‘Bulk of wealth is created in the firm’s growth advantage period’

On the eve of the launch of its 22nd Annual Wealth Creation study, RAAMDEO AGRAWAL, co-founder and joint managing director, Motilal Oswal Financial Services, talks to Vishal Chhabria on the learnings from the latest initiative. He also shares his views on

What are the key learnings from the annual wealth creation study? At the start of this study, we looked at CAP (Competitive Advantage Period) and GAP (earnings’ Growth Advantage Period) of a company, to gauge the power of longevity in wealth creation. Businesses have a very long life (longevity). TCS, Infosys, HDFC Bank, Marico, etc., were not built in a day but over many years, and their ability to sustain competitive advantage and high earnings growth have helped their market value rise multi-fold. So, identifying a machine with longevity, where you buy and hold, is important.How long a company is going to grow, at what speed and how long is it going to remain highly profitable, are crucial factors. There will always be times when competition or external factors bring down the CAP. CAP measures the longevity of competitive advantage. But since CAP alone is not sufficient, measuring longevity of growth is also vital. GAP helps measure how long a company’s earnings could grow faster. How do you go about identifying the companies? There are two frameworks. The level of attractiveness of an industry’s structure and the company strategy help determine CAP. “The five forces model” of Michael Porter tells us whether fundamentally an industry structure is profitable or not. Today, telecom has a very interesting industry structure, but internal rivalry, the fifth force, is so intense that nobody is making money. So, it is unlikely that investors can make money. Liquor and cigarettes are examples of a very good industry structure. Apart from industry structure, the company’s strategy and its mindset to grow is very important. So that’s at a CAP level.The more difficult one is GAP. Bulk of the wealth in a stock is created in its GAP. GAP is the time during which a company grows its profits at a faster rate than peers. Equally important, there has to be scope for the industry to grow at a fast pace. If it is growing by four-five per cent, then it is tough for a company to grow at say, 25 per cent. Software services is a recent example. Do you see the life cycle of companies and their GAP shortening? Yes, in some businesses, but it is not necessary. Technology is making things faster and better. The delivery channels have become better, customers are well-informed. But, fundamentally, businesses don’t change. Like, banking is becoming faster because they are using a lot of technology, but good banks are making more money than ever. But yes, the GAP is shortening. On an average, the median number of years is 9-10 for good companies currently. Is there a common thread between the winners and losers? Yes. Increasingly, what I realised in the past 30-35 years, is that the quality and competence of management is a huge differentiator. In this entire scheme of things, where does price stand? It is very important. Investing is not complete unless you buy at a reasonable price. But, this study is not focussed on price, but on longevity. Given the valuations across the board, what is your call on the near-term outlook for markets? Today, valuations are lofty, which I’ve not seen in many years. Everything seems priced in. But, whether there will be correction or not, I don’t know. But, two-three things are clear. One, domestic flow is very sound. Valuations are such that there is a massive supply (of fresh equity paper) also. So, there is a good meeting of supply and demand. Foreigners, issuers, existing promoters, government, many people are selling. It’s a fantastic situation where the real economy and companies are getting money.

The world is watching for earnings and the economy to turn around. Once the economy turns around, many companies will do very well. My strategy is to find value and such companies. Let’s not bother about what the market is doing.