Financials emerge largest wealth creating sector

A detailed annual study on wealth creation has thrown up a surprise this year. For the first time, the financial sector has emerged as the top wealth creating sector.

This new leading wealth creating sector has steadily increased its share of wealth from 12 percent in financial year 2006 to 24 percent in financial year 2011, the 16th Annual Wealth Creation Study (2006-11) by Motilal Oswal Securities has found.

At Rs 5,19,400 crore, this is the second highest ever wealth created by any sector in a span of five years, after Oil & Gas in the peak of the commodity boom over 2003-08.

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For the purpose of its study, Motilal Oswal identified the top 100 Wealth Creators in the Indian stock market for the period 2006-2011. These companies have the distinction of having added at least Rs 100 crore to their market capitalisation over the period of five years, after adjusting for dilution.

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Among companies, Reliance Industries (RIL) has emerged as the biggest wealth creator for the fifth time in a row, from 2007. Motilal Oswal says this is a record and the first time that a company has emerged the biggest wealth creator for five years in a row. “The only other instance has been Hindustan Unilever (HUL) which has also emerged the biggest wealth creator five times, of which only four were in a row from 1996 to 1999,” the latest study notes.

Tech companies, mainly TCS and Infosys, are hot on its heels, and one of them is likely to claim the top slot going forward.

“Incidentally, Warren Buffet too is positive on the long term prospects of Energy and Technology related businesses, his latest mega investment being 5 percent stake in IBM for $10 billion,” says the study.

Financials is also the fastest wealth creating sector with price (i.e.market cap) CAGR of 28 percent, significantly higher than the average of 18 percent. “This has been made possible by two factors: 5-year PAT CAGR of 25 percent, higher than the average of 20%, in turn, leading to lowering of valuation discount from 23 percentin FY06 to just 6 percent in FY11,” says the report. Going forward, the brokerage estimates that the importance of financials will increase further as insurance companies get listed, and new banking licences get issued.

For the first time, more than 10 companies have qualified for the title of Most Consistent Wealth Creators, by featuring among the top 100 wealth creators in 10 consecutive studies. In such a case, 10-year price CAGR is used as the tie-breaker, and Kotak Mahindra Bank has emerged the fastest on that count, the study notes. HDFC and HDFC Bank also figure in the list of top 10 Most Consistent Wealth Creators.

According to the study, private sector financials are emerging as blue chip stocks with high, and more importantly, consistent growth performance.

However, public sector undertakings (PSUs), despite their size, continue to disappoint on the wealth creation front. Their share of wealth creation has increased marginally from 22 percent in the last study to 24 percent this year, thanks mainly to ONGC, NMDC and SBI, the report says.

On fundamental parameters, PSUs continue to underperform their private sector counterparts: FY06-11 Sales CAGR of 16 percent (28 percent for private) and PAT CAGR of 14 percent (24 percent for private).

PSUs’ price CAGR is in line with PAT CAGR at 14 percent, well below 21 percent for the private sector. “The only consolation is that PSU P/E has held up at 13x, unlike the private sector which has seen a de-rating from 22x in FY06 to 19x in FY11,” the study points out.

Wealth destroyers

During FY06-11, total wealth destroyed at Rs 3,25,400 crore is about 15 percent of the total wealth created of about Rs 22,00,000 crore. This reflects the significant deterioration of the Indian market over FY10. In its last study covering FY05-10, wealth destroyed was a mere 2 percent of the wealth created. The number of wealth destroying companies has also significantly increased to 1,036 from 650 in the previous study. Four sectors - Capital Goods, telecom, technology, construction/real estate account for 56 percent of the wealth destroyed. “Just 3 companies - Suzlon, RCom and Satyam Computers - account for a whopping 25 percent of the total wealth destroyed,” the study says.