A large swathe of Indians would feels that Rs 1 crore is a handsome retirement corpus. But will that be the case after 30 years?

The purchasing power of Rs 1 crore after 30 years would be equivalent to approximately Rs 17 lakhs today if we consider an inflation rate of 6%.

Additionally, the overall cost of foreign education today is upwards of Rs 50 lakhs in good universities. A plush 2 bhk flat in upscale areas of leading metros doesn’t cost less than Rs 1.5 crore.

Unfortunately, despite working for several years, many find it challenging to achieve their goals. Traditional assets aren't empowering individuals to create wealth.

However, what if one could increase one’s invested corpus by 5x to 10x over 7 to 10 years? This is possible by investing in good quality multibagger stocks.

For instance, between 1st April 2014 and 31st March 2022, the share prices of Titan, Asian Paints, and Pidilite have increased by 10x, 6x, and 8x respectively.

This means an investment of Rs 10 lakh in these companies would have grown to Rs 1 crore, Rs 60 lakh and Rs 80 lakh, respectively.

Even a renowned company can be a multibagger
One may believe that finding multibaggers can help an investor create substantial wealth. But it is easier said than done. In the quest to find such shares, investors may purchase shares of companies without adequate due diligence based on tips or hearsay.

Therefore, it is vital to understand that a multibagger may not just be an obscure share but also a renowned company with excellent growth potential.

Here are 6 points to consider while scouting for multibaggers:

1) Powerful industry tailwinds
Before choosing stocks, one should shortlist high-growth industries. High growth could occur if there is policy backing or a shift in a sector from unorganized to organised, macro trends, and more.

For example, the Indian government has been actively pushing for the indigenization of the defense manufacturing space by formulating favorable policies. Therefore, one should consider opportunities in the defense sector.

Similarly, Titan has taken advantage of the growth runway the jewelry space offers, which has primarily been an unorganised sector. An investor may look at industries growing at a healthy rate of 15% or more.

2) Efficient Capital Allocators
Investors need to discover companies that are efficient capital allocators. In simple words, capital allocation tracks the efficiency of a company in allocating its resources to generate the highest possible returns.

Hence, if a company can deploy its capital to generate high returns, it should retain a large percentage of its profit. If it cannot do this, it should distribute its profits among shareholders.

Investors must use ROCE (Return on Capital Equity) to discover efficient capital allocators. Any company that generates a ROCE of 15% or more is an efficient capital allocator.

One may also wish to check out the durability of the ROCE. For instance, Colgate-Polmolive (India)'s 10 Year ