Before we get into the intricacies of multi-bagger stocks, we need to get acquainted with the term. In layman terms, multi-bagger stocks are diamonds in the making. These are the stocks which have the potential of generating very high returns in the long run. However, not all stocks are called as multi-bagger stocks. The checklist for labelling any stock as ‘multi-bagger’ or ‘mega return’ stocks are as follows:

  • Management track record and integrity
  • Business USP – First mover advantage, Price-maker, Regional dominance, Technology edge, Patents, etc.
  • Institutional ( FII & DII) and promoters ownership trend
  • Rewarding Minority stakeholders – Dividend, Bonus, Rights Issue etc.
  • Percentage of promoter ownership pledged
  • EBITDA – (Earnings before Interest, Taxes, Depreciation and Amortization) Growth
  • PAT (Profit After Tax) Growth
  • ROCE – Return on Capital Employed
  • Debt Equity Ratio – Capital cushion to support growth
  • Capital Discipline

If a stock’s price increases by twofold, they are termed as two-bagger stocks. If it grows by 8 times, it would be termed as eight-bagger stocks. In short, multi-bagger are stocks whose prices have appreciated manifold over their original investment values.

These stocks normally undergo through three phases till they generate multi-bagger returns.

Three Phases before multi-bagger returns

First Phase or Consolidation Phase

Here, many investors are not cognizant of the potential of such stocks. Typically, these stocks observe:

  • Low institutional participation
  • Low liquidity
  • Less market recognition & media coverage
  • Improvement in the fundamentals of the company
  • Cheap valuation multiples
  • Market capitalization below INR 50 billion

In this phase, the stocks are traded in a narrow range and will not undergo many corrections. This is the best time for investors to purchase the stock. However, it is difficult to identify these stocks as such stocks have remained in the same price levels before they experience any appreciation in their price. So Patience is one of the key to remain invested in these stocks before you can enjoy the multi-bagger returns.

The classic example would be of Havells. If one had invested INR 1 lac in 1996, it is worth around INR 28 crores today.

Second Phase or Advancement Phase

This stage witnesses improvement in the financial parameters such as valuation, stock price, market capitalization and trading volume. In this stage, the stock gains attention from analysts as well. The company faces the transition from small-cap to mid-cap as the stock is no longer inexpensive due to a reasonable valuation. However, there is still a good chance to generate multi-bagger returns if you stay invested.

Final Phase or Culmination Stage

The sharp jump in its price, high valuation, high retail participation, and high liquidity makes it a multi-bagger stock in India. It is continuously on an analyst’s radar and any news about the company affects its stock price immediately. This is a favourable time to book profits on the stock. It is advisable to circumvent any purchase of these stocks as they are capable of giving only minuscule returns from here on.

The essence of multi-bagger stocks in India is that they can swank about their strong fundamentals, management credibility, and sound business model. However, before you can invest in such stocks, it is advisable to consult a certified financial advisor who can conduct best stock analysis based on its fundamental research.

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