Identified Well On Time, Multi-Baggers Can Fetch A Fortune

1) As long as 15 years back, in the year 2001, automobile major, Eicher Motors was trading at just Rs 19 at the bourses. No, it is not a typo—the stock was priced at Rs 19 only. Jayantbhai Mehta, a retired school-teacher at Porbandar in Gujarat invested a major chunk of retirement benefit in the stock of Eicher Motors, a name synonymous with Royal Enfield motorcycles. On October 3 in 2016, Eicher Motors traded on BSE at Rs.25,773 when Mehta sold off his portfolio by booking a whooping amount of profit pegged at 1,35,548 per cent. Mehta had invested Rs.1 lakh in Eicher Motors in 2001. On October 7 when his broker handed over a cheque of Rs.1355.48 crores.

2) Way back in 2006, Sharad Tirodkar had invested Rs.5lakh in the stocks of Symphony, a not-so-known name in the consumer durables sector. Tirodkar picked up stocks of Symphony at a price of Rs.1.33 each share. His friends attached with stock investing had opposed him vehemently asking him not to risk his money putting in the stocks of Symphony. Today, they all are proved wrong and Tirodkar has been smiling all over as Symphony stock is being traded in BSE at a price of Rs.1166. If Tirodkar sells of his possession of Symphony stocks today, he will book a profit of no less than Rs.4013.25 crore.

3) Five years back, Subir Dasgupta had put in his hard-earned money in the stocks of Indo Count Industries buying its stocks at a price of Rs.9.60 per stock. On October 3, he had to withdraw his investments for buying a house. Dasgupta's money invested in Indo Count Industries has grown by 7251 per cent. He was pleasantly surprised. Stocks of Indo Count are traded in BSE at a price of Rs.731.70.

Considering the three true stories cited above, one can certainly feel lucky or unlucky depending on the person's exposure in the multi-bagger stocks. While lakhs of individual investors have earned fortune like Mehta or Tirodkar and Dasgupta, lakhs of others who had missed the bus just because of their risk-taking abilities and distrust on multi-baggers. In this exhaustive report, we talk about few multi-baggers which have made it really big in last few years scripting several stories of ‘rags to the riches' in India. But failure to identify the right set of stocks also might have scripted some stories of ‘riches to rags' during the same period of time. So the trick basically involves the identification process of the multi-baggers which can change an investor's life for good. After reading the true-life examples above, someone who has missed the opportunities may wonder why he had failed to recognise the right opportunities at the right time-we will like to tell you here that though no rocket science is involved in identifying the multi-baggers, there are certain parameters one must check before investing his/her hard-earned money.

Check the debt levels of the company as any indication of the company having debt over 25 per cent of the equity value may not be healthy enough to invest your money in it. One also has to figure out the sources from where the company generating its revenue and the future of the earning sources. Spending sometime on understanding the industry/sector and its peers may help you to identify the right multi-bagger at a right time. Alongwith , also check its business models and plans. Any significant changes in its management control in recent times also need to be noted and compared. A close observation on its previous quarters' balance-sheets may open up further information for the investor. While these few lines may help one prima facie to identify a multi-bagger, there may be few more reasons why a stock may have the capacity to be a multi-bagger in future.

Over past 10 years the equity markets have done extremely well. A mere passive investment in Sensex as an index via an index fund or an ETF would have more than tripled investor's wealth if we consider past 10 years' data. Over 10 years' period (Oct 5th 2006- Oct 5th 2016), Sensex gained by 236 per cent. An amount of Rs 1,00,000 invested on October 5th of 2006 in Sensex would be Rs 3,36,000/- as on October 5th of 2016.

Now consider some active investing by choosing to take exposure in banking sector. Simply by taking exposure in banking sector, an investor could have made 370 per cent gain over last 10 years which means Rs 1,00,000 invested in the Bankex 10 years back would have been Rs 4,70,000 on October 5, 2016. Similar investment in auto index would have fetched a gain of 404 per cent in 10 years and Rs 1,00,0000 would have been Rs 5,04,000. Clearly we can see the benefits of active money management in the equity market by choosing to invest in sector that shows outperformance.

Point to make here is a small outperformance can make a huge difference in long term as in this case. A simple initiative towards active money management can add tremendous value and it is worth every effort that one puts in the exercise of identifying the possible outperformer.





We have observed that over ultra-long term, it is extremely difficult and almost impossible for companies to grow at a rate higher than 25 per cent on an annualised basis. Our data mining suggests that there are only five companies viz., MRF, Wipro, Berger Paints Ltd, Asian Paints Ltd and Balkrishna Industries Ltd. However, the list magnifies as the tenure is reduced. There are almost 644 companies that we could identify have generated more than 25 per cent annualised returns (as on October 3, 2016) if we consider a period of five years. As many as 271 companies have delivered returns higher than 25 per cent on annualised basis over a 15-year period. This data suggests huge opportunity for including multi-bagger stocks in one's portfolio. One just has to be smart enough to hold on to a dozen of such multi-bagger stocks for several years together. We find that investors often do well in identifying multi-bagger stocks, but at times are extremely careless when it comes to holding on the multi-bagger stocks for a long term.



