2.1.2 Economic Profit is a superior metric compared to Accounting Profit Many equity investors consider AP and RoE before making their investment decision. However, juxtaposing the two can be somewhat fuzzy. Unlike this, EP offers a composite metric, capturing the interaction of AP and RoE. To assess the efficacy of EP vis-a-vis AP, for every year beginning 2014, we observed the return profile of the top 500 companies, classified into equal-weighted portfolios as tabled in Exhibit 6. Exhibit 6 Economic Profit portfolios have significantly superior performance compared to Economic Loss portfolios Price YoY ending 2014 2015 2016 2017 2018 2019 2020 2021-2022 2023 Avg CAGR _Alphayrs Nifty 500 Return 18% 30% 8K AK 11K 8% 28K EK 2K 2K ISK 13H RETURN ‘Top 500 by Mkt Cap 19% 58% 5K 36K 13% 8% 33K 102% 28% KIM 16% Allprofit-makingcos. 21% 62% 5% 37% 15% 7% 32% 101% 26% 1% 22% ITH with EP 25% 72% 0% 37% 16K 5K _—-28%_——9B% —-26%_—-2%_—-24K_ 19% With et 14% 41% 14% 38K 14% 12% 44K 109% 24% 1% 17% 116 All loss making 1% 32% 6K 28K aH 23% —-4AK 112K ABH BK 1K [ALPHA OVER NIFTY 500 ‘Top 500 by Mkt Cap 1% 20% 3K KH 26% 7% HOH Allprofitmaking 4% 28% 3% 13K 4% 25% 5% KO with EP Te 39% 8% 19% 4% 2% SK 0% 8% 6% 8 2 With EL C7 an x 33% 4% 3% HO Allloss making 19% 1% 1% 4% 16% 3% kK OG NO. OF stocks ‘Top 500 by Mkt Cap 500 500 500 500500500500 500500500500, ‘Allpeofitmaking «438—«435—=—MAG=—«3G— BSS AGS SL A5G 8 with EP 296286 290 ««-309 313303512234. With et uaz 15612713723 10578. Allloss making [a Cy Note: EP — Economic Proft; EL ~ Economic Loss; For EP and EL companies, negative Alpha numbers are highlighted Two key takeaways: 1. On average, the EP portfolio delivered 8% Alpha with a probability of 80% (i.e. in 8 out of 10 observations). In contrast, the Economic Loss (EL) portfolio delivered only 2% Alpha that too with a lower probability of 60% (i.e. in 6 out of 10 observations). 2. Ona CAGR basis, the EP portfolio delivered Alpha of 6% whereas the EL portfolio delivered negative Alpha of 2%. Thus, not only does EP reflect true profitability of a company, a portfolio of companies with EP has.a high probability of outperforming the market. Having established the superiority of EP over AP, we proceed to analyze it further. 2.2 All companies can be mapped to an Economic Profit Power Curve ‘The book referred to earlier maps leading global companies to what the authors call the Economic Profit Power Curve. We too attempted the exercise on India’s top 500 companies by 2013 market cap. We find that the shape of the Power Curve is exactly the same as in the book (Exhibit 7). December 2023 3MorILat Oswat 28th Annual Wealth Creation Study (2018-2023) Exhibit 7 Economic Profit Power Curve for India Inc in 2013 2013 Economic Profit Power Curve 15,000 Quintile 5 Quintile 4 Quintile 3 Quintile 2 10,000 (INR -830 bn) (INR -41bn) (INR 22 bn) (INR 106 bn) 5,000 5,000 10,000 15,000 101 rat ut 161 181 201 2a 2a 261 281 301 3a 3a 361 381 aor aan aa 461 aan Figures in brackets are the aggregate Economic Profit in the Quintile The Power Curve can be explained as follows — ‘+ We listed the top 500 market-cap companies in 2013 in ascending order of their EP. ‘+ We divided the companies into 5 EP Quintiles of 100 each ‘+The Power Curve captures the above. ‘© Quintiles 5 and 4 are all companies with EL + Quintiles 3, 2 and 1 are all companies with EP. ‘+ Bulk of the losses and profits are at the extreme Quintiles. 2.3. Companies which move up the Power Curve generate healthy returns Itis obvious that companies move up the Power Curve only when they generate high incremental EP. Thus, such companies typically generate significant shareholder return (barring the rare cases of exceptionally high opening valuation). For instance, consider Exhibit 8 which captures the inter-quintile moves of the top 500 companies between 2013 and 2023, Exhibit 8 Economic Profit Quintile Moves: 2013 to 2023 Nifty 500 return during 2013-23: 13% CAGR Return CAGR Number of companies 2023 2023 wala 2 3 4 5 | Total asa a 2 34 S| Total 1 [ax ux 11m ax ex | 14% 1 [oo 23 2 3 2 | 100 2 | 25% 21% 16% 14% 5% | 19% 2 | 2 27 2% 2 7 | 100 3 | 43% 26% 17% 15% 12% | 22% 3 | 5 25 37 23 10 | 100 4 | 15% 21% 9% 16% 7% | 10% 4 | 3 21 30 2% 17 | 100 5 | 17% 14% 16% 6% 3% | 9% s | 1 1 6 25 44 | 100 Total [21% 21% 15% 13% 6% | 16% ffotal_| 100 100 100 100 100 | 500 Q=Fconomie Profit Quintile December 2023 0MorILat Oswat Key observations: Significantly market-beating performance happens when companies move up the EP Quintiles e.g. companies which moved from Quintile 3 in 2013 to Quintile 1 in 2013 delivered the highest return (43%). However, the number of stocks is only 5. Likewise, 25 companies moving from Quintile 3 to Quintile 2 delivered 26% return CAGR and. 21 companies which moved from Quintile 2 to Quintile 1 delivered 25% return. 28th Annual Wealth Creation Study (2018-2023) Performance in Quintiles 4 and 5 is somewhat erratic. As stated earlier, these Quintiles comprise EL companies. So, in such cases, moving up the Power Curve implies lowering EL or turning around into EP. There’s no clear pattern here. Exhbit 8 Economic Profit Quintile Movers: 2013 to 2023 Quintile 3 to 4 (5 companies) Quintile 3 to 2 (25 companies) Quintile 2 to 1 (21 companies) 2013-23 CAGR 2013-23 CAGR 2013-23 CAGR, Company Price EP __-PAT Company Price EP PAT Company EP PAT SRF 53% 41% 25% Astral 45% 18% 22% Pi Industries 37% 28% 29% TataEhsi 51% 46% 37% — SundramFasteners 38% 32% 19% Solarindustries «34% 22% 20% TVSMotor 42% 36% 26% Timken India 35% 35% 25% Persistent Systems 33% 20% 17% Gnec 2% 81% 18% KRBL 32% 19% 19% _IIFLFinance 32% 23% 19% RCE 10% 28% 13% Honeywell Auto 29% 23% 18% Abbott india 3% 24% 21% Supreme Petrochem 29% 22% 20% [Link].