Of wealth creators & markets

The tenth Wealth Creation Study 2000-05 by Motilal Oswal takes into consideration two interesting points in time.

The starting point, 2000, was at the end of the previous boom. In 2005, we are in yet another boom. The Sensex in 2000 was at the 5,000 levels. In 2005, it is at 9,000. This reflects that huge amounts of money can be made if too much time is not wasted in looking at the index.

During this period, technology, media and telecom (TMT) stocks have lost almost Rs 2.5 lakh crore, but ONGC alone created more than Rs 1 lakh crore of new wealth.

In 2000, one could buy the entire ONGC for Rs 20,000 crore, when Wipro was trading at about Rs 1,25,000 crore.

The wisdom needed was not to chase crazily priced TMT stocks but to focus on cheaply- priced but fundamentally strong companies like ONGC at that point of time.

Commodity companies have been gaining their importance over a period of time. In 2000, 17 commodity companies featured in our list of wealth creators.

IT firms have lost their fizz and the only company that could make it to the list is Infosys. Second layer IT companies have great potential at around 10x PE multiples.

Such bluest-of-blue-chips that consistently create wealth typically enjoy strong consumer franchisees with strong linkages.

Everyone aspires to have such companies in one’s portfolio, but they must be bought at reasonable prices to meet the investment objectives. These stocks are valued at a premium to the market and are in general not found “cheap”.

One should purchase them below their long-term average valuation, reflected by their median value. One could get 25-50% returns by investing in such stocks for the long term. Some of the stocks that appear to be at or below their long-term median valuations are pharma MNCs (Aventis, Merck, GSK, Pfizer); FMCG companies (Nestle, HLL, Britannia, P&G). MNCs that are available at reasonable valuations could be interesting for long-term investing, along with some IT companies.

Next year may turn out to be the year of FMCG, pharma and IT companies. This triangle used to prevail in the 90s.

The author is MD, Motilal Oswal Securities Ltd. Views expressed are personal.