"We are never confused about why we exist. Although volume growth, earnings, returns and cash flow are critical priorities, our people understand those measurements are all simply the means to the long-term end of creating value for our share owners." -- the late Roberto Goizueta, ex-CEO, Coca-Cola.

Goizueta would be turning in his grave if he took one look at our value creators of the past 10 years. When banks pay you 8% per annum, every few years a handful of stocks fetch anything between 100%-200% returns. They are the value creators Goizueta had in mind.

These companies have patience, imagination, strategy and the stamina to deliver value for their shareholders. They give the real meaning to stock investing.

Unfortunately, that is only part of the story. The nice part.

While academics, analysts and consultants would have you believe that corporate governance, credibility, honesty and consistent growth ensures increase in shareholder value, all this can be easily negated by a period of frenzied, mindless speculation that distorts value horrendously even over a 10-year horizon.

If you are in the middle of a crazy a bull run, you are likely to get the most unlikely names as wealth creators -- names that have left us baffled. At the same time, the best names in the Indian corporate sector have languished low in the list of wealth-creators.

Two stories emerge from our list of wealth creators over the past 10 years.

One, the unavoidable story of red-hot speculation that has gripped the Indian market for the past three years. This has led to the rise of a shining new sector -- property and construction -- from within the ashes of dozens of value destroyers in steel, textiles, consumer products, which have vast land holdings in urban areas. Speculative fever has also afflicted smaller-sized companies propelling many small-cap and mid-cap companies very high in the wealth-creation ranking. The sheer force of speculation has pushed low-profile companies high up in the wealth-creators' list.

The second story is that of the very average performance in the wealth-creation sweepstakes by some of the best names in the Indian corporate sector.

Low Profile, High Rank

Arrow Webtex (Rank: 15), Panoramic Universal (Rank: 16), Jetking Infotrain (Rank: 20), Investment and Precision Castings (Rank: 24), Alchemist (Rank: 36). . .

Have you even heard of these companies? They do not figure in the list of stocks any analyst tracks. TV journalists do not chase the CEOs of these companies for sound bites. And yet, they have recorded the fastest growth rates in total shareholder returns (TSR) over the past 10 years.

Their natural habitat is probably the message boards of trading portals or investment blogs. These stocks have been swept high up on the list by hyper speculation of the past three years.

What else would you say about a stock like Donear Industries which ranked 4th -- above Reliance, Infosys, Wipro and many other outstanding companies in wealth-creation over 10 years? Donear is supposed to be a "fashion fabric" company. What is it that has pushed up a textile manufacturer so high when the textile story has been disappointing?

All one knows is that Donear is setting up a Rs 140 crore shirting project in Surat which is likely to enhance exports. Well, shirting is a commodity business and has been a graveyard for Arvind Mills. Haven't investors found a better sector to buy other than textiles or are some big players ramping up the stock? Citigroup Global Markets recently bought a large stake into this company pushing up the price substantially.

Where are stocks like these headed? They are bound to end up with poor TSR in the future. Long-term sustainable value can be built only through sustained performance. Often, companies and sectors, which do very well for a few years, stagnate in the following years. Indeed, in every bull market, one or two sectors do extremely well where even garbage floats to the top. Since value is a function of performance and perception, a slight change in either is enough to cause prices to tumble.

Growth invariably slows down and today's hot sectors turn cold. Even more likely, players in these hot sectors get giddy-headed and make big mistakes.

Company	TSR Rank	TSR (%)	Mkt Cap in1996
Unitech	1	34196%	73.74
Matrix Laboratories	2	29910%	3.16
Phoenix Mills	3	28935%	5.26
Donear Industries	4	28533%	3.96
Vimta Labs	5	27799%	1.16
Pantaloon Retail	6	20412%	3.55
Infosys Technologies	7	19583%	751.82
Mercator Lines	8	19545%	3.84
Wipro	9	17319%	580.89
Patel Engineering	10	17075%	7.45
Satyam Computers	11	16942%	137.80
Financial Technologies	12	16342%	2.73
Havells India	13	15928%	7.22
Lakshmi Energy & Foods	14	12586%	6.01
Arrow Webtex	15	12281%	2.62
Panoramic Universal	16	11587%	0.88
Prime Prop. Devp. Corpn.	17	11518%	0.94
Aban Offshore	18	10592%	32.49
Amtek Auto	19	10590%	10.62
Jetking Infotrain	20	9557%	0.50

