Hi,
This is the time of the year when politics is heating up in the country. With less than a year left for the next general elections, all parties have been gearing up to widen their prospects for the 2019 election. In the meanwhile, let’s just see what matters to us most, that is the stock market return in the 4 years of Modi government.
For the analysis, I have used the below Datapoints: 1. Share Price & Market Cap on 16th May 2014(Historical day when Narendra Modi came to power) & 5th June 2018(Latest data date, filtered companies out with Market capitalization less than ₹100cr) 2.Standalone Sales, EBITDA, PAT for 2017, 2016, 2015, 2014. Since the database that I use hasn’t been updated for the data of 2018.
Companies with return of more than 2500% in last 4 years
Well, there are at least 87 companies that have given returns in excess of 1000% in a matter of 4 years. And Yes, the question coming into your mind yes, there are 9 companies that have given returns in excess of 25 times & those are good enough to give you a retirement fund.
While I was analyzing the numbers, I came across the following traits:
1. Most of these companies were penny stocks. Of the 87 stocks
28 were below ₹ 10 i.e. 32% 69 of them were below ₹50 i.e. 79%
Average Sales Growth of these 87 companies = 17%
Average EBITDA Growth of these 87 companies= 32%
Average PAT Growth of these 87 companies= 89%
2. Profitability(PAT) outweighs Sales growth in 73 of 87 companies which comes to be 84%
3. Similar is the relationship between EBITDA & PAT relationship where PAT has the upper hand
4. I hardly knew any of these company in the list back then. This shows that you need to take the initial risk and as Phil Fisher rightly said “Maximum Return is made when the companies are building their capabilities”
5. Another interesting finding here is that the list is dominated by “Chemical Companies”. This most likely is because of the Chinese pollution effect.
It’s not that all the shares made money, there are those which lost significant value. As you might be thinking there is a flip side to everything. Yes, you are right, there are 74 companies which have lost more than 50%.
While calculating the returns figure, if you have noticed that returns are well above 2500% in many cases whereas the drop cant be more than 100%. As Basant Maheshwari have righted quoted in his book “The Thoughtful Investor” that investors downside is limited but there is no limit to the upside.
To come to a conclusion, the positive returns far outweigh the negative cases. I must say that these 4 years of Modi government have been quite prosperous for Indian equities.
Well, its quite easy to calculate the returns and say that if you have invested in the company then you could have made so much money. Given the fragile nature of the company & limited information, it would have been really difficult. Let me check this out for myself.
Would I have invested in these companies in 2014?
While deciding any company to invest in, I follow a checklist based method.
Investment decisions
I have just glanced at the numbers to come to come to give it a “Yes/No”.
I have said Yes or No on very basic analysis but the answer might have varied widely.
In order to choose such companies, you would require to have a very good understanding of the industry by either working in that sector or having in-depth understanding.
Large companies & returns in last 4 years
Now, let’s look at the world of large-cap companies. I have selected the top 15 companies. Well, they might not have dropped much but haven’t awarded the shareholders handsomely when compared to the list shared above.
If you go by this list & you are willing to take some amount of risk, its the small & mid-cap who is the better choice to create you wealth.
Quite often, we see analysts screaming about the dangers of investing in the small & mid-cap.
Reliance communications, Vakrangee, Adani Enterprises, IDEA, PNB, JP associates etc are the companies which have turned from large caps to mid or small caps. I am not saying that such wealth destruction happens only in large one, my point is that no sector is immune.
Anyway coming to the core topic, the 4 years of Modi government had been a wealth creator with expectation & implementation of reforms. This also is backed by a continuous flow of money to Mutual funds(as a result of several Real estate associated laws and demonetization) & extraordinarily low interest rate(almost 0) in the developed world.
Further reading:
By,
Shekhar Yadav