2021: The Year of Multibaggers!
Ever since the markets started recovering from the lows of March 2020, the stocks prices have not looked back and what we are witnessing now is a historic rally, which may rarely repeat itself in our lifetime. While the stunning rally has created wealth for investors across the board, what has surprised most participants is the number of multibaggers this market has created. If you look at the past one-year returns for any random listed stock, chances are that more than 50-50 of the returns being more than 100 per cent. Yogesh Supekar discusses at length what makes a multibagger and how best we can identify such stocks
One could say that it’s raining multibaggers with frontline indices making lifetime highs for themselves along with mid-cap and small-cap indices. In fact, small-cap and mid-cap indices hitting all-time highs make for an interesting development even though the concern about valuation remains. It is interesting because a majority of investors invest in small-caps.
And a majority of the multibaggers come from small-caps. With small-caps doing exceedingly well after three years of consistent underperformance and ample liquidity in the system aided by participation on all fronts such as FIIs, DIIs and retail investors, the Indian equity market has found itself in a sweet spot.
The benefits of this are being accrued by even those who do not understand the market that well but have shown courage to participate in the uptrend. People who have spent time in the markets know that this phenomenon is temporary and that it may not last forever. However, the newbies in the market, after tasting a wealth-creating opportunity in 2020, do not want to believe that the ongoing rally is a fluke. The fresh breed of investors does not think like old-timers who have spent long periods in the market. Today first-time investors are experiencing multibagger returns in almost anything that they have invested in few months ago and that has created unrealistic expectations from the market.
Because the returns have been flowing fast and steady from almost all sectors and categories, nothing short of multibaggers’ returns are acceptable to a large chunk of investors. This is exactly why one must revisit the conditions under which one can expect to find future multibaggers. Says Ajay Dandawate, who hails from a Tier II city and has been investing in equity markets since 2009, “My philosophy to identify multibaggers is simply: identify investing opportunities in a particular sector whose index is hitting record highs. If it is Nifty Metal that is trading at lifetime highs, there is something sizeable happening in the sector and the probability of identifying multibaggers in that sector increases manifold.”
“As of now, Nifty Pharma has made a fresh all-time high and hence I can suggest that multibagger returns are quite possible from the pharmaceutical sector. What I mean to say is that industry prospects analysis is the best investment practice that can unravel the future multibaggers. The industry with the best growth potential and prospects will naturally throw maximum number of multibaggers. Chemical manufacturing companies is a fine example. So many of them have surprised on the upside and they are yet to stop creating wealth. There was a positive trigger for sugar stocks and the stocks rallied as if there is no tomorrow and all wealth needs to created today and now. Look at Balrampur Chini. Thus, if you nail the art of industry analysis, you will find multibaggers as if it was a daily routine business,” he adds.
Indeed, industry analysis is important for identifying multibagger stocks; however, industry analysis may not be enough. One has to do more than just that. If you look at the macro picture and observe the historical multibaggers’ performances not only since the markets crashed owing to the pandemic-led lockdowns but since the global financial crisis that happened in 2008, one can categorize multibaggers into two broad categories:
1. Consistent performances leading to annual compounders
2. Turnaround stories.
Thus, if you want to identify future multibaggers you have to simply identify stocks that are either turnaround stories or are consistent compounders. If we look at last year’s multibaggers, which are aplenty, we find that at least two of the biggest multibaggers, CG Power and Subex, have shown remarkable turnaround and the stocks have gained by more than 10 times and seven times respectively. Both the stocks were turnaround stories with capital allocation and liquidity at the core of their problems. CG Power was hit by a corporate governance issue and lacked working capital to fulfil its existing orders.
Murugappa Group then invested in beleaguered CG Power and both the problems of liquidity and corporate governance issue were resolved, which led a jump in its stock price by more than 10 times in less than a year. In the case of Subex, the RoCE improved from sub-six levels to almost 18 levels, indicating improvement in the efficiency of the company. A smart capital allocation policy helped Subex recover sharply and it is still showing signs of further revival even as the stock has gained more than 700 per cent in less than one year.
The factors outlined below should be focused on while identifying future multibaggers.
Industry Analysis and Prospects
Industry analysis emerges as one of the best ways to identify investing prospects. If you get early winds on which sector is going to outperform, half of your task of identifying multibaggers is taken care of. The table below highlights the number of multibaggers realised in a six-month period and in one year gone by.
We can see that a maximum number of multibaggers have emerged from the chemical sector followed by IT and pharmaceutical sectors in the past one year while the financial sector has struggled. The hotel sector, despite the lockdown issues, has managed to chip in with seven multibaggers in one year. It was clear since the beginning of 2020 that IT, pharmaceutical and chemical sectors would be in an uptrend since there lay huge untapped opportunities for these three sectors. Also, they were the least impacted by the many full and partial lockdowns and hence were able to dominate the markets.
Any effort to identify a multibagger should start with identifying an attractive industry to invest in. A sunrise industry or a sector will always throw humongous opportunities. To track the attractiveness of the industry and trends one must calculate the sales growth of top market capitalization companies in a sector and also the profit margins. If the sales growth and profit margins are improving almost for all the top companies in the sector it is easy to conclude that the industry’s fortunes getting revived. The cement industry is an example where the improving demand and better pricing power to cement manufacturers has helped cement manufacturers deliver outstanding profits in the past 4-5 quarters. So much so that most of the top cement manufacturers are trading at or close to their lifetime highs. Better cost control, increased utilizations and reduction in gearing was seen across the cement companies. Such a secular trend once spotted should excite investors of investing opportunities in the sector.
Consistent Performers are Annual Compounders
Consistent performers are the ones with a strategy in place for improving their market share. Often these consistent performers are the ones that enjoy industry-leading profit margins and showcase high return ratios. It is not easy for companies to outperform markets consistently. If one looks at the market data closely, focusing on those companies with market capitalization greater than Rs 1,000 crore, one might be amazed to find that out of approximately 850 companies only 10 have managed to generate returns of more than 10 per cent every year since 2016 running up to 2020. The list includes quality names such as HDFC Bank, Bajaj Finance, Aarti Industries, Atul, Vinati Organics, Berger Paints, etc.
The process for identifying consistent performers can be started by adopting appropriate filters such as:
✓ Sales growth greater than 15 per cent YoY
✓ PAT growth greater than 20 per cent YoY
✓ RoE greater than 18 n RoE greater than industry average RoE
✓ Profit Margins greater than average Iidustry profit margins
✓ Incremental institutional interest i.e. FIIs and DIIs
✓ Quality management driving the business n Strong product portfolio line-up.
Some of the companies qualifying in terms of the above filters are HDFC Life, SBI Life, ICICI Prudential Life from the financial space and NATCO Pharmaceuticals, Ajanta Pharmaceuticals, Laurus Lab and Divis’s Lab from the pharmaceutical space. We have stocks like Amber Entreprises and Vaibhav Global meeting the quality parameters. There are several others from different sectors that also qualify. There is always a high chance that consistent performance from quality stocks that show above average profit growth, sales growth, return ratios and have quality management driving the businesses will deliver multibagger returns.
Low Liquid-Low Price Stocks with Bright Prospects
If you look at the table below, you will find that stocks within the price bracket of Rs 10-100 have been able to generate extremely high returns in the recent past.
Low price stocks are not necessarily penny stocks and may not be low liquid stocks. An example of a low price multibagger is Ramky Infra which is up by more than 213 per cent in one year and used to trade at Rs 39 per share one year ago. Turnaround stories or consistent performers in the low price categories will often catch investors’ attention faster than let’s say a stock trading at Rs 5,000 per share. In the long run, fundamentals will catch up and the price of the stock should not matter. Investors can start focusing on low liquid stocks that are less researched and are not yet on the institutional investors’ radar. Often these candidates have low market capitalization and would be trading at low PE, definitely lower than the industry average. One way to hunt for multibaggers in the micro-cap space is to analyse the consistency in quarterly results.
Often some of the outstanding performances in the quarterly performance of micro-cap companies can lead to lifetime multibagger opportunities. A point in case can be Titan Biotech which is a micro-cap company that has quarter-on-quarter delivered outstanding results and the stock prices have appreciated by nearly 1000 per cent in five years and over 400 per cent in one year alone. The trick is to find a high RoE micro-cap company with low PE and consistency shown in quarterly results.
Quality of Management
Ascertaining the quality of management is not an objective task. However, one can judge the quality of management from the consistency in strategy, its execution track record, corporate governance, focus on long-term wealth creation goals, ability to improve brand value and market share while also delivering on quarterly performance consistently, etc. Immediately, names like Titan, HDFC Bank and Infosys come to our mind when we are talking about the quality of management. Lately, the management style and quality of Laurus Lab has also been appreciated in investment circles.
This is due to the company’s ambitions, execution capabilities, astute capital management and ability to deliver on growth without losing focus of long-term strategic objectives. CG Power’s turnaround and price appreciation is also attributed to the fact that the management quality of Murugappa Group is trusted by investors and hence are willing to invest in the stock. Management quality matters in the long run. Pidilite is another shining example of shrewd management where the company has shown its ability to dominate the adhesive markets in India for more than a decade.
