Wealth creating companies have substantially high RoE (Return on
Equity) and RoCE (Return on Capital Employed). There is also a high
correlation between RoE and P/E.
In an era of nascent equity
markets, MNCs enjoy high
traction with investors. Thus,
over 1991-96, MNCs were only
5% of total listed companies,
but accounted for 32% of top
100 wealth creators during the
period.”
Businesses with high entry
barriers (e.g. arising out of
proprietary knowledge in
technology/marketing such
as in pharmaceuticals) are
more likely to feature among
top wealth creators.
Focused companies are more
likely to create sustained
wealth, rather than diversified
companies.
Mid-cap stocks have the
propensity to create wealth
faster than heavyweight blue
chips but the surety of wealth
creation is greater for large
caps.
Right judgment of long-term
sustainability, prosperity of
business, and responsible
management play a crucial
role in identifying wealth
creators.
Wealth creation occurs when
a great management runs
a great business. But if an
outsider were to buy into such
great businesses through the
stock market,
he/she must enter at the
right price to earn substantial
appreciation.
Hero MotoCorp (earlier known
as Hero Honda) is one of
Motilal Oswal’s earliest QGLP
ideas, and a classic example of
how “Wealth creation occurs
when a great management runs
a great business.”
Quality #1 – Great management
Hero MotoCorp started off in
the mid-1980s as a JV between
Honda, the world’s No.1 twowheeler company and Hero
Group, the largest manufacturer
of bicycles in India.
#2 - Great business
In India, two-wheelers is a great
business given (1) the huge size
of opportunity, and
(2) limited competition. In
a developing economy, a
two-wheeler is the entrylevel vehicle for motorised
personal transportation. The
opportunity is enormous, both
in India and globally. India has
a large population with an
aspiring middle class, which
helps create a huge market for
two-wheelers. Even outside
India, unlike cars, not many
companies make two-wheelers.
Also, the business enjoys
negative working capital thanks
to on-cash sales coupled with
outsourcing of components.
Growth
Hero Honda was the first
company to launch the fuelefficient 4-stroke motorcycle
in India, which was then a
predominantly scooter-driven
market. In fact, Hero Honda spearheaded the whole value
migration within Indian twowheeler market from scooters
to motorcycles. It is today
India’s largest two-wheeler
company by far.
Longevity
A motorcycle typically has an
average life of about 10 years.
Hence, there is an attractive
replacement opportunity as well. Longevity of the business
is almost assured.
Price
The Indian two-wheeler
opportunity could be bought at
less than ` 1,000 crores in mid1997. Since then, the stock has
compounded 25% every year
for 21 years to-date v/s 12% for
the Sensex.
Laying the Foundation
Looking back, the very first wealth
creation study covered all 4 pillars of
our QGLP Investment Philosophy.
One of the key highlights of the study
is - “Right judgment of long-term
sustainability, prosperity of business,
and responsible management play
a crucial role in identifying wealth
creators.” This essentially covers
Q(uality), G(rowth) and L(ongevity).
MNCs and businesses with high entry
barriers were prominent wealth creators
even during the first study, suggesting
the importance of quality – both of
business and of management.
A business can be called ‘great’ when
it combines Quality, Growth and
Longevity. Having identified such great
businesses, investors then need to
ensure that they buy the stocks at the
right P(rice).
The final highlight of the study puts it
all together – “Wealth creation occurs
when a great management runs a great
business. But, for an outsider to buy into
such great businesses through the stock
market, he/she must enter at the right
price to earn substantial appreciation.”
Finally, the essence of the first study
also confirms that Quality does not
necessarily come cheap. “There is also
a high correlation between RoE (i.e.
representing Quality) and P/E (i.e.
representing Price).”
It is only when all of QGLP is understood
and practised in a disciplined manner
that sustained wealth can be created in
equity investing.