High Profile, Low Rank

At the same time, look at the absence of the most luminous names among the Indian corporate sector from the ranks of top value creators. One of the best ways to look at how blue chip stocks have done is to consider what you would have got had you invested in Sensex stocks in 1996. Over 10 years, the Sensex had gained 347%.

To start with, 15 of the 30 stocks that comprised the Sensex in 1996 were booted out because they ceased to meet the criteria of size and liquidity. How did companies that exited the Sensex do?

Great Eastern Shipping and Nestle are the only two companies that have managed to outperform the Sensex in the last 10 years. GE Shipping managed to reward its shareholders with a 683% return (Rank: 400) among the sample while Nestle earned a 405% return (Rank: 586).

Tata Power with a 328% return (Rank: 665), Steel Authority with 302% (Rank: 694) narrowly under-performed the Sensex followed by Indian Hotels 203% (Rank: 845) and IPCL 134% (Rank: 969). While HPCL with 72% (Rank: 1097), Tata Chemicals with 63% (Rank: 1126) and Colgate with 50% (Rank: 1163) were hopeless laggards. The worst were MTNL and Arvind Mills, which eroded investors' wealth by 27% (Rank:1451) and 53% (Rank:1367), respectively over the past 10 years.

Of the 15 that remained in the Sensex throughout the 10-year period, only 10 stocks beat the Sensex. Cement manufacturer, Gujarat Ambuja was the best performer with a return of 1074% (Rank: 258), followed by ITC, which returned 940% (Rank: 288). Reliance, ACC, L&T and BHEL were in the mid-league, returning 821% (Rank: 333), 799% (Rank: 344), 688% (Rank:398) and 660% (Rank:415), respectively. Ranbaxy, Grasim, Tata Steel and Bajaj Auto were among the last four companies to have managed a performance better than the overall index in the last ten years.

Ranbaxy's TSR was 534% (Rank: 478), while Grasim was not far behind with a TSR of 515% (Rank: 487). Tata Steel and Bajaj Auto have created a comparatively higher value for their stakeholders with a TSR of 390% (Rank: 606) and 387% (Rank: 611) among the 1593 companies. Banking giant SBI returned 259% (Rank: 735), Hindustan Lever, once a darling of Indian investors returned 252% (Rank 750) and Hindalco 233% (Rank 786). The worst were Tata Motors and Reliance Energy, which returned 148% (Rank: 948) and 128% (Rank: 984), respectively.

The bottom five companies have not managed to even equal the index returns over the past 10 years.

Why have these companies with plenty of resources, experience and market dominance failed to create value? Raising shareholder value is like mountaineering. To remain even a modest value creator you have to keep climbing.

As you go higher, it gets tougher to climb the same distance. A 1000-feet climb from the bottom is not the same thing as going from 10,000 feet to 11,000 feet and climbing another 500 feet from a mountain ledge that is 15,000 feet high is so much harder.

Moreover, hanging on courageously to a 15,000-feet ledge is not the market's idea of growth and value. You will be applauded for your endurance but the money will be on a company several thousand feet below but is moving fast. To use another common metaphor, value creation is like being on a treadmill. You have to keep running (growing) to stay where you are (to maintain value).

Most people find it hard to understand that that for mature and large companies, even if 'performance is good', shareholder value may not keep rising. But the market is clear about it. That is why Hindustan Lever gets a TSR rank of 750.

Also, in a growing economy like India's, new sectors emerge, attracting smart capital and investment interest. Since the fastest growth is from the smallest base and there is always a fancy for new companies, investors like to bet on companies that are at the base of the mountain.

Where do we go from here? The wishes, capriciousness, fancies of the market will play upon shareholder value, especially as long as India remains a hot market for global and local speculators.

