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Mr. Raamdeo Agrawal - Chairman, Motilal Oswal AMC

Mr. Raamdeo Agrawal

Motilal Oswal Asset Management – Buy Right Sit Tight Insights - September 2015

Dear investor friends,

I am pleased to present the second edition of our “Buy Right Sit Tight Insights”. Here, every quarter, we will share with you our investment insights and other ideas which we believe are relevant to the world of equity investing.

I would greatly appreciate your feedback and suggestions for improvement. Please email the same to

In the first edition in July 2015, we saw the importance of having an investment philosophy in equities (to read the same click here.) Here, we present how stocks which comply with our investment philosophy – QGLP (Quality, Growth, Longevity, at reasonable Price) – are rare and valuable.

QGLP stocks – rare and valuable
In most cases, that which is rare tends to be valued more – diamonds, precious metals like gold and platinum, even a close friend or a great employee. Does the correlation between rarity and value hold true even in the stock markets? To answer this question, we studied the behavior of stocks over the 10-year period FY2005 to FY2015.

Why FY2005 to FY2015?
It has been said that stock markets are a weighing machine in the short run but a voting machine in the long run. By definition, equity investing is a long-term phenomenon. With progressively shorter time horizons, the activity of buying stocks tends towards speculation rather than investing i.e. the buyer/seller is more interested in price change than change in the underlying value.

So, how did Indian stocks behave from FY2005 to FY2015?
First, consider the benchmark, BSE Sensex. Over the 10 years, Sensex return CAGR was 16%, broadly in line with earnings CAGR of 12%. As is rightly said, over the long-term, stock markets are slave to earnings growth. The next question – how did individual stocks perform? If a picture can speak a thousand words, we believe the following summary table answers this question effectively.

Key facts from above table and their implications

FACT #1: There were 1,681 companies which were listed in both FY2005 and FY2015. For a more meaningful picture, of these 1,681 companies, we considered companies which had FY2005 market cap of Rs 100 crores or more. There were 531 such companies with average return of 8% v/s 16% for the Sensex.

IMPLICATION #1: There is a fairly large investible universe in equities. However, in aggregate, their performance is likely to be lower than the benchmark FACT #2: Of the 531 companies shortlisted as above, only 67 managed average RoE of 20% or higher for 10 years. The average 10-year stock price CAGR of these companies was 26%. So, RoE of 20% implies a minimum 5% premium over cost of equity. Less than 15% of the investible universe managed to sustain this level of return for 10 years. This proves that Quality – i.e. the ‘Q’ in QGLP – is rare and a key differentiator between out-performers and under-performers.

FACT #3: Of the 67 companies shortlisted above, only 29 companies clocked 10-year PAT CAGR of 20% or higher. The average return on these companies was a robust 33%.

IMPLICATION #3: The benchmark has long-period earnings growth of around 15%. Thus, 20% is a decent premium over the benchmark earnings growth. About 40% of the Quality companies managed to sustain this level of growth (‘G’ of QGLP). However, those which did (i.e. Q+G+L), delivered handsome returns of 33% i.e. an alpha of 17%.

FACT #4: Of the 29 QGL companies as above, 24 could be bought in FY2005 at a P/E of 25x or lower. The average return on these companies was an even higher 35% i.e. alpha of 19%.

IMPLICATION #4: The ‘P’ in QGLP stands for reasonable Price of purchase. High quality companies with healthy long-term earnings growth bought at reasonable price appears to be a sound formula for earning handsome returns in equity markets, both absolute and relative to benchmark.

In conclusion – QGLP stocks are rare and valuable
Clearly, QGLP stocks are valuable. However, they are very rare, considering that only 24 companies out of the investible universe of 531 managed to make the cut i.e. less than 5%. Identifying such companies is both a science and art, entailing years of experience in research and analysis of equities.

At Motilal Oswal, as a group, we have investing experience of 35 years in the Indian markets, including 13 years of investing public money. Armed with QGLP, we are now far more confident in the market place. QGLP, including its earlier versions, has been practiced for the last 13 years through our first PMS product, Value Strategy. We believe the effectiveness of the QGLP philosophy is reflected in the performance across our products (Click here for more details on performance).

We remain committed to disciplined application of QGLP and continuous improvement in the process itself for the benefit of our investors. We invite you to understand our process and participate in the exciting Wealth Creation journey.

Thanking you,

Raamdeo Agrawal

Data Source: CapitaLine and Internal Analysis; FY – Financial Year ending March; Data as on March 2015

This bulletin has been issued to explain our investment philosophy. The information contained in this document is for general purposes only and should not be construed as investment advice to any party. Readers shall be fully responsible / liable for any decision taken on the basis of this bulletin. Past performance may or may not be sustained in the future. This bulletin is not for circulation in general and is meant for intended recipient only. The stocks mentioned herein are used to explain the concept and is for illustration purpose only and should not be used for development or implementation of an investment strategy. It should not be construed as investment advice to any party. The stocks may or may not be part of our portfolio/strategy/schemes.

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