What are multibagger stocks and how to find these hidden gems?
Multibagger was coined by Peter Lynch. Multibagger stocks are equity shares of a company that can generate manifold returns. The returns are higher than the associated cost of acquisition.
Multibagger shares have huge earning and growth potential. They demonstrate sound management and production techniques.
Qualitative Characteristics of Multibagger Stocks
Competitive Edge or Market Monopoly
Multibagger stocks have a market monopoly. They provide products or services that no other company does. This permits the company to achieve better pricing and market share and subdue competitors.
For example, Adhesive maker Pidilite Industries has been a multi-bagger stock. The company manufactures Feviquick, Fevicryl, Fevistick, M-Seal, and Dr. Fixit. It was the first company in India to manufacture adhesives due to this the company was able to capture 70% of the market share.
Strong Promoter Holding
Promoters must have a significant holding in the company. Significant holding allows the Promoter to take tough decisions during turbulent times. For Example, Pidilite Industries have 68.69% Indian promoter holding.
Financially Conservative Outlook
The management of the company must utilize the financial resources of the company optimally. The company's management must speculate on the pros and cons before allocating capital.
The company must have a good amount of free cash flow. It can be used during tough times to buy back stocks, pay shareholders, and expand product inventory.
Good Governance and Vision
The company's management must have good governance and vision. Good governance builds and increases financial performance, helps to attract and retain talent, and provides a competitive edge.
The vision motivates the team to achieve exponentially, explore unknown terrains and take up problems positively.
For Example, UPI( Unified Payment Interface) is a vision of India's government. It was launched in 2017 to improve financial inclusion and increase the digitization of payments.
UPI crossed one billion transactions in 2019 and had 100 million active users. UPI has benchmarked India's position in digital innovation in the financial sector.
Quantitative Characteristics of Multibagger Stocks
High Earning Growth
Market monopoly and great product inventory ensure high earning growth. Earning growth helps is critical for the financial performance of the company.
EPS ( Earning Per Share) is one of the ways to evaluate the earning potential of the company.
A strong brand presence ensures high-profit margins. It also allows companies to charge a premium for their products or services.
For Example, Maruti Suzuki was started in 1981. It was a joint venture between the Indian Government and Japan's Suzuki. Maruti Suzuki has a strong brand presence in India and had no competitors till 1996. This allowed the company to charge a premium price for its cars and capture a significant share of India's automobile sector.
Multibagger stocks have little debt due to high-profit margins and high earning growth. Financially conservative management ensures that the company utilizes financial resources optimally.
Free Cash Flow
Multibagger stocks generate high free cash flow. Free cash flow can be utilized to pay dividends, product innovation, research, and salary hikes.
How to find multi-bagger stocks?
A multi-bagger stock can amplify its value by many folds.
To spot a multibagger stock, investors must check the debt of the company. The debt must not exceed 30% of the equity value. Then they must check the company's performance in the previous quarters. They must also evaluate the earning potential. Finally, they must evaluate the company's plans and how it will utilize the capital in the upcoming quarters.
Investors must also evaluate whether the company will be able to scale without burning huge capital. Is it a capital-intensive company?
Risks and Benefits of multibagger stocks
Risks of multibagger stocks
Multibagger stocks suffer from low liquidity and performance problems during their initial stage. Any bad news can trigger a price collapse.
The investment is locked for a significant time. The company takes time to scale and show results.
The chances of getting trapped in an economic bubble and value trap are high.
Multibagger stocks demand bulk purchases. They expose investors to boon and bane.
Benefits of investing in Multibagger stocks
Good earnings growth
Points to consider before investing in a multibagger stock
The points to consider before investing in a multibagger stock are-
Sales and Profitability
The company must exhibit a steady rise in sales and profitability in every quarter.
Investors must invest in low market cap companies to seize the earning opportunity.
An investor must check the amount of debt the company has and the time frame to repay the debt. They must also analyze where the debt money is being utilized.
