Download Motilal Oswal 23rd Annual Wealth Creation Study

Motilal Oswal 23rd Annual Wealth Creation Study

Highlights

(i) The two key drivers of Intrinsic Value are Return on Equity (RoE) and Earnings growth

(ii) Companies create Intrinsic Value only when they earn RoE higher than Cost of Equity

(iii) Low RoE companies must focus on increasing RoE, high RoE companies on increasing growth

(iv) Both high RoE and high Earnings growth are difficult to sustain

(v) PEG (P/E to Growth ratio) less than 1x is a near-infallible formula for healthy outperformance

Conclusion

(i) Buy QGLP – Quality, Growth, Longevity at reasonable Price

(ii) The two key drivers of value are RoE and Earnings growth.

(iii) Companies create Intrinsic Value only when they earn RoE higher than Cost of Equity.

If RoE is exactly equal to Cost of Equity, any level of growth creates no value.

(iv) Low RoE companies must focus on increasing RoE, high RoE companies on increasing growth.

(v) Both high RoE and high Earnings growth are difficult to sustain, especially Earnings growth.

Hence, stocks whose rich valuations factor in such high growth rates to sustain will most likely disappoint.

(vi) PEG less than 1x is a near-infallible formula for healthy outperformance.

(vii) Any growth insight is valuable, even if it means only for the next one year.

(viii) Valuations above 50x P/E have a very low probability of generating market outperformance.

(viiii) Buy QGLP – stocks with high-Quality business run by high-Quality management, with healthy earnings Growth to be sustained over a Long period (at least 5-6 years), at reasonable Price, preferably PEG less than 1x.

(ix) And finally, investors must seriously consider selling stocks in their portfolio trading at 3x PEG or 2x relative to market, whichever is higher.