Lessons from the Biggest Multi-baggers
For equity investors, certain stocks, properly selected, can be the ladders to great riches. While banks are paying you 6%-7% per annum, every few years, a handful of stocks can go up 100% more. Over 10 years, some stocks can go up manifold. Here is some data from the past 10 years of value creation (2013-2022 period) by listed companies. After applying for some filters such as liquidity, and trading frequency, the following 10 companies have emerged as the highest value creators: Tanla Platforms, Paushak, Shivalik Bimetals, Vidhi Specialty Food Ingredients, Alkyl Amines Chemicals, KEI Industries, HLE Glascoat, Fineotex Chemicals, Tata Elxsi and Uno Minda. How well have these companies done? From an adjusted price of Rs5.12 in 2013, Tanla Platforms went up to Rs946 (average price of 2022), which is a stupendous rise of 189 times. Paushak went up 130 times. Shivalik Bimetals was up 126 times over the past 10 years.  What causes certain stocks to rally in this insane fashion when the best of Indian companies cannot deliver more than a low double-digit return? We have been doing this annual compilation for the past 16 years. Here are our observations:
1. Starting Valuations:  This is the most important factor. All stocks that have created enormous shareholder value were available at exceptionally low valuations in 2013, partly because the stock market was in the doldrums. KEI Industries was valued at a throwaway price-to-earnings (P/E) ratio of 4. Paushak’s valuation was 2.8. The P/E of Alky Amines was 6. Vidhi Speciality was valued at a P/E of 3 and Fineotex Chemicals had a P/E of 4. A very low valuation is the springboard for exceptional value creation.
2. Profit Bursts: All these companies had broken into a sudden sprint, at some stage. That was the time to latch on to them. Shivalik’s net profit, which was between Rs7 crore-Rs9 crore for four years between 2017 and 2020, suddenly jumped to Rs19 crore in 2021 and Rs26 crore the next year. The net profit of Fineotex Chemicals first jumped from Rs16 crore in 2015 to Rs28 crore in 2016, and continued to rise steadily every year until March 2021. After this, it jumped 20% and again by 75% the following year, putting it among the top gainers on the back of these two years of big profit growth. Alkyl Amines, an R&D-focused specialty chemicals manufacturer, reported a net profit between Rs85 crore-Rs95 crore for four years between March 2104-2017. In March 2018, the profit shot to Rs118 crore, but this was nothing compared to what was to follow. Profit jumped 39% the next year, 56% in March 2020 and 67% the year after. The stock naturally sky-rocketted. UNO Minda, one of the top-10 value creators, reported a stunning 34% compounded annual growth rate (CAGR) in net profit over the past 10 years.
KEI Industries, another top value creator, which makes mundane products like electrical cables and wires, reported a 10-year CAGR of 31% in net profit, leading to a growth in shareholder value at a yearly CAGR of 57% over 10 years. For mind-boggling gains, we must look for a massive jump in profits.
3. Small Size: All these companies were small in 2013. Tanla’s turnover was just Rs117 crore in 2013. Last year, it was over Rs3200 crore. Paushak’s turnover was just Rs51 crore a decade ago. Shivalik Bimetals had a turnover that was even smaller – just about Rs30 crore. If you are looking for multi-baggers, look for smaller companies. They will not be followed by analysts and no fund manager can buy such small companies with low trading liquidity. Large companies, those that are talked about in the media and tracked on social media, have already been discovered. They will not lead to extraordinary gains.
4. Hot Themes: This factor is not necessary but, if present, helps in inflating valuation. Shivalik Bimetals is a good company, but the return on investment is not extraordinary. However, being part of a hot sector, an investment theme or a meme, helped increase its valuation enormously. In fact, there are multiple themes in Shivalik’s case. It is utilising the PLI (performance-linked incentive) scheme to expand into electric vehicles, charging stations, intelligent battery systems and solar energy farms with battery storage. PLI, electric vehicles (EVs) and green energy are all hot themes. Tanla, which is into messaging, e-commerce and e-payments, rode the wave of market interest in technology companies, and the themes of distributed ledger (that backs bitcoin) and “communications as a platform” in 2021. 
With the benefit of hindsight, all these are great lessons—especially the combination of low valuation and high-profit growth—but finding and profiting from these situations is not as easy as it looks. For one, stock prices are influenced both by external factors and internal ones. For instance, multi-baggers often fall sharply due to external events, sowing doubts even among the most diehard fans. Staying the course is tough. Second, a vastly improved business performance looks obvious with the benefit of hindsight, but is only revealed over time. Even the managements of these companies are often not sure how the future would unfold. The best course of action for investors is to look for a combination of improved financial results combined with a reasonably low valuation, and hope to ride the journey of such extraordinary value creators.
(This article first appeared in Business Standard newspaper)
but allegation of insider trading after so many ye
17 hours ago
2 weeks ago
Interesting write up.

The small-cap universe is rather limited which means it a losing proposition. Not all of them will do well. The best way to approach this is to spread your seed wide and far and hope 5-6 will hit jackpot -- possible only with capital + diversification the same way VCs and Angels approach startups. Not every individual investor has this luxury with exception of UHNIs. And there's the liquidity issue which makes it difficult to double down on winners.

Secondly, with respect to valuations, very often they are depressed for a reason -- and the market is often right. It's very difficult to pick exceptions, unless we're in the middle of a bear market or a recession where good companies are quoting low valuations (and you have plenty of dry powder).

The problem with stock picking is that it's a function of luck/timing and time itself, and very often time cannot be recovered. It's an "expensive" pursuit. This would have been a cakewalk in the old days where universe of listed companies was limited, and information arbitrage was possible and few players in the market (that's how Buffet made his fortune -- just don't listen to people these days).

Having said this -- more power to people who can profit from this pursuit.
2 weeks ago
Great article!!
Sumit Nahata
3 weeks ago
Debasish Sir, also recommend few such future opportunities. ????
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