&Fin. 30% 27% 24% Elgh Equipments 28% 26% 17% Page Industries «28% «17% ~——18% TvsHoleings 27% 28% 18% Eicher Motors 26% 27% 25% VIP ings 25% 34% 19% AIAEngineering «25% «22% «18% Praj Industries 25% 41% 14% Britannia Inds 23% 25% 24% Century Piyboard 24% —-22% 22% Schaefflerindia 23% 20% Esab india 23% 23% 14% IndraprasthaGas_23% 15% P&GHeaith 23% 18% 11% PRGHygiene 18% 16% Natco Pharma 21% 24% 24% Coromandelinter. 17% 19% Alicargo Logistics 20% 57% 14% Chola Financial 16% 16% Lakshmi Machine 18% 16% 11% Marico 16% 18% Chambal Fertilisers 18% 25% 17% Rain Industries 16% 11% Apollo Hospitals 18% 24% 11% Redington 15% 16% Dhanuka Agritech 18% 11% 13% Oberoi Realty 13% 22% BASF India 15% LtoP 13% NLC India 2% 32% siemens 15% 27% 13% Bankof Maha Th 23% Pres 2% 23% 11% Gilete india O% 27% 15% ‘Akzo Nobel % 45% 1K StyrenixPerform. 0% 18% 11% We carried out the above inter-quintile exercise for 5 more 10-year periods ~ 2008-18, 2009-19, 2010-20, 2011-21 and 2012-22. Exhibit 10 is the average of all the above 6 observation periods. December 2023 iMorILat Oswat 28th Annual Wealth Creation Study (2018-2023) Exhibit 10 Economic Profit Quintile Moves: Average of six 10-year observation periods between 2008 and 2023 Nifty 500 average return: 11% CAGR Return CAGR Number of companies End Q End @ Sta] a2 34 S| Total Stal a 2 3 4 5 | Total 1 [Gee ae 6% ax am | 12% 1 [ss 9 3 7 2 | 100 2 | 26% 22% 10% 10% 5% | 19% 2 | 2 28 17 18 13 | 100 3 | 33% 25% 12% 8% 6% | 19% 3 | 7 31 30 22 9 | 100 4 | 34% 21% 9% =~ 8% 7% | 15% 4 | 5 19 38 2% 12 | 100 5 | 29% 14% 10% 7% 1% ~(| 14% s | i113 228 36_| 100 Total [24% 21% 10% «8% 4% =| (16% ffetal_| 100 100 100 100 100 | 500 Q=Economie Profit Quintile Key observations: ‘© Quintile moves from 3 to 2, from 3 to 1 and from 2 to 1 continue to deliver market-beating returns. * Upmoves from Quintile 4 and 5 also generate handsome returns, albeit they tend to be speculative in nature as they involve mainly turnarounds. '* One significant observation is that on average, almost all market-beating returns happen when companies end up in Quintiles 1 and 2, no matter what the starting Quintie is. ‘+ The conclusive and actionable observation is that it pays to start from Quintiles 2 and 3. Any upmove will obviously lead to high returns, Equally important, regardless of the final outcome, on average, investors should expect 19% return (highlighted under Total column). Having understood the power of EP, we can now delve into factors which drive it 3. Drivers of Economic Profit TEM - Trends, Endowment, Moves In the book, Strategy Beyond The Hockey Stick, the authors list 10 key variables which drive EP. They classify the same under 3 heads ~ Endowment, Trend and Moves as under. Exhibit 110 key variables dri ing Economic Profit Endowment Trend Moves ‘= Company size © _ industry trend ‘© Programmatic M&A = Debt evel = Geographictrend + Dynamic reallocation of resources ‘© Past investment in R&D ‘+ Strong capital expenditure ‘+ Strength of productivity program ‘+ _ Improvement in differentiation We tweak the above slightly and discuss them as TEM — ‘* Trends - factors external to a company, mostly stemming from the sector; and ‘+ Endowment & Moves - factors internal to a company, December 2023 2MotILat Oswat 28th Annual Wealth Creation Study (2018-2023) 3.1 What are Trends Trends are directional shifts in the broader economy, various sectors, technology, consumer behavior, etc. They can create opportunities for some businesses and threats for others. Examples of trends ‘+ Heightened environmental concern is a huge opportunity for electric vehicle manufacturers, and a serious threat for ICE (internal combustion engine) vehicle manufacturers. ‘* Digitalization is a huge trend, creating significant opportunity for businesses like food delivery and quick commerce, and a threat to their offline counterparts like restaurants and mom-and-pop stores. ‘* OTT (over-the-top) media platforms are a huge opportunity for the players in this business, and a major threat to businesses like cinemas and TV channels. 3.1.1 What causes trends / how to identify them Favorable industry trends are driven by a combination of economic, technological, societal, and environmental forces. These forces can vary depending on the industry and the specific circumstances at a given time. We list some of the key forces that commonly drive trends Technological Advancements: Technological innovation is a major driver of favorable industry trends. New technologies can create entirely new industries or transform existing ones. Businesses that adopt and leverage these technologies effectively often gain a competitive edge. Example: The rise of Artificial intelligence. 2. Consumer Preferences: Changing consumer preferences and behaviors can significantly influence industry trends. Industries that align with consumer demands for convenience, sustainability, health, and digital experiences tend to thrive. Example: Rise of private sector banks due to first movers in conveniences like ATMs, internet banking, mobile banking, ete. 3, User-industry demand: The trend in user-industry demand can in turn determine the trend in supplier industries. Example: A boom in the real estate sector typically translates into significant demand for inputs like steel and cement. 