Where to focus while selecting Multibagger stocks? 
Investors can focus on those companies that are not being discussed too much either in media or in public. Often the evolving multi-bagger story is not even well researched by the financial analysts or equity analysts. Chances are that the stock is trading at extremely low multiple as the story is yet to be discovered by investors and analyst community and hence there is low demand for these stocks as there is no buying happening even though the stock remains attractive on several parameters.

Due diligence, often to be conducted by investor himself, should be focused on the financial analysis of the company and on the pedigree of the management. Scalability of the business operations is one key focus area which investors often miss. The whole idea is also to analyse if the growth being delivered by the company is profitable and happening at a reasonably low level of leverage or even better without any leverage. No other medicine works better than a high and consistent EPS growth, low leverage and high profit margins for stock prices. An additional element that needs due focus is the free cash flow generated by the company on a regular basis. Free cash flow will indicate the company's ability to invest in future growth of the company.







Conclusion :- 

In a tough world of investing, right information is everything and timing is quintessential. A right strategy with right security (multi-bagger) will fetch fortune . Trick for identifying the multi-bagger story seems to be in getting the macro picture crisp clear in mind. Once an investor is convinced on the macro story scanning the company specific information with the pointers highlighted in this articles should serve the purpose. Rather than being obsessed with an idea of having a multi-bagger in the portfolio, investors can simply focus their energies on identifying those companies which are expected to deliver a healthy earnings QoQ and hold on to those stocks which promise to do so for years together. Now that requires a lot of patience and this is one virtue that will differentiate winners from looser in the game of multi-bagger investing. There are plenty of opportunities to identify multi-bagger stocks and practically the exercise can be fruitful if the focus is on the parameters as discussed here.

Dharmesh Kant
Head- Retail Research, Motilal Oswal Securities



What is the minimum time frame an investor need to wait for a stock to become a multi-bagger?

Ideally it takes 4 to 5 years for a potential business to play out in full vigour. In this time frame the growth trajectory of revenue, profitability, cash flow, return on equity, capacity expansions, market share gain etc is established by the company. So, at least 5 to 7 years should be given to a stock which is a probable multi-bagger.

What role does the valuation of a company play in identifying a multi-bagger stock?

It is the most important aspect of stock selection. There is no thumb rule on a particular number. For example a company may have a PER of 70x but if it's earnings is expected to grow at 90x in foreseeable future it is still cheap. Valuation has to be judged in context of multiple factors primarily, revenue & profitability growth trajectory, expected return on equity, leverage in balance sheet and free cash flow to firm . As long as present stock price of a company is lower than the per share valuation arrived based on aforesaid factors it merits a buy.

Looking at the current scenario,which sectors or themes you think can turn out to be a multi-bagger in the coming years?

BFSI – ( Banks, NBFC and MFI's) has very high potential for growth going forward. Others consumption driven sectors like automobiles, electric and electronic appliances, home refurbishing, white goods companies.

What would be your advice to small retail investors when it comes to identifying multi-bagger stocks in the market?

Do your homework well. Consult an expert before investing. Read management discussion and analysis section of annual report of a that particular investible idea for at least last three years and check whether management delivered on guidance if not, evaluate the merits of reason cited for deviations. Buy cheap

Akash Singhania - CA, Deputy CIO
Equities DHFL Pramerica Asset Managers Pvt. Ltd.



Q1. What are the typical characteristics of a multi-bagger stock?

Stocks can turn multi-baggers for plethora of reasons. First and foremost are those companies which are fundamentally strong and have intrinsic value much above their price which leads them to turn multi-baggers over a period of time. These companies typically tend to have high return ratios, low leverage, positive free cash flows, steady growth, capital efficient business model, good corporate governance, etc. Apart from these steady compounders cum multi-baggers, certain other companies turn multi-baggers like turnaround or cyclical or asset-heavy companies which are available at distressed valuations. These companies tend to come out of a vicious downcycle in their industry or business model or any company specific issues.

Q2. Can you please share with us your experience of picking a multi-bagger stock and how where you able to identify it earlier than others?

We identified and invested in a leading biscuit maker company couple of years back which has turned almost a four-bagger now. The company is a market leader in its category and among the country's top three biscuit makers. Consumer companies in general tend to have steady growth, high return ratios, low debt and positive free cash flows. Specifically our invested company was a story of margin expansion from mid single digits to teens which played out in the last few years. Increasing market share, strong brand and distribution, operating leverage and change in top management all contributed to robust earnings growth as well as stock price performance.

Q3. What exactly does an investor need to look at while studying the quality of promoters and management?

