When Raamdeo Agrawal pointed out how a paltry investment of Rs. 1 lakh in ITC became a fortune worth Rs. 20 crore in 25 years, a lot of people sat up and took notice.
There are several other such instances where the right stocks, if held for long periods of time, have become incredible multibaggers and led to fantastic wealth creation.
Raamdeo Agrawal emphasizes that the task of finding a similar wealth creator stock like ITC, Asian Paints, Nestle etc does not have to be one of chance and luck. Instead, because wealth creator stocks exhibit definite characteristics, if you can spot those characteristics early on, your chance of bagging a wealth creator stock is substantially increased.
In the Motilal Oswal Wealth Creation Study, Raamdeo Agrawal has proceeded on a systematic basis. He has identified the factors that must be present both at the industry level as well as at the company level for a stock to become a winner. Let’s take a quick look at those factors:
|Check-list Of Factors At The Industry Level|
|(i) Competitive landscape and bargaining power:||Is the industry’s competitive landscape favorable? Do players enjoy superior bargaining power / terms of trade with customers and/or suppliers?|
|(ii) Size of opportunity and profit pool:||Does the industry enjoy a large profit pool which can be effectively tapped into by a company with a unique value proposition or strategy?|
|(iii) Value migration:||Is the industry showing trends of value migration? Or does it offer opportunity for the same in future?|
|(iv) Stability of industry:||Is the industry fairly stable i.e. less prone to destabilizing factors like business cyclicality, high production innovation, and regulatory controls?|
|(v) New industry or strategic opportunity:||Is it a new industry or strategic opportunity with huge potential?|
|Check-list Of Factors At The Company Level|
|(i) Quality of corporate-parent / management:||Does the company have a solid corporate-parent and management team?|
|(ii) Unique value proposition or strategy:||Does the company have a unique value proposition or strategy to overcome competitive forces?|
|(iii) Nature of business:||Does the company enjoy Consumer Advantage or Production Advantage? How strong is the advantage?|
|(iv) Market leader or pioneer:||Is the company a market leader or a pioneer?|
Converting Theory Into Practice:
Now, identifying these factors in theory is easy. It is in putting it to practice that the difficulty arises. This is where Raamdeo Agrawal’s wisdom and experience comes in handy.
Having identified the characteristics that a potential multibagger must have, Raamdeo Agrawal has put the theory to test by doing back-testing and applying the methodology to identify potential Emerging Value Creators. He has identified the following five stocks:
|(INR b)||FY13||1HFY14 Growth|
|RoE %||PAT Gr. %||Sales %||PAT %||Price (INR)||P/E (x)|
What you will notice from the said five stocks is:
(i) All of them have a high ROE in FY 2013 (and earlier). The lowest ROE is 24%;
(ii) The PAT growth in FY 2013 has been good, ranging from 11% for Symphony to 43% for Zydus;
(iii) In HY FY 2014, the companies have recorded good sales and profit growth. Bajaj Finserv has reported a 33% growth in sales and a 35% growth in PAT;
(iv) the Price to Earnings (P/E) ratio is reasonable based on the current prices. It ranges from a low of 5 for Cairn to a high of 23 for Symphony;
(v) Each of the stocks has a strong competitive edge which gives it an edge over its competitors (such as a strong brand name for the consumer companies to exclusive access to an oil well for Cairn);
(vi) All the companies are well-known for their ethical and efficient management.
Do you have any of these 5 stocks in your portfolio (I have Bajaj Finserv & Bajaj Corp)? If not, you need to seriously consider whether to add them.