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The multi-baggers from 10k to 20k

The majority of the multi-baggers owe their stellar returns to the market "re-rating", rather than an impressive expansion in their earnings.

Kumar Shankar Roy

It took a little over 18 months for the benchmark index of the Indian stock market to double from 10,000 levels to the dizzying heights of 20,000. Not to be left behind, the Nifty too breached the 6000 level on November 1, from a shade below 3000 last June. One would think this would have made the job of ferreting out multi-baggers (stocks whose prices have risen several times over) easy. But could you have spotted these multi-baggers through some in-depth research into th ese companies in June last year? Maybe not!

Indeed, the list of multi-baggers over the past year and half would leave an investor confused. Street-sense says that capital goods, real-estate and infrastructure, the most fancied sectors in the stock market in the past year, would have been the ones to yield multi-baggers over the past year and a half. But there is no specific sector theme to the stocks that made it to the top. Companies from the infrastructure, capital goods and real-estate sectors are, in fact, missing from the top 20.

Unitech comes in at the 38th position in spite of witnessing its stock price rising 5.6 times. It would also have been quite difficult to catch these stocks last year, even had you pored over their financials. The majority of the multi-baggers owe their stellar returns to the market "re-rating" them (allowing them a larger price-earnings multiple), rather than an impressive expansion in their earnings. Which are the stocks heading the multi-baggers list? Is there a pattern to them? Let us find out.

Top multi-baggers

Jai Corp, Walchandnagar Industries, State Trading Co, India Infoline and BAG Films lead the list of top 10 multi-baggers since June 2006 (when the Sensex was at 10,000). These stocks naturally represent the big gainers among the 1,033 listed stocks on the NSE. Others that make it to the list are Autolite (I), KS Oils, REI Agro, Nicco Corporation and Goldstone Technologies. All these stocks had risen tenfold or more in the period under review — June 19, 2006 to November 16, 2007 (we chose these dates as they represent Sensex levels of 10,000 and 20,000 respectively).

Would you have put Jai Corp on your "buy" list last year, based on its business prospects? Maybe not. Seeking an explanation for why a Rs 19 stock in a matter of just one-and-a-half years rose to Rs 1,000, we find that Jai Corp is into such businesses as steel, plastic processing and spinning yarn facilities. But this was not why it was sought after.

The stock came into the limelight because of speculation that the promoters of a mega corporation have an indirect stake in the company and plan to use it as their infrastructure vehicle. This partly explains the stock price rising by over 67 times. The fact that only 15 per cent of its stock is freely available to the investing public may also have helped its stratospheric rise.

In the second slot, we have Walchandnagar Industries Ltd (WIL), whose story is a different one; though the fact that the stock has risen by nearly 20 times its price tag of Rs 450 in June last year. WIL is engaged in the manufacture of sugar plants, cement plants, nuclear power and space equipment and other engineering products. Notwithstanding the decent results posted by it over the past year (72 per cent profit growth), interest in the stock has been stoked by reports of indirect stake held by some influential politicians in the stock.

Apart from these, companies that operate in "sunrise" businesses and seen as offering high potential, such as India Infoline (broking), Goldstone Technologies (IPTV services), BAG Films (media), Nicco Corporation (entertainment parks) and REI Agro (basmati rice) feature in the top ten multibaggers (see Table).

Surging on 'potential'

For five of these companies, namely WIL, State Trading Corporation, India Infoline, BAG Films and Rei Agro, earnings have risen, but their PE multiples have expanded even more, as investors have marked them up on the strength of their forays into promising new businesses. There are a couple of stocks which did benefit from a change in fundamentals.

The spike in prices of the shares of Autolite and Nicco Corporation is explained mainly by a turnaround in profitability. Nicco recorded a profit of Rs 6 crore last year as against a loss of Rs 16 crore in the year ago. Autolite, which makes lights and tubes, posted around Rs 5 crore profit, compared to a loss of Rs 3.3 crore in the earlier year. Both companies continued a sharp ramp-up in earnings numbers in the first six months of the current fiscal.

Though spotting the multi-baggers in advance was difficult, there was actually a good chance you held one in your portfolio. In the over 1,000 stocks reviewed on the NSE, shares of more than 490 companies, over half, gave a 100 per cent return between June 19 and November 17. Most of the stocks enjoyed both domestic as well as foreign investors' attention, leading to a hefty rise in prices. Over 60 companies saw their stock price rise five-fold or more. Stocks of 12 companies multiplied 10 times or more.

Small-caps in limelight

It is a known fact that retail investors have an unexplained penchant for stocks trading at low absolute prices, and these dotted the list of multi-baggers. While the multi-baggers, in general, did not huddle close to any specific sector theme, the market-cap status of stocks did play a role.

Results showed that out of the 490 companies that doubled their value in these 18 months, 409 were small-caps, i.e. companies with a market capitalisation of Rs 2,500 crore or less. In this set of small-cap companies, the average share price rise was 3.4 times, higher than the average share price rise in mid-caps as well as large-caps at 2.4 times for each respectively.

Mid-caps are companies that have market capitalisation between Rs 2,500 crore to Rs 10,000 crore.

These results are not surprising because this period has largely seen the mid-cap (103 per cent) and small-cap indices (107 per cent) exceeding the returns of the bellwethers such as the Sensex (97 per cent) or the Nifty (98 per cent).

In the mid-cap space, around 61 companies were multi-baggers (they at least doubled in value) while only 23 large-caps (companies with a market capitalisation of Rs 10,000 crore or more) were a part of the list. This data clearly indicates that cheap stocks of lesser-known companies delivered a more stellar rise than stocks of widely-tracked, larger companies.

Parting shot

If the multi-baggers were not entirely sought after for their strong earnings growth, the stocks that fell most sharply in this period were certainly swayed to a greater extent by fundamentals. Companies such as Aztecsoft, Nova Petrochem, Thiru Arooran Sugar and Suryalakshmi Cotton Mills head the list of worst performing stocks over this period.

Other laggards include Dhampur Sugar, Celebrity Fashions, Shah Alloys, Uttam Sugar Mill, Simbhaoli Sugars and Sakthi Sugars.

Unlike the multi-baggers, whose share prices have gone up as a result of better growth potential, rather than actual earnings, the laggards appear to have declined directly in response to their profit performance.

Finally, discussion on multi-baggers from 10k to 20k would be incomplete without mention of the following companies. IFCI, despite its unimpressive financials, saw a stellar rise, following the announcement that the management had put a 26 per cent equity stake on the block. Reports of the company's real-estate holdings and its long list of suitors helped the stock move up from Rs 9 to Rs 90, gaining a whopping 900 per cent in the process.

India may not yet be ready for Internet protocol TV, but that didn't deter investors putting their money into IOL Broadband. From being a little known entity, the Rs 53-share gained almost 10 times its value in a matter of months, without the fundamental picture changing too much.

On the other hand, stocks such as Gujarat Mineral Development Corporation (832 per cent), Reliance Natural Resources (740 per cent), KLG Systel (500 per cent) and Welspun Gujarat Stahl (480 per cent) rode excellent earnings growth.

Fundamentally sound companies that turned out to be multi-baggers include TV18 India, Everest Kanto, Elecon Engineering, SREI Infrastructure Finance, Kotak Mahindra Bank and Larsen and Toubro.

In some cases, niche business areas attracted investors' attention. Educomp (e-learning), Alphageo (seismic surveillance), Aban Offshore (oil rigs), Karuturi Networks (a leading cultivator of flowers), and Rolta (digital mapping) are prime examples

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