4, Regulatory Environment: Government regulations and policies can shape industry trends by promoting certain practices or technologies while restricting others. Example: Indian government's subsidy for electric vehicles is steadily driving up their demand. 5. Economic Conditions: Economic factors such as GDP growth, interest rates, and inflation can impact industry trends. Example: During periods of economic growth, industries like tech, luxury goods, and travel often see favorable trends. 6. Global Events: Events like pandemics, geopolitical changes, and natural disasters can have a profound impact on industries. Example: Covid-19 pandemic accelerated trends in remote work and e-commerce. December 2023 BMorILat Oswat 28th Annual Wealth Creation Study (2018-2023) 7. Environmental Concerns: Growing awareness of environmental issues and sustainability is driving trends toward eco-friendly products and practices. Industries that embrace sustainability often see increased consumer support and government incentives, Example: Sustained demand for renewable energy businesses like wind and solar power. 8 Demographic Shifts: Changes in demographics, such as an aging population or the emergence of Generation Z as a consumer group, can drive trends in healthcare, housing, and other sectors. he rate at which new technologies are adopted by businesses and consumers can drive trends. Industries that are quick to embrace and integrate innovations often have a competitive advantage. Example: Online discount brokers. 10. Globalization: increased globalization can open up new markets and opportunities for industries that can operate on a global scale. It can also lead to increased competition. Example: The rise of India’s IT sector. 11. Cultural and Social Trends: Cultural and societal shifts can impact industries. Example: Changing attitudes toward health and wellness have driven trends in the food and fitness industries 12. Competitive Landscape: The level of competition within an industry can drive trends. Industries with healthy competition often see continuous innovation and improvements, and vice versa, Example: Entry of Reliance industries into the telecom sector led to serious margin erosion for incumbents. 3.1.2 Impact of trend Any trend will have one of these two impacts: (1) Value Migration or (2) Value Creation. Value Migration In his book Value Migration, author Adrian J Slywotzky says, “Value migrates from outmoded business designs to new ones that are better able to satisfy customers’ most important priorities.” Value here stands for profits and market cap. Value Migration results in a gradual yet major shift in how the current and future Profit Pool in an industry is shared. It creates.a sizable and sustained value inflow into beneficiary sectors and value outflow from their adversely affected counterparts. December 2023 1MorILat Oswat 28th Annual Wealth Creation Study (2018-2023) Exhibit 12 Examples of trend-led Value Migration Trend Sector Value migration from Value migration to Thangein customer preference Banking ‘State-owned banks Private banks Technology advancement Telecom Fixed line networks Wireless networks Outsourcing Pharmaceuticals Developed world Low-cost chemistry countries Unorganized to Organized Gems & Jewelry Unorganized jewelry market, Organized jewelry retailing Change in competitive landscape Aviation Full service airlines Low cost airlines Value Creation Some trends lead to whole new value getting created without major disruptions in other businesses. Examples include Google, Facebook, and the recent trend in India’s chemicals sector. Trends can make or mar the fortunes of companies. Yet, the final impact of a trend on a company depends on factors internal to it, namely, Endowment and Moves, 3.2 What is Endowment Endowment refers to current strengths of a company which enable it to ride the trends and move up the EP Power Curve. Conventionally, Endowments include — ‘© Corporate-parent i.e. owner group ‘© Quality of management © Size of revenue ‘© Production capacity ‘© Competitive edge ‘© Market share © Brand © Distribution network © Debt-raising capacity ‘© Investment in R&D, and so on. However, for the purpose of generating Hockey-Stick Returns, the key Endowment is whether all of the above factors combine into a placing the company in the top 3 Quintiles of EP. 3.3. What are Moves Moves here refer to the strategic initiatives taken by a company to leverage its Trend and Endowment, and drive EP growth. ‘The book referred to herein covers most of the important Moves that a company can undertake: © Programmatic M&A ‘* Dynamic reallocation of resources ‘+ Strong capital expenditure ‘+ Strength of productivity program ‘+ Improvement in differentiation. December 2023 5MoTILat Oswat 28th Annual Wealth Creation Study (2018-2023) ‘© Programmatic (i.e. methodical) M&A Example: Ultratech has done significant acai ns at regular intervals as tabled below. Exhibit 13 Ultratech has a solid track record of acquisition-led capacity build-up Year Company/plants acquired Capacity Ultratech Cement Capacity (mtpa) {mtpa) CYi3_ Gujarat units of JPA group 48 aa n2115227 €¥16__ JP group (Cement plants) 212 Cy18__ Century Cement 146 CY18_—_Binani Cement 86 C¥23 _Kesoram industries 108 Exhibit 14_Ultratech’s acquisition-ted outperformance 8,000 — Ultratech Stock Price (INR) 7,000 — Nifty 50 Rebasea 6,000 5,000 4,000 3,000 2,000 3,000 2020 zon. 2022 2023 ‘* Dynamic reallocation of resources Example: Angel One has transformed itself from a regular stockbroker to a discount broker. Exhibit 45 Angel One's reallocation of resources has