Investing 101

Value Investing Case Study : A 53,499,900% gain.


 If I had the technology to send a message back in time, I would tell my father in 1980 to “Use Rs.10,000 to buy 100 shares of Wipro as an one-time investment and never sell it for the next 30-35 years.” If he had done that his investment would now be worth about Rs.535 crores. Yes, you read that right. Crores, not thousands or lakhs.

Rs.10,000 to Rs.535 Crores

Lets just assume that you bought 100 shares of Wipro each at a face value of Rs.100 in the year 1980. Total investment: Rs.10,000. You don’t touch it at all, no profit booking or buying more shares. Occasionally companies provide benefits to its shareholders by way of corporate actions. They could provide bonus shares for shares that you hold, they could do a stock split where a high face value share would be broken down into smaller face value shares but number of shares increases proportionately, etc.

Wipro has done various such bonuses and stock splits in its history of 1980-2014. Lets now see the different corporate actions and how the number of stocks would’ve grown.

Wipro Investment growth
1980 Initial Investment 100
1981 1:1 Bonus 200
1985 1:1 Bonus 400
1986 Stock split to FV Rs.10 4,000
1987 1:1 Bonus 8,000
1989 1:1 Bonus 16,000
1992 1:1 Bonus 32,000
1995 1:1 Bonus 64,000
1997 2:1 Bonus 1,92,000
1999 Stock split to FV Rs.2 9,60,000
2004 2:1 Bonus 28,80,000
2005 1:1 Bonus 57,60,000
2010 2:3 Bonus 96,00,000

After the year 2010, there were no more bonuses or stock splits. But with just that initial investment of Rs.10,000 (100 shares) you now would end up with 96,00,000 shares of the company because of all the stock splits and bonus shares. Current stock price of Wipro is about Rs.557 per share, as of 7 April, 2014.

Rs.557 × 96,00,000 = Rs.534,72,00,000 or about Rs.535 crores. That is a CAGR (Compound Annual Growth Rate) of 47.39%. Does any of your bank FD give you 47% annual interest rate? It was all possible because of the free shares that the company gave to its shareholders as an incentive for investing in their company. If you immediately needed to liquidate this entire holding today (urgent need for >Rs.500 crores?), you can do it and you would have to pay a grand total of 0% tax on your profits, because long-term capital gains in equity is tax-free.

How about additional yearly payout of Rs.6 crores?

If you thought that tax-free Rs.535 crores out of a meagre investment of Rs.10,000 was unbelievable, here comes another shocker. Every year the company announces dividends from its operating profits for its shareholders. As a shareholder, you would also get this benefit for how many ever stocks you hold.

For example, last year 2013 (calendar year), the company announced total of Rs.7 per share. Multiply this with the number of shares you hold and this will be automatically credited to your bank account.
Rs.7 × 96,00,000 = Rs.6,72,00,000 or Rs.6.72 crores for the year 2013.
Best part: dividends are also not taxed at the hands of the shareholder (as of FY 2013-14). So you can take all of this Rs.6.72 crores for yourself.

For a comparison, just calculate your (or your dad’s) current salary per annum and imagine getting Rs. 5-6 crores every year as additional income. How does this Rs.10000 investment compare to all the other money invested in other products like real estate or gold. No other investment would’ve given you annual tax-free payouts. If only my dad had the surplus money to invest in this.

Has anybody really done this? Can I go buy Wipro now?

As the saying goes “hindsight is 20/20”, we can calculate all this only after the company has grown from selling vegetable oils, soaps to becoming an IT major. Had everyone known that this cooking oil company would give such returns in 1980, everyone would have invested in this and become billionaires. Also the shares wouldn’t have been listed on any exchange in 1980 and you would have had to invest privately into the company. Buying Wipro now wouldn’t give you the same returns as the company is already grown to such proportions and such a large cap stock giving multi-fold returns is very hard.

How can I get returns like this?

There have been numerous such companies that have given great returns to investors, like Reliance, Titan, Dr. Reddy Labs, etc. No one can predict which company would grow to such a huge levels before 30 years. Remember, for every Wipro like story, there are thousands of companies which has eroded investors wealth and become penny stocks. Investing in equities alone isn’t enough, investing in the right company at the right time is even more important.

Even if someone invested in the best company in the world, its basic human psychology to book profits when the stock prices increase so many fold. Some investors don’t feel comfortable even for a 50% increase in their investment. No one would have the patience to hold such a stock when he sees how volatile the market is in short-term.

If you really want such phenomenal returns, you would have to do lot of fundamental research, do your due diligence on the company and invest in it when it’s in the early stages. Most important of all is, staying invested in the company for the really long-term to reap the entire benefits.

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