Quality of Competitors
If a segment is highly competitive the profits become thin. A highly competitive segment derails profits and earning capabilities. Companies burn capital to attract customers and gain an edge.
Attractive Indian Multibaggers
From the above 6 stocks, let’s talk about 4 stocks in details
IndiaMART is one of India's largest e-commerce companies that provides B2B and C2C sales services. The company was started in 1996 by Dinesh Agarwal and Brijesh Agarwal.
Business and Revenue Model
IndiaMART operates on a subscription-based model for suppliers. The company charges a subscription fee to sellers for listing their products on the website.
Revenue and Growth( Source Startup Talk)
The company has a network of over 143 million registered buyers and +6.4 million subscribers.
The company has a whooping collection of more than 71 million products and services.
Stock Market Performance
IndiaMART IPO was a success in 2019. On the third day, the IPO was oversubscribed by almost 36 times and received bits of 9,66,86,235 equity shares on the final day.
The revenue of the company has grown from Rs 317.76 crore in March 2017 to Rs 854.70 crore in September 2022. The stock prices have grown from Rs 1,325 in July 2019 to Rs 4,336.80 in October 2022.
First mover advantage
Strong brand equity and awareness
Strong balance sheet and Financial Statement
Highly competitive sector
Low return on investment
Indian Railway Catering and Tourism Corporation( IRCTC) is an Indian railway subsidiary established by the Ministry of Railways to manage Indian railway ticketing, catering, and tourism operations.
IRCTC earns through catering, ticketing, and packaged drinking water.
Stock Market Performance
IRCTC IPO was listed on October 2019 and it was subscribed 112 times. The revenue of the company has increased from Rs 1870 crore in March 2019 to Rs 2,488 crore in June 2022.
IRCTC solely manages the online railway ticketing and catering services on trains.
IRCTC has no competitors.
The company is highly dependent on the policies of the Ministry and Railways. Any change in the policies can threaten its functioning and profitability.
Adani Transmission is the largest private-sector power transmission company in India with a pan-India presence. The company has more than 18,500 Ckm power transmission length and network availability of 99.87%.
Adani Transmission is a private transmission and distribution company. The company handles, commissions, operates and maintains electric power transmission systems.
Stock Market Performance
Adani Transmission shares have increased from Rs 325 in February 2020 to Rs 3,035 in October 2020. The revenue of the company has increased from Rs 2,875 crore in March 2017 to Rs 11,559 in June 2022.
Adani Transmission Strengths
Strong yearly growth in revenue.
The operating profit-to-sales ratio for Adani Power is higher than the national average.
A significant share of equity share capital and debt has been invested in asset innovation and operations.
Adani Transmission Weakness
Low market share
Tata Elxsi is the world's leading provider of design and technology services across industries. The company helps customers to reimagine their products and services through design thinking, IoT, Cloud, Mobility, Virtual Reality, and Artificial Intelligence.
Tata Elxsi offers services and solutions for consumer experience, distribution & delivery, and ad monetization for media, new media, and OTT services.
Stock Market Performance
The value of the stock rose from Rs 912.55 in October 2015 to Rs 8,707.25 in August 2022. The revenue of the company increased from Rs 419 crore in March 2009 to Rs 849 crore in March 2015.
Tata Elxsi Strength
A steady increase in profit and revenue.
Strong cash-generating capabilities.
Efficient management of assets for profit generation
Diverse revenue model
Tata Elxsi Weakness
Loyalty amongst suppliers is low.
The cost of building a new supply chain or logistic network is high.
The cost of replacing existing partners is high.
Multibagger stocks can amplify investors' returns but investors must invest with them after evaluating their financial performance and future overview.
During the economic bubble, many multibagger stocks become irresistible but evaluating the financial performance can add a little salt to them.
Sources used: Value Research, Business Today, Economic Times, Start-up Talky