Should this event surprise us any more Seven of the top ten share offers in 2010 were from firms that are not based in the developed economies of western Europe, Japan or the US.
The Boston Consulting Group has been researching and writing on value creation and identifying the top value creators in the world. Started in 1999, the BCG Top Value Creators Report is published annually and the 2010 Top Value Creators Report has been released recently. Starting with a list of 4,000 companies whose financials are published, the report identifies the top value creators based on average annual return to the shareholders in the preceding five years. The report identifies the top performers not just on growth in the price to earning multiple reflecting the future outlook for the firm, but on a comprehensive set of metrics that drive total shareholder returns, including the intrinsic or fundamental value of the business(es) driven by revenue and margin growth and free cash flow contribution driven primarily by dividend yield.
In the early years of the report, as one would expect, the top value creators were mostly from the developed economies. The first time an emerging market player featured in the report was in 2004 when Embraer, the Brazilian aircraft company, was not only included in the list but emerged as the top value creator over the preceding five years. However, most of the top ten firms were still from the developed countries. It was only as recently as in 2007 that firms from developing countries for the first time outnumbered their peers from developed countries in the top ten listing. In just three years since then, years which saw unprecedented global growth followed by the biggest economic crisis in recent years, this shift in performance is total. In the 2010 report, all the top ten value creators are from emerging markets. Tencent, the Hong Kong-based Internet company, was the top value creator with an average annual return of over 106% to its shareholders (for the period 2003-2009), with Naveen Jindal-led Jindal Steel and Power (JSPL) as the second highest value creator (and the highest in its industry category) with an average return of over 88%.
In the automotive industry, all but one of the top ten are from emerging economies with three Indian companiesMahindra & Mahindra, Hero Honda and Maruti Suzuki featuring in the list. It is very visible, as one would expect, in the machinery and construction industry, given the economic growth in the developing world. More surprisingly, it is also true in the consumer goods industry where the top seven value creators are from the emerging markets. Clearly, the local players in these markets are giving the older established global consumer firms a real run for their money. Even in the multi-business segment, the pride of place of being the top value creator goes to an Indian companythe low profile Jaypee Industriesleaving the well-known global conglomerates trailing far behind. The only industry where there are no representatives from the emerging countries and all top ten are from the developed economies is pharmaceuticals and medical technology. However, the top performers are not the usual suspectsthe global pharma leadersbut smaller research-driven newer entrants. Firms from the emerging markets in the pharma industry have some way to go before they join this list.
It is not just the shift of firms from West to East that is startling but also the shift from hot consumer and technology focused industries to the boring building blocks of our industrial economy. Industry sectors like machinery and construction and chemicals were rarely viewed as top picks by share holders. The fact is that these two industries have created the highest value for investors in the last five years, giving them an average annual return of over 46% and 42%, respectively, closely followed not surprisingly by mining and minerals with an average annual return of just over 41%.
The world economy is increasingly becoming a two-speed one. The developed world is likely to see a prolonged period of below average growth. The developing countries will continue to grow with increased focus on their internal markets and the growth in trade between them. This two-speed world will make global shareholders increasingly turn to emerging economies to invest la Petrobras.
For the Indian policymakers, there is no better time than now to attract the massive flow of funds required to meet the huge capital needs of infrastructure and industrial growth in the country. Can we implement a strategy to increase the FDI flow into India from around $35 billion in 2009 to over $100 billion in the next few years Global investors are willing to fund big bets. Can we identify the sectors where we would like to make the big bets and attract global funds and technology At the firm level, the story for global investors could not be any stronger. The pre-crisis period saw several big bet acquisitions made by Indian companies to change their global competitive position. Post-crisis, Indian companies seem to have become more cautious. JSPL has created more value for its shareholders than any other company in the world except one. That is a truly powerful story to tell global investors. Can JSPL and other Indian firms leverage this performance with global investors and persuade them to making the big bets that would change their growth trajectory
We have not faced a more promising window of opportunity than today to attract global funds to India. Will we grab this opportunity or lose the plot Only time will tell.
The author is managing director, Boston Consulting Group, India