radically changed its fortunes since 2021 ‘Angel One PAT (INR mn) Pivoted toa discount broker 2014 2015-2016 ©2017-2018 ©2019 +2020 | 2021 20222023, ‘* Strong capital expenditure Example: Balkrishna Industries’ gross block is up from INR 19 bn in 2013 to INR 84 bn now. December 2023 16MorILat Oswar 28th Annual Wealth Creation Study (2018-2023) Exhibit 16 Balkrishna Industries’ outperformance is led by sustained capex. Balitishna Inds Gross Block (INR bn) 2500 aihna Sinck Price NR) 4 2,000 Nifty 500 Rebased 1,500 3,000 00 ° © Productivity programs Example: TVS Motor has improved its margins through a disciplined productivity program Exhibit 27_TVS Motor’s outperformance is driven by a disciplined productivity program 1,250 TVS Motor EBITDA Margin ve — 1VS Motor Stock Price (INR) 2 Bex EB 1000 eg f8s — Nifty 500 Rebased gees 750 500 250 ° Improvement in differentiation Example: Polycab India has significantly upped its branding and visibility in recent times Exhibit 18 Polycab India’s ad spend is on the rise Polycab Ad spend (INR mn) 1.244 2014 2015 2016 -«2017-_:« 2018 ~=—« 2019 «2020» 2021«« 2022-2023 December 2023 7MorILat Oswat 28th Annual Wealth Creation Study (2018-2023) ‘© Change in management We found change of management to be a key move, widely prevalent among Hockey-Stick Return companies. In most cases, a new management ~ specifically the CEO — infuses fresh blood into the company, leading to a turnaround in its fortunes. Examples: 1. Britannia has seen a change of fortunes since the induction of Varun Berry in 2013, 2. CG Power has significantly turned around after it came into the Murugappa group in 2020, Exhibit 9 Britannia’s and CG Power's fortunes have significantly turned post change in management 5000 6G Power Mkt Cap (INR bn) — Britannia Stock Price (INR) PUINR DT) 4000 Nifty 500 Rebased 3000 os 2000 190104 89 1000 ° 31 949 7 o 4. _Engendering Hockey-Stick valuations ‘Adding P (Price) to TEM AAs discussed so far, TEM ~ Trends, Endowment, Moves ~ combine to drive up a company’s EP. However, in many cases of Hockey-Stick Returns, Hockey-Stick EP growth needs to be combined with Hockey-Stick valuations. This is possible only when the stock is bought at an attractive Price (P). This completes the framework for Hockey-Stick Returns i.e, TEMP. The key question is - what is that attractive P? To answer this, we computed average returns by P/E range and PEG range (PE-to-Growth ie. PE + Future EPS CAGR), Exhibit 20 Return distribution by PE range Exhibit21 Return distribution by PEG range 2013 PE PriceCAGR [Link] 2013PEG | PriceCAGR [Link] Range (x) 2013-23 stocks Range(x) __2013-23__stocks <10 18% 143 <1 24% 131 10-20 18%. 151 12 18% 81 20-30 15%, 61 23 14% 43 330 11% 83 >3 10%. 7 Others 10%. 62 Others. 5% 168 TOTAL 16% 300 TOTAL 16% 300 Note: Others are cases where PE and PEG cannot be meaningfully computed December 2023 1MorILat Oswat 28th Annual Wealth Creation Study (2018-2023) The conclusions are: ‘+ Buying below P/E of 20x improves the chances of Hockey-Stick Returns. ‘+ However, if there is insight on future growth, buying below PEG of 1x significantly enhances the chances of Hockey-Stick Returns. EP-based Valuation: Subject of further research For valuation based on EP, we considered 3 metrics — 1. EP CAGR~ corresponding to PAT CAGR 2. PEP (Price to EP) - Market Cap + EP — corresponding to PE and 3. PEP-G-~PEP-to-Growth (i.e. PEP + Future EP CAGR), corresponding to PEG (PE-to-Future PAT CAGR). We first computed average returns by PEP range (Exhibit 22). We found no clear pattern in the same. We followed it up with returns by PEP-G range (Exhibit 23). Here, we find that the returns are perfectly stacked — lower the PEP-G, higher the return Thus, going strictly by this observation, Hockey-Stick valuations can be engendered by buying stocks below PEP-G of 2x. In the vast mystical space of valuation, the above metrics are a subject of further research and backtesting. Exhibit 22 Return distribution by PEP range Exhibit23 Return distribution by PEP-G range 2013PEP | PriceCAGR [Link] 2013 PEP-G | PriceCAGR No. of Range(x) 2013-23 stocks Range (x) 2013-23 __ stocks <=10 22%: 2 <1 33% 2 10-20 17% 59 12 27% 41 20-30 23% 54 23 21% 24 30.40 16% 54 34 17% v 40.50 21% 34 45 19% 8 >50 16% 83 ST 14% 16 Others 1% 204 >7 15% 34 Others, 12% 341 TOTAL 16% 500 TOTAL 16% 500 Note: Others are cases where PEP and PEP-G cannot be meaningfully computed 5. Hockey-Stick Returns companies Key observations 5.1 Hockey-Stick Returns companies For the purposes of this Study, we define Hockey-Stick Return (HSR) as compounded Price CAGR of 25% over 10 years. Our Study period is 2013 to 2023, and our Study universe is the top 500 companies by market capitalization as of end-2013. There are 54 Hockey-Stick Return companies (HSRs) as tabled in Exhibit 24 December 2023 2MorILat Oswat Exhibit 24 Hockey Stick Return companies ~ 2013-23 28th Annual Wealth Creation Study (2018-2023) 2013-23 EP Quintile 3013.28 EP Quintle company Price cAGR 20132023 Move Company PricecaGR 20132023 Move SRE 5% «3 ~1~«2~”~CAdonitnterprses «30% = ° Tota Es 3 ent 3% SS 2 Bajaj Finance i a 3% 2222~O ° Astral 45% 2432 HoneywellAuto 29% «3 1 VS Motor 42% 3-1 2 Supremeetrochem 29% 3-2 1 Fariindustries 41% +«—«2~=~*S«*S~S*~E*CS*«érgae Enterprises © 29% =SCASSSC ° Escorts Kubota «40% «=~ CTrven Eg, we 4 2 2 Relaxo Footwear «40% «= «3~=~«4~=~SCASCEgEquipments 28% 3S 2 JBChem &Pharma 39% 4 2 <2 ~~—«~Pageindustries = 8K SSS 2 Sundram Fasteners 38% 3-2 ~~~ TVS Holdings m% 23 2 P'lindustries 3% «2K Cements m 2 4 2 Atul 37% 3 —«3~=~C*OS~CKanarin Ceramics —=«27% =~ ° RatnamaniMetas 36% 2 ~~ 2~~~~0~~—-Voltas m 3 4 4 Tirnken Inia 3% 23°22 4M m 5 4 1 Solarindusties «34% == 2~=SOSaS inde nia m 4 2 2 FinolexCables «39% «=< 2S} Canta Pharma mm 2 2 0 Hatsun Agro 33% 3 «3~—=«O~—«Cfoedgeindia) += Persistent Systems 33% | -2 ~—=«1:~=~=S*d:~SC*stsurceSolns. «26% = 2 Ba] Finserv a whe 25S ° IFL Finance 32% 2 ~~«1~~=«~~—Csahilndia Glass o 2 2 Grindwell Norton 32% + -2 ~=«=2~=~SO*O~SSC*Echer Motors we 22 OL 1 wre 32% 243.