Companies, which lead in value creation by definition, combine high return on capital with consistent growth over long period of time. Quite naturally these companies, apart from being well managed and driven by innovation, tend to operate in industries which have favourable characteristics such as large size and high growth rates. What is also critical is an ecosystem which enables the company to scale up easily covering aspects such as infrastructure, human resources, legal system etc..
As a reflection of an economy’s ability to nurture such companies and provide the necessary ecosystem, it is interesting to look at the pace of value addition by the best companies in India and put it in global context. As a rough proxy, the market capitalisation less net worth can be viewed as the value added by a company—effectively this is the current value of the company less all the capital invested in the business by shareholders. This, divided by the number of years of existence, can give us a sense of the pace of value addition.
Admittedly, this is a coarse measure for a number of reasons. First, the net worth does not capture time value of capital invested in the business. Second, the years of existence may not be a very accurate measure of the time a business model has taken to scale up since frequently there are material changes to the model itself. Also, market capitalisation of a company is volatile so the numbers can change over time. However, with all these shortcomings, if the data shows up order of magnitude difference, it should still give us some food for thought.
By this parameter, the list of Indian companies with the fastest pace of value creation is dominated by the heavyweight sectors of the stock market – IT, private banks and pharma. The average of the top ten comes to R5,200 crore (about $850 million) with the highest being R10,300 crore ($1.7 billion). The top ten includes three software companies, three financials and one pharma company. The average age of the top ten is 28 years.
Taking a broader set of top 25 companies brings down the average to R3,100 crore ($500m). Most of the additional companies are from FMCG, auto, software and financials. The average age of this sample is 34 years.
Compare these numbers with the global giants. The standout performance on this scale comes from the technology leaders. Google,