The property companies will continue to dominate the top 100 list for a while, the three software companies -- Infosys, Wipro and Satyam -- too will continue to create value. But, unless there is major restructuring, the public sector behemoths are destined to remain value destroyers.

Somewhere in the middle, just about beating the market indices, will be the large Indian and foreign companies with great brands and lineage. What can an individual company do to create wealth? Just as one cannot change one's parents, there is little a company can do to change its ranking, if it finds itself in a sluggish sector. Look at Tisco, which had a TSR rank of 606.

Elephants Can't Dance

Market cap has nothing to do with value creation

Company	Mkt Cap in1996	TSR (%)	TSR Rank
ONGC	29,301.43	614%	438
IOC	24,514.98	245%	758
HLL	15,538.42	252%	750
MTNL	15,343.35	-27%	1367
SBI	14,717.86	259%	735
Reliance	12,077.68	821%	333
I T C	9,458.98	940%	288
Tata Motors	9,213.26	148%	948
VSNL	9,064.01	166%	916
SAIL	8,588.96	302%	694

One of the commonest misconceptions -- often spread by the media -- is to equate market capitalisation to value. What creates value is the change in market price and not absolute market value. Without it, given their size of operations, ONGC and IOC would have been great value creators.

Also, consider the case of a company that buys back 20% of its equity and the market price goes up by 15%. Market capitalisation falls, but shareholders gain. Where would you have been, if you had tried to hitch a ride on the back of giant companies because their market cap impressed you?

Look at the table. ONGC, IOC and MTNL have all recorded poor TSRs. You would have been better off putting your money in safe bank deposits.

As Solid as the Bricks?

There is no identifiable property sector among the listed stocks as yet. And still, the biggest wealth creators have been companies with a property play embedded in them

Robust economic growth, low interest rates, demographic change, rising affordability and the impact of foreign direct investment has made real estate the hottest sector today. No wonder, three of the top 10 value creators were from realty and construction. Companies, even with a remote connection to these two sectors, have seen a huge market interest, distorting our list completely and pushing excellent well-run companies by the wayside.

Take, for instance, Phoenix Mills, which has risen miraculously from the ashes to emerge as a big wealth-creator (return:28935%, rank:3). Phoenix is a real estate play with its massive land holding in prime areas of Mumbai city.

It emerged among the top three value creators, its stock price ramped up in active speculation over the unlocking of value from the land it holds. Having seen this kind of a rise, the market is salivating for more. There are macro numbers to justify the optimism.

The residential segment forms nearly 91% of the overall real estate activity in the country. Investment in the residential segment is likely to grow at a compo-unded rate of 18% according to Edelweiss to touch $107 billion by 2011. Investment in this segment was up 22% in FY06 at $46.6 billion.

Commercial space comes next. Office space in India stood at nearly 135 million square feet in 2005-06, growing by as much as 23% over the previous year. The next five years are likely to see an investment of $7.1 billion in this segment -- a compounded growth of 28%.

To keep pace with a GDP growth that is second-fastest after China, manufacturing sector recording double-digit growth and booming software and BPO sectors, commercial space is being built at a frenetic pace.

Another important growth factor for the realty sector is the fast-growing organised retail segment. Current statistics put available organised retail space in India at roughly 66 million sq. ft, says Edelweiss.

Demand from this segment is likely to grow at 26% over the next five years thanks to rising income levels. India's per capita disposable income has grown at scorching 250% over the past 10 years and this is expected to rise another 10% plus every year for the next five years.

These are precisely the factors that have sent local and global investors scurrying to buy any stock with a flavour of real estate and construction, transforming them overnight to the highest value creators. Here is one astounding case. Shree Precoated was struggling as a small-time steel company, coating steel sheets. It has now put up its Mumbai property for development and guess how much it expects to rake in? Rs 8400 crore! No wonder these stocks have shot through the roof.

The Methodology

The best measure of shareholder value is the simplest one

How does one measure wealth creation or shareholder value? This is a basic question and the answer is simple -- it is whatever a shareholder gets out of being invested in a company over a certain period. That means the difference in market price between two periods (adjusted for splits and bonuses) plus dividends. This is called total shareholder returns (TSR). We have applied this simple formula to a database of all stocks listed on the BSE and NSE, subject to certain modifications.