~~2=2~~«t~~CTtanCompany—=26% 22S ° Abbott india 3% 2 tt Usha Martin 52 3 CeraSanitaryware 33% «3 «3 ~~~0«*FACT mK St 4 Balkrshnainés 31% «2S SSS CV nds mK 232 : Chola. iv.&Fin. 30% «2S Power Bind HOS 4 eM Shriram 30% 22 «0 —~Praindustries mK 32 1 Key observations: + Ofthe 54 HSRs, as many as 31 (57%) saw an upmove in EP Quintiles * 17 (31%) maintained their EP Quintiles + Only 6 (12%) saw a downmove in EP Quintiles 5.2 HSRs by EP Quintiles We plotted the distribution of HSRs by EP Quintiles as under. bxnbit25 Quintiles 2 and 3 are a favorable starting point 20230 %ot wise [a 23 23 | Teta Upmove count total 1 3 3 3102 10 32% fz] 72 1 | a8 astoa: 3 10% joa | 3 03 21 | a2toat 826% a | 5 2 |7 a4toa2 516% s 2 24 1 2/7 Totalofabove 26 BAK Tota a6 a8 63 | sa Totalupmoves 31——=100% Q=Economic Profit Quintile December 2023 2MorILat Oswat 28th Annual Wealth Creation Study (2018-2023) Key observations: ‘+ Ofthe 31 EP Quintile upmoves, 21 (68% i.e. 2 out of every 3) came from Quintiles 2 and 3. ‘+ Quintiles 2 and 3 also offer the highest probability of HSRs — 18% and 19% respectively (highlighted in Total column). ‘+ Exhibit 25 reaffirms the conclusion from Exhibit 9 i. it’s best to start the investing process from EP Quintiles 2 and 3. 5.3 HSRs by EP Quintiles and Market Cap Quintiles Next, we classified the top 500 Market Cap companies in 2013 into 5 Quintiles of 100 each, with Quintile 1 comprising the top 100 companies ranked 1 to 100, and Quintile 5 comprising companies ranked 400 to 500. We plotted the distribution of HSRs by EP Quintiles and Market Cap Quintiles as under. Exhibit 26 HSRs are predominantly small cap in the year of purchase 2013 Market Cap Quintle 2013 Market Cap Q meal a 23 4 8 | Tol wea, a 2345 | Tota 1 [24 3 1 [saa 300 2 | 3 a | 18 2 | 3 3) 37 20 8 | 100 3 | 1 2 5 un] 3/3 6 1 35 40 | 100 a | 1 6 | 7 4 | 2 8 2 3 37 | 100 s|2 1 i 1 2/7 s | 17 30 24 14 15 | 100 Tota [46 AO) 54 ffotal | 100100 [ud0omua0oT=a00n] 500 a= Fconomic Profit Quintile Key observations: ‘+ Of the 300 companies in Market Cap Quintiles 3, 4 and 5, 156 (highlighted in blue in the right table) come under EP Quintiles 2 and 3. Of these 156, 33 (highlighted in biue in the left table) are HSRs, translating to a healthy probability of 21% + Overall, there are 44 HSRs (highlighted in grey in the left table) out of 300 companies in Market Cap Quintiles 3, 4 and 5, translating to a probability of 15%. ‘+ In contrast, there are only 10 HSRs out of 200 companies in Market Cap Quintiles 1 and 2, translating to a low probability of 5%. ‘+ Clearly, HSRs are small caps in the year of purchase. 5.4 HSRs by EP CAGR and P/E In Exhibit 27, we plotted HSRs on a grid with 10-year EP CAGR on the X-axis (whether greater than or equal to 15%) and P/E on the Y-axis (whether it has at least doubled over 2013 to 2023). Key observation: The results are true to form ~ stocks with higher EP CAGR and expanded P/E deliver the highest return, December 2023 FrMorILat Oswat 28th Annual Wealth Creation Study (2018-2023) Exhibit 27 Returns are highest where EP CAGR is high and P/E also expands 2013-23 Price CAGR: 32% 2013-23 Price CAGR: 38% arti Industries Grindwell Nor ‘Abbott india Page Industries Adani Enterprises Hatsun Agro Astral Persistent Systems nul 1K Cements Bafa Finance Praj Industries Yes BajajFinsery SW Steel Coforge Solar Industries Balkrishna Inds Kajaria Ceramics EigiEquipments SRF Brigade Enterprises Ratnamani Metals Firstsource Solns. Sundram Fasteners Cera Sanitaryware Relaxo Footwear Honeywell Auto Tata Elst CM Shriram Titan Company [Link] & Pharma Timken India Escorts Kubota Usha Martin ke. VS Holdings Finolex ables Voltas Plindustries TVS Motor Co. Hockey Stick Valuation (2023 over 2013 P/E at least double?) 2013-23 Price CAGR: 27% 2013-23 Price CAGR : 29% CG Power & Inds Eicher Motors Inf Edge (india) CCholamandalam Inv. Tre IiFLFinance Unde india Supreme Petrochem No ‘Ajanta Pharma VIP Inds Fact Trivent Engg Asahi Ing No Yes Hockey Stick Earnings (2013-23 EP CAGR 5962) Note: Quadrant 1 companies (greyed) are outliers which do not conform to the EP CAGR-PE framework 6. Case Studies The TEMP framework We present case studies of select HSRs based on the TEMP framework — 1. Astral 2. Bajaj Finance 3. JB Chemicals & Pharmaceuticals 4, Plindustries 5. Persistent Systems December 2023 2MotILat Oswat 28th Annual Wealth Creation Study (2018-2023) 6.1 Astral Brief background © Astral is a leading player in the CPVC (chlorinated polyvinyl chloride) pipes and fittings business in India. '* Its product portfolio also includes adhesives, water tanks, faucets, sanitaryware, and paints. © Revenue mix: Piping/Plastics 73%; Adhesive & Paints 23%. Trend Favorable trends for Astral include: ‘+ Shift in demand from unorganized sector to organized sector following implementation of Goods & Services Tax, demonetization, etc. ‘+ Value migration from metals to plastics — high replacement demand from Gl (galvanized iron) pipes to plastic pipes. ‘Within plastic pipes, CPVC pipes can carry hot water, and are a superior alternative to PVC pipes. ‘© Government initiatives to improve penetration of tap water. ‘+ Strong uptick in real estate Endowment In 2013, Astral’s main Endowments were — ‘+ Wide product profile to capitalize on diverse market opportunities ‘+ Nationwide distribution network and ‘+ Strong balance sheet with low debt. Astral levered its favorable Trend and Endowment with some big, bold moves. Moves ‘+ Astrat’s game-changing (and margin-enhancing) move was its decision to discontinue its ti up with Lubrizol and develop its own CPVC technology. It now sources its CPVC compound from Sekisui, Japan. ‘+ Expansion & diversification: Astral has acquired rival companies in pipes. It also entered new product segments such as adhesive solutions, drainage systems, plumbing solutions, faucets & sanitaryware, paints and water tanks. ‘+ Ithas invested heavily in automation and technology, transforming into lean manufacturing ‘+ It has focused on brand-building through multiple marketing strategies such as national brand campaign (Har Ghar me Astral), brand sponsorship in national events like IPL, social media & influencer marketing and co-branding partnerships with other leading brands such as Jaquar, Kohler and Hindware. Price ‘* In March 2013, Astral stock traded at an attractive P/E of 14x. ‘+ Over the next 10 years, the stock has delivered Hockey-Stick Return CAGR of 45%. December 2023 2MorILat Oswat 28th Annual Wealth Creation Study (2018-2023) Exhibit 28 Astral stock has delivered 2013-23 return CAGR of 45% 1,800 1,600 1400 —— Nifty 500 (Rebasea) 11,200 4,000 00 — Astral Stock Price INR) 600 400 200 Mar-16 Mara Mor-a7 Mar-i8 Mar-19 Mar-20 Mar-23 Mar-22 6.2. Bajaj Finance Brief background ‘+ Bajaj Finance (BAF) is a subsidiary of Bajaj Finserv and provides comprehensive financial solutions across retail, SMEs, and commercial sectors, with a focus on Consumer Lending, SME Lending, Commercial Lending, Rural Lending, Deposits, and Partnerships. Trend Favorable trends for BAF over 2013-23 include: ‘+ Steady systemic credit growth of 10%. ‘+ Boom in consumer durables on the back of rising per capita income. ‘* Strong adoption of digital payments BAF levered these trends to deliver an AUM CAGR of 30% over 2013-23, Endowment In 2013, BAF’s main Endowments were ~ ‘+ Strong corporate-parent: The strong brand of Bajaj Group evoked trust in both the lending as well as the deposit raising operations of the company. + Captive market: Back in 2013, BAF was the largest "two-wheeler financier" in the country, It operated at 578 Bajaj dealers and at over 2,130 ofits sub-dealers. + In 2013, it was also the top consumer durables lender in India, operating in 91 cities and financing 13% of all consumer electronics sales. It was present in over 4,500 points of sale across the country. ‘+ Bajaj prioritized sustained customer relationships, targeting those with a positive repayment history of two-wheeler and/or consumer durables loans for personalized loan cross-selling Operating in the top 75 cities, the company financed over 106,000 new customers in 2013. ‘+ The introduction of the EMI (Existing Member Identification) Card and Flexisaver revolutionized the industry, optimizing approval times and enhancing the customer experience, December 2023 2MorILat Oswat 28th Annual Wealth Creation Study (2018-2023) Moves ‘© BAF expanded its “0% interest” offer from consumer durables to lifestyle products like furniture and luxury items, partnering with brands such as @home and Apple. ‘© Using advanced analytics, the company extended loans to doctors and formed strategic partnerships with industry leaders like Bajaj Allianz and HDFC Life, enhancing wealth management channels. Despite global challenges in FY19-20, company showed resilience. in FY23, the company partnered with DBS Bank for co-branded credit cards. ‘+ As of Sep-2023, the company boasts a widespread presence with 3,934 branches and an extensive presence across over 181,000 listribution points, It aims to solidify its position in India's financial sector, targeting a 3% market share in payments GMV, 3-4% in total credit, and 4-5% in retail credit. The strategy includes cross- selling, new product innovations in payments and new product lines in lending like Auto, microfinance, tractor, CV and emerging corporates loans. Price ‘* In March 2013, BAF stock traded at as low as 10x. © Over the next 10 years, the stock has delivered Hockey-Stick Return CAGR of 47%. Exhibit 28 Bajaj Finance stock has delivered 2013-23 return CAGR of 47% 9,000 8,000 7000 — Nifty 500 (Rebased — 8ajaj Finance Stock Price (INR) 6,000 5,006 4,000 3,000 2,000 2,000 Mar-14 Mar-18 Mar-19 Mar-20 Mar-21 Mar-22 Mar-2a Mar-13 Mar Mar-16 Mar-17 6.3. JB Chemicals & Pharmaceuticals Brief background JB Chemicals, established in 1976, is one of India’s fastest growing pharmaceutical companies, and a leading player in the hypertension segment, Besides its strong India presence (54% of revenue, its other two home markets are Russia and South Africa In India, the company has six brands among the top 300 pharma brands in the country. The company exports its finished formulations to over 40 countries including the USA. J.B Chemicals is a leader in the manufacturing of medicated lozenges. It ranks among the top 5 manufacturers globally in medicated and herbal lozenges. December 2023 5MotILat Oswat 28th Annual Wealth Creation Study (2018-2023) Trend Favorable trends for J B Chemicals over 2013-23 include: ‘* Expanding branded Generics Market: Patent Expiries, drug combinations and changing lifestyle are enabling structural growth prospects in India Pharma Market (IPM). Further, enhanced penetration/reach, favorable insurance policies, government led healthcare benefits and increased awareness is driving growth of IPM. ‘+ Focus on Innovation and R&D: Pharmaceutical companies are investing heavily in R&D of newer drugs and better treatments. This is leading to the development of innovative products and technologies that are improving health outcomes. Indian pharma companies are investing an estimated 7-8% of their revenue in R&D. ‘+ Rise of the Chronic Disease Burden: The increasing prevalence of chronic diseases such as diabetes, cancer, and cardiovascular diseases is creating demand for new and effective treatments. Endowment ‘+ Strong brand portfolio: | B Chemicals has a strong brand portfolio with well-established brands like Rantac, Glycomet, and Nicotex. ‘+ Solid production capacity: It has 8 state-of-the-art manufacturing facilities in India including a dedicated facility for lozenges. The plants are backward-integrated and cost-effective ‘+ Extensive Distribution Network: The company has a wide and well-entrenched distribution network across India. ‘+ Focus on Marketing/promotions: The company has invested heavily in marketing efforts through strong medical representatives (MR) base and implementing innovative ways to aid strong brand recall among key influencers for offtake of medicines. ‘+ Experienced Management Team: The company has a strong and experienced management team with a proven track record of success. Moves ‘+ Focus on core business: In CY11, the company divested its non-core businesses, such as the OTC portfolio in Russia, Ukraine, and CIS, to focus on its core pharmaceutical business. ‘+ Expansion into new therapeutic areas: The company has expanded its product portfolio by entering new therapeutic areas such as diabetes, nephrology, respiratory, virology (CY21) and probiotics/reproductive health segment (C¥22) ‘+ Increased focus on exports: The company has increased its focus on exports to diversify revenue base and reduce its dependence on the domestic market ‘+ Investment in R&D: The company has increased its investment in R&D to develop new and innovative products. ‘+ Change of ownership: In July 2020, KKR & Co acquired a 54% promoter stake of the company. Since then, Mr Nikhil Chopra has been its CEO and Whole-time Director. ‘+ Cost reduction initiatives: The company has implemented a number of cost reduction initiatives, such as lean manufacturing and process automation, to improve its operational efficiency. Price ‘+ In March 2013, J B Chemicals stock traded at as low as 10x. * Over the next 10 years, the stock has delivered Hockey-Stick Return CAGR of 39%. December 2023 26MorILat Oswat 28th Annual Wealth Creation Study (2018-2023) Exhibit 30 4 B Chemicals stock has delivered 2013-23 return CAGR of 39% 1,200 — ! Bchem Stock Price (INR) 3,000 — Nifty 500 (Rebases) 800 600 400 200 Mara3 Mara Maras Marae Mar20 Mar2a Mar22 Mar23 6.4 Pl industries Brief background ‘+ Plisan integrated agri chemicals solution company. It caters to complex chemistry solutions market in agri and other fine chemicals areas across the world. ‘+ Itcurrently has two broad verticals: (1) Custom Synthesis & Manufacturing (CSM, 77% of 2023 revenue, and (2) Domestic formulations business (23% of revenue). Trend Favorable trends for P | industries over 2013-23 include: ‘* Increased outsourcing by global agrochemical players to eastern countries. ‘© High focus of customers on partners with R&D and strong chemistry skills. ‘+ Rising per capita application of pesticides in domestic market. ‘+ Partnership driven approach both for manufacturing and marketing. * Focus on safe and sustainable manufacturing practices. Endowment ‘© Robust manufacturing infrastructure: 5 formulation facilities and 15 multipurpose manufacturing plants spread across 4 manufacturing locations. ‘+ State-of-the-art R&D with comprehensive infrastructure at Udai than 470 scientists and engineers. ur, Rajasthan with more ‘* Long-term partnerships with leading companies globally (especially Japanese), providing them solutions across the fields of R&D, regulatory services, manufacturing services, application development, marketing, distribution, and customer connect initiatives. ‘+ Non-compete business model and respect for IP ~ long history of 20 years in CSM business without any IP violations. ‘+ Expertise in chemistry and process engineering. ‘* Globally competitive cost advantage. December 2023 7MorILat Oswat December 2023 28th Annual Wealth Creation Study (2018-2023) Moves ‘* Consistently investing in R&D (3% of revenue and 15% of EBITDA over last 10 years). Focus on innovator business with patented molecules contributing more than 90% of exports business Built technical capabilities with team of more than 500 scientists and researchers. Global scale manufacturing assets certified by international agencies and customers. ‘+ Diversified into Pharma and specialty chemicals. Inorganic expansion to build scale and gain technical expertise. Price ‘* In March 2013, PI stock traded at 18x. ‘+ Over the next 10 years, the stock has delivered Hockey-Stick Return CAGR of 37% Exhibit 31 Pl stock has delivered 2013-23 return CAGR of 37% 4,000 SP linds Stock Price (NR) 3,800 — Nifty 500 (Rebased) 3,000 2,500 2,000 1,800 1,000 500 ° Mar-13 Mara Mar-15 Mar-16 Mar-a7 Mar-38 Mar-19 Mar-20 Mar-23 Mar-22 Mar-23 6.5 Persistent Systems Brief background Persistent Systems is a global IT services and solutions company