Power of compound intrest.

Talking about investing power, quite a few of us would have been involved in financial investments (i.e. deposits, mutual funds, shares, or other). We would have read about windfall gains made by investment gurus and conversely also heard/seen the major risks in equity investments.

Let’s take a couple of big examples from the Indian IT space: Wipro and Infosys. The market enthusiasts would already know where I am leading this discussion to, and may want to skip the reading. But for the benefit of the general population, let’s understand how these companies fared since their inception for a shareholder.

Case 1: Investing in Wipro

What if you / your father could invest 100 shares of Wipro in the year 1980 and did nothing since then? Wipro was founded in 1941 with 17,000 equity shares and incorporated in 1945. As the base price or face value per share price used to be Rs 100 at that time. Assuming a minimum purchase of 100 shares (as was the norm in the era), we could expect an investment of about Rs. 10,000 or so. Yes, this was quite some amount for many people in India in the 1980s. But let’s assume, if the investor had the capability, what he / she could have as investment returns now in the year 2013. Is the guess a lakh, or 10 lakhs, or 100 lakhs. Well let’s analyze and read on.
Without considering any dividend payments by the company, and just based on valuation of the shares, here is the valuation chart since 1980:

Initial Investment (1980)

100 shares of Wipro totalling Rs. 10,000 to Rs. 15,000 (in the year 1980).

Share holding calculation from 1980 to current

Current Valuation (2013)So we see, the 100 shares bought in 1980 is now worth a huge 9.6 Million shares in 2013. With Wipro currently trading (Nov 2016) at about Rs. 438 per share, the value of this holding totals a whopping Rs. 4, 204, 800, 000, i.e. an amount of nearly Rs. 4.2 Billion or Rs. 420 crores. This is simply an amazing rate of investment return, at nearly 50% compounded growth per annum.
More importantly, the above figure is without taking into account any accrued dividends, that Wipro has paid through the years. If we consider for example, between the years 2011 to 2013, Wipro has paid the following dividends:

Announce Date	Dividend Type	Dividend (%)	Dividend/ Share	Net Dividend
15/01/2013	Interim	100%	Rs. 2	Rs. 19,200,000
25/04/2012	Final	200%	Rs. 4	Rs. 38,400,000
10/01/2012	Interim	100%	Rs. 2	Rs. 19,200,000
27/04/2011	Final	200%	Rs. 4	Rs. 38,400,000
17/01/2011	Interim	100%	Rs. 2	Rs. 19,200,000
TOTAL DIVIDEND ACCRUED (2011 to 2013)				Rs. 134,400,000

So, the dividends for 2011-2013 itself comes to about Rs. 134 Million, or about Rs. 1.34 crores.

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.

Case 2: Investing in Infosys

I will quickly take another example of Infosys, to just show that Wipro’s case was not just an aberration. This was the year 1993, when Infosys floated a public issue. If you had bought 100 shares of Infosys from its IPO worth Rs 9,500 and held on to them, let’s see what you could retire comfortably today with.
So 100 shares of Infosys invested in 1993 is now equivalent to 51,200 shares in 2015. With Infosys currently trading at about Rs. 2,864 per share, the market value as of date for the share holder is a whopping Rs. 53,000,000 (i.e. Rs. 53. million OR Rs 5.3 crores). This is a huge rate of return (compounded rate of over 50% p.a.) without taking into account any dividends.

 there are many such companies as such, for example,

• CIPLA: Investment of Rs 10,000 in 1979, will fetch more than Rs 100cr+ (as of 2005)
• RANBAXY; investment of Rs 1000 in 1980 will fetch more than Rs 2cr+(as of 2005)

As of 2012,

An investment worth Rs 1,000 in Reliance Industries’ initial public offer (IPO) about 35 years earlier is now worth Rs 7.78 lakh, said its chief, Mukesh Ambani, on Thursday. Noting this was a compounded annual growth rate of 21.6 per cent, he promised further value creation for shareholders, at the company’s 38th annual general meeting here on Thursday, according to a PTI report.

there are some surprises such as Hindustan Unilever (HUL), ITC and State Bank of India (SBI).
According to an analysis of BSE 500 firms by the Business Standard Research Bureau, at least 44 companies did better than RIL during the period between January 1, 1991, and on Thursday. Data prior to 1991 was not available. During this period, RIL multiplied investors’ money 38 times. An investment of Rs 1,000 made in RIL shares on January 1, 1991, is worth Rs 38,085.

 Hero MotoCorp (Rs 4.74 lakh), Cipla (Rs 4 lakh) and HDFC (Rs 2.73 lakh) are some of the other top Sensex value creators.

if you had invested Rs 40,000 in Unitech during the lows of 2004, your bank account would see a whopping Rs 1.1 crore (Rs 11 million.

Among non-Sensex firms, Sesa Goa shares have turned Rs 1,000 into Rs 10.03 lakh. Dr Reddy’s has made it Rs 3.79 lakh. SBI, ITC , Mahindra and Mahindra and HUL are some of the other Sensex firms which had beaten the oil and gas behemoth in the ex-1991 returns.

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.

Growing your investment needs patience

So, the IT industry has been a great place to invest for the past 30 years. More importantly, it lays the importance of the compounding power of well planned long-term investments. Its an overused statement by many, but proper business study and patience are indeed the key attributes for a successful investor.
To replicate an example like above, you probably would need to ask – what are the business themes and trends that will shape our future? Answering this could help decide where you want to remain invested for the next 20 to 30 years and possibly retire as a wealthy person!