Consistent compounding: India vs China

In spite of the greater size and growth of its GDP, China lags behind India in terms of consistent compounding by its companies. Here's why.

- SAURABH MUKHERJEA

As is well known, not only have emerging markets (EMs) grown twice as fast as developed markets (DMs) over the past decade, China and India have been the fastest-growing EMS if measured by growth in real GDP over the past decade (see chart 'Real GDP growth, 2010-2020').

Unsurprisingly, therefore, when it comes to producing Consistent Compounders (CCs), i.e., companies which grow their revenues by at least 10 per cent every year for 10 consistent years and generate a minimum ROCE of 10 per cent throughout that period, India and China are head and shoulders ahead of any other EM. What is more intriguing, however, is that although China's economy is five times larger than India's ($14,862.56 billion vs $2667.69 billion in 2020; source: www.statista.com), India has produced significantly more Consistent Compounders than China! Even more intriguingly, the Indian Consistent Compounders have compounded their share prices more than twice as fast as their Chinese counterparts (26 per cent vs 10 per cent). See table 'Number of Consistent Compounders (CC) by country'.

Moreover, if we just apply 10 per cent revenue growth filter and 10 per cent ROCE filter each at a time (rather than simultaneously applying the two criteria - as has been done in table 'Number of Consistent Compounders (CC) by country'), we get a similar conclusion, i.e., India and China stand far above other EMS and the Indian companies significantly outperform the Chinese companies in terms of shareholder returns. See tables 'Companies delivering at least 10 per cent YoY revenue growth pa for the last 10 years' and 'Companies delivering at least 10 per cent ROCE pa for the last 10 years'.