For this, we started with all companies listed on the two bourses on 01 December 1996. From these, we picked for consideration only those companies that have traded for a minimum 40% of the days in the past 10 years. For price appreciation, we have considered the average adjusted closing price for the first six months and the last six months of the 10-year period starting December 1996 up to December 2006. Companies not traded within this period have also been eliminated to further refine our sample. This gave us a list of 1593 companies.

To calculate TSR, capital appreciation was measured as the difference in market cap between 1996 and 2006. But capital appreciation is just one part of the overall value that a shareholder with a buy and hold philosophy derives.

The second, and equally important, aspect is that of dividend. Dividend earned over the 10-year period was added after adjusting the holdings for bonus issues. Thus, the TSR of the sample between 1996 and 2006 was arrived at by calculating the percentage change in the value of holding in 1996 over the value of holding in 2006 and adding the dividends received during this period.

While this method is simple and logical, so-called experts, mainly management consultants, often confuse the issue by using weird methodologies.

In one early instance, KPMG doing a study for Business Standard, identified value creators based on sales, economic profit and market value added (MVA). The results were embarrassing. The study named Malvika Steel, SM Dyechem and Usha India as value creators. All of them went bankrupt subsequently.

Often, academic approach to calculating shareholder value is at the other extreme: ignore the market price altogether. According to this approach, value-creating companies are those that have positive free cash flows after applying the cost of capital. Some companies apply this yardstick to themselves to find out whether each of their actions and divisions are creating free cash flow. The technique is called economic value added (EVA).

This is a more scientific approach but the market has no time for it. Witness the TSR of high-EVA companies like Hindustan Lever and P&G.

Our study of wealth creators has thrown up a list of 1593 stocks, based on certain parameters. Space constraints prevent us from carrying the entire list. So, here is a list of the top 1000-odd. The list below of 144 stocks should be a surprise. It is full of small, unknown and speculative stocks. How many of these would survive the next year or the year after?

A rice mill manufacturer as a value creator? GG Dandekar Machine Works ranked 155 with a return of 1872%. Selling water is a cut-throat business. But Mount Everest Mineral Water which almost went bankrupt after it was launched ranked 209 in the list having provided a 1347% return. What pushed up the stock? Rumours that Coke or Danone were interested in buying the company.

Rampant speculation of the kind that has been happening in the Indian market can create bizarre situations. Reliance Industries, the most valuable Indian company, ranked 333 with a return of 821%. And just above it was Ahlcon Parenterals with a return of 823%. How? Ahlcon has been a highly speculative play for which a Kolkata-based broker, Mathew Easow, has been censured by the regulator.

The arrival of domestic travel may have been boosted with the advent of low cost airlines but what is great for consumers is not great for airline companies which are making losses. But the market euphoria about them is running over. Jagson Airlines which has a small unprofitable niche in the aviation business has seen its stock price rise to dizzying heights. It ranked 504 with return of 497%.

Auto companies are doing extremely well, within them Maruti is a market leader. You would expect its channel partners to do as well. But Sai Service Station has failed to create value (TSR: 314%; rank:681), despite running a business in the commercial capital where cash flow is assured thanks to steady sales and large servicing revenues. Maybe the management is not even interested in creating value.

One of the most significant laggards was Hindustan Lever, beaten to the punch by much smaller rivals. It ranked 750 with a return of just 252%. Another set of laggards were companies now controlled by Kumar Mangalam Birla. Aditya Birla Nuvo ranked 812 after massive restructuring with a TSR of just 217% while Hindalco's TSR of 233% fetched it a rank of 786.

Sundaram Brake Linings is a part of the TVS Group, which has a solid stronghold in the auto and auto ancillaries sector. It is the first Indian company in the friction material segment to introduce asbestos-free break blocks and the first one from this segment to win the coveted Deming Application prize.

Unfortunately, all this meant little for shareholders. Its 10-year return was 178% (rank: 892).

Powered by