Quality of promoters and management or corporate governance practices is of prime importance. We have an internal DEFT model (Discipline, Environment, Fairness and Transparency) which has many parameters to track corporate governance practices of various companies. For example we check whether the promoters stick to the core business, history of merger, acquisitions, restructurings, whether promoters understand cost of equity, undue benefits if any to promoters or management, related party transactions, placements and insider trading, disclosure of market sensitive information and whether stock prices anticipate results or such information, etc. These above parameters are not exhaustive and have to be looked in a holistic manner.

Q4. Can large-cap stocks turn out to be multi-baggers as well?

Large-cap can indeed turn out to be multi-baggers over a period of time. Typically large-cap companies are market leaders and have strong fundamentals and business models to weather adverse cycles. They inhibit a greater extent of compounding led gains which makes them multi-baggers over a period of time. 

Q5. How to accommodate potential multi-baggers in a portfolio framework? 

Weightage of a perceived multi-bagger depends upon the mandate of the portfolio and consequent portfolio construction which balances risk, reward and volatility. Apart from company fundamentals and valuation, quality, size and liquidity of the stocks are other relevant factors to determine the extent of their holdings. Since every portfolio will have a different mandate, no thumbrule can be applied.

Mr. Amit Nigam, 
Head Equities, Peerless Funds Management Co. Limited.



What are the typical characteristics of a multi-bagger stock? How does one identify a multi-bagger stock?

A stock becoming a multi-bagger is a journey wherein the underlying company needs to fulfil certain basic criteria of investments – it should have a good quality business (implies the company has a sustainable profitablity track record) and is run by capable people who also take care of minority shareholders.The time taken to traverse this journey, in our view, depends on three things:
1.Potential for profitable growth and management passion & capability to achieve that
2.Management intent to share the benefits of this growth with minority shareholders
3.Level of undervaluation vis-à-vis the markets at the time of investment

Once identified and invested in, the company has to be continuously evaluated on the first two parameters to ensure the thesis remains intact.At Peerless Mutual Fund we follow an investment philosophy focused on identifying such good businesses. We focus on the RoCE (Return on Capital Employed) and Free Cash flows, as the parameters of profitability, to select stocks in the manufacturing sector and RoE (Return on Equity) and RoA (Return on Assets), as the parameters of profitability, for the stocks in the financial sector.

An important factor to realise the full potential of a multi-bagger is that it is not important when we invest in it but how long we remain invested. We need to understand that all businesses have cycles, short or long, depending on the capital intensity of the business. This cyclicality of the business is mirrored in the stock price with an amplified cyclicality. Traversing the journey of a multi-bagger successfully; requires holding on to a stock even during a down cycle.

In order to enhance our holding ability in a stock, our experience suggests that we put more effort in building knowledge of the different aspects of how the business is run e.g. raw material sourcing, process operations, distribution details, competitive intensity etc.

The importance of this knowledge manifests during the "down cycle" of the business which desists us from cashing out, and in fact gives us the confidence to use the stock price correction to increase allocations to the stock. When the up cycle follows – the stock price appreciation works on a bigger quantum of investments; enhancing overall returns; giving us the multi-baggers.

Quality of promoters is considered to be one of the most important feature while identifying a multi-bagger. What exactly does an investor need to look at while studying the quality of promoters and management?

While studying the quality of promoter/ management unfortunately there are no laid down parameters. We at Peerless use both quantitative and qualitative parameters; e.g. misallocation of capital, consistent inferior profitability than industry peers can be a potential red flags on quantitative front; while corporate governance practices e.g. uniform disclosures to all shareholders; reputation of auditors etc. can be some of the examples of qualitative parameters. Additionally, we observe these data points over longer time horizons – typically over a decade to understand the past track record of the promoter/ management. Interacting with different stakeholders of the business – suppliers, dealers, employees, etc. can also sometimes give insights into the quality of promoter/ management.

Small cap stocks are preferred by investors as they have a potential to be multi-baggers? Can Large cap stocks turn out to be multi-baggers as well?

Yes – large cap stocks can also be multi-baggers. It depends on the business opportunity available for the large cap company and the ability and willingness of the management to grow the company. As an example, some of the private sector banks in India despite having been in business for almost two decades have less than 10% market share of the entire banking business. If these banks were to continue growing faster than the industry without sacrificing profitability we would not be surprised if they can still compound several times over the years to come. Another example could be of a large domestic company taking its business beyond the boundaries of the nation and creating a global business – in a profitable manner. The only caveat would be that in the case of large cap stocks the pace of compounding would be slower as the current size of the business would weigh on the growth rates of the business.

On the other hand, while it is possible that small cap stocks may compound at a faster rate, this is typically accompanied by higher uncertainty and risk. At Peerless Mutual Fund, we focus our efforts on businesses which have the key determinants of success, irrespective of their capitalisation status.