with a focus on Digital Engineering and Enterprise Modernization. It has about 23,000 employees in 21 countries and is among the fastest-growing Indian IT Services company over last 5 years. Persistent Systems has annualized revenues of over USD 1.1 bn and is valued at USD 6 bn. Trend IT services industry went through a tectonic shift over the last decade, with traditional outsourcing commoditizing and Digital and Cloud led services being the growth levers. Similarly, outsourcing of areas like product and software engineering services gained acceptance, providing strong growth momentum to companies like Persistent Systems. ‘Smaller companies have also benefitted from a focus on specific industry verticals. FryMorILat Oswat 28th Annual Wealth Creation Study (2018-2023) Endowment ‘Persistent has always focused on the relatively premium development end of the IT services market, which helped it attract quality talent. ‘+ Its capabilities in product engineering services and work with large software developers provided a relatively unique capability set with less competition, ‘+ The company has fostered an employee-friendly environment with above average compensation vs industry peers, helping retain good talent. Moves ‘+ After an IBM partnership driven model between 2013 and 2020, Persistent shifted its focus towards Cloud led IT services, resulting in growth acceleration. ‘+ The company appointed Mr Sandeep Kalra as CEO in late 2020. Mr Kalra has been instrumental in driving the internal change in focus towards IT services from low growth. software support work. ‘+ Mr Kalra also revamped its sales team to enable high growth, resulting in number of large clients doubling over last 2 years along with a significant reduction in top client concentration. ‘+ Persistent has also meaningfully strengthened its relationship with large hyperscalers through organic and inorganic routes, helping it tap into high-growth Cloud services demand. Price ‘+ In March 2013, Persistent stock traded at an attractive P/E of 12x. ‘+ Over the next 10 years, the stock has delivered return CAGR of 33%. Exhibit 32 Persistent stock has delivered 2013-23 return CAGR of 33% 6,000 — Persistent Systems Stock Price (INR) 5,000 — Nifty 500 (Rebased) 4,000 3,000 2,000 1,000 Mara3 Maras Maras Mar-i6 Mara7 Marta Mar-19 Mar-20 Mar-24 Mar-22 Mar-23 December 2023 3MorILat Oswat 7. 28th Annual Wealth Creation Study (2018-2023) Conclusions Economic Profit is a superior metric to Accounting Profit to understand true profitability of a company. TEM (Trend, Endowment and Moves) is a sound strategy for companies to move up the Economic Profit Power Curve. Successful TEM compa Returns. Mid and small caps are favorably placed to deliver Hockey bought at reasonable price improve the chances of Hockey-Stick Returns, December 2023 30MorILat Oswat 28th Annual Wealth Creation Study (2018-2023) Annexure: Hockey Stick Return companies ~ 2013-23 (Alphabetical order) 2013-23 2013-23 Company Price CAGR 2013 ‘Move Company Price CAGR 2013 ‘Move ‘arti Industries 41% 2 a Info Edge (India) 26% 3 2 Abbott India 31% 2 1 1B Chem & Pharma 39% 4 2 ‘Adani Enterprises 30% 5 ° JK Cements 27% 2 2 Ajanta Pharma 27% 2 ° J5W Stee! 26% 5 ° ‘Asahi India Glass 26% 4 2 Kajaria Ceramics 27% 2 ° Astral 45% 3 a KRBL 32% 3 1 Atul 37% 3 0 Linde India 27% 4 2 Bajaj Finance 47% 1 ° Pl Industries 37% 2 1 Bajaj Finserv 32% 1 ° Page Industries 28% 2 1 Balkrishna Inds 31% 2 ° Persistent Systems 33% 2 1 BEML 27% 5 1 Praj Industries 25% 3 1 Brigade Enterprises 29% 4 o Ratnamani Metals 36% 2 ° Cera Sanitaryware 31% 3 o Relaxo Footwear 40% 3 a €G Power & Ind 25% 5 4 Solar Industries 34% 2 1 Chola. nv. & Fin. 30% 2 1 SRF 53% 3 2 Coforge 30% 2 ° Sundram Fasteners 38% 3 1 DCM Shriram 30% 2 ° Supreme Petrochem 29% 3 1 Eicher Motors 26% 2 a Tata Elxsi 51% 3 2 Elgi Equipments 28% 3 a Timken India 35% 3 1 Escorts Kubota 40% 4 ° Titan Company 26% 1 ° FACT 25% 5 4 Trent 30% 5 2 Finolex Cables 33% 2 a Triveni Engg 28% 4 2 Firstsource Soins. 26% 4 2 TVS Holdings 27% 3 1 Grindwell Norton 32% 2 ° VS Motor 42% 3 2 Hatsun Agro 33% 3 ° Usha Martin 26% 5 3 Honeywell Auto 29% 3 1 VIP Inds 25% 3 1 IIFL Finance 32% 2 1 Voltas 27% 3 a December 2023 aMorILat Oswar 28th Annual Wealth Creation Study (2018-2023) 2018-23 Wealth Creation Study: Detailed findingsMorILat Oswar 28th Annual Wealth Creation Study (2018-2023) Hen 2018-23 Wealth Created at INR 70.5 trillion = During 2018-23, the top 100 Wealth Creators of India Inc created wealth of INR 70.5 trillion, lower than the previous 5-year period 2017-22. Pace of Wealth Creation at 21% CAGR is also lower than the previous 5-year period, but well higher than the BSE Sensex return of 12%, Wealth Creation Exhibit 1 2018-23 Wealth Created at INR 70.5 trillion Wealth Creation trend 922 (INR trillion) roa | | 705 sen #9 29 342 : 24 265 294 pa 28.4 261 ge sas are ees 22888 8 ssegeg35 ee ee8 28 885 8 cave 2018-23 pace of Wealth Creations 2% CAGR visi benchmar’s 22% CAGR son Weath crested CAGR (1) (Figures in brackets are Sensex CAGR) (30% 89% (15%) (14%) 2896 ( (245) 28% (1235 21% 2003-08 2004-09 2005-10 2006-11 2007-12 2008-13 2009-14 2010-15 2011-16 2012-17 2013-18 2014-19 B58 2015-20 2016.21 2017-22 2018-23 Forget markets, think stocks: For the past 9 successive study periods, market benchmark indices have delivered muted returns ranging from 5% to 15%. Still, the top Wealth Creators have maintained their track record of 10-15% outperformance over the benchmark. This reinforces our pet take on market strategy, “Forget markets, think stocks.”