Market Share and Product Portfolio
Any company which has shown an ability to increase market share and is in possession of monopolistic product or service should not be ignored by investors. Examples can be SBI Cards, Affle India, Route Mobile, Galaxy Surfactants, Redington India, Pidilite, Nestle, HUL, Gillete, etc. These companies with monopolistic products have a tendency to display above average profit margins and create moats for themselves over the years. Such companies can be excellent candidates to provide multibagger returns.
One should study the market size and the market share of the company year after year to understand the ground reality. Also, any investor should analyse the various steps taken by the management to improve a company’s market share. An in-depth study of new product launches and how these may impact the bottom-line is extremely essential. Any company with a superior product portfolio can provide advantage to the company to increase market share and improve profitability. Nestle, HUL and Dabur are some of the best examples of such companies with superior product portfolio.
Low Valuations and Value Unlocking
If an investor is able to identify unlocking of value in any listed company, chances are bright that he is eyeing a multibagger stock. Often enough, listed conglomerates unlock value by demerging their subsidiaries. Multibagger returns are also possible in case where an investor identifies a quality company with steady cash and deep value. It is possible that a listed company is trading on bourses with a market capitalization of Rs 100 crore but the asset holding of the listed company may be valued at Rs 1,000 crore.
When the markets get more and more aware of this arbitrage opportunity the demand for the stocks of such companies increase and that may lead to multibagger returns. At times such listed companies with huge assets are loss-making; however, the trigger is in the asset value held in the balance sheet. The market will therefore expect monetisation of these assets at some point of time. Hemisphere Properties is a prime example of such a multibagger stock. The real estate company has no sales on its books, no profits and only expenses incurred so far, and yet the stock is up by almost 100 per cent in just six months.
Finding multibaggers is not easy and requires specific skill-sets. There is no objective sure-shot formula to discover multibaggers. However, there can be guidelines which, if followed, can improve your chances of finding multibaggers. Industry analysis and also focusing on quality low prices stocks may improve your chances of identifying a multibagger by a good margin. However, if you are focusing on a consistent performer with annual compounding effect, the stock’ price – be it low or high – should not matter. A bull market will throw a lot of multibaggers but when capital is invested in market crashes, the chances of magnifying stock returns improve drastically.
In general, market timing plays an important role in identifying a multibagger. Betting on CG Power when it was trading at Rs 6 per share when there were murmurs of Murugappa Group investing in the company and investing in the same company at Rs 24 per share when the news of Murugappa Group’s investments in CG Power was confirmed is not the same experience. One has to bet on future development and while doing so one is speculating on the positive outcome. Several investors have mastered the art of actually investing in loss-making companies with the hope that they will turn profitable one day and, in the process, create wealth for themselves.
Usually, while investing in loss-making companies it is important that an investor identifies the problem and then eventually identifies the trigger that can make the company profitable. The trigger for stocks like SAIL and other struggling steel companies was the rise in commodity prices. Anyone who was confident about the rise in commodity prices would have made a killing on commodity stocks. Also, one aspect of multibaggers to always remember is the breakout. One must ascertain after how many years of consolidation and underperformance has the breakout happened and whether it is aided by sufficient volumes. SAIL underperformed for more than 11 years and failed to cross the Rs 100 level in eight years.
Basically, longer the consolidation more fiercely the stock can break out, thus creating multibagger opportunities for investors with patience and skills. Tata Elxsi underperformed for more than 25 months since July 2018 but has not looked back after a breakout. Even a stock SIP of five years would have fetched annualized returns of nearly 59 per cent in a five-year period in Tata Elxsi. It is important to have faith in the growth story of an annual compounder and even more important is to invest continuously on one’s conviction idea. Contrary to the belief that only lump sum investments will lead to multibagger returns, a stock SIP in a high-growth company can also lead to above average returns.
For example, a SIP in a multibagger stock like Laurus Lab in three years would have fetched an annualised return of 161 per cent. The current markets, even though in an overbought zone, are fuelled by immense liquidity, hope centred around vaccination, quality earnings, increased participation by retail investors, rapid economic recovery and lower interest rate environment. It is possible that the market will throw a good number of multibaggers in the foreseeable future. Just identify the triggers for the stocks and the sector and be willing to remain invested for more than a decade if you want to experience a genuine multibagger. Remember, it may take just 2-3 multibaggers to change your fortunes. Bet on the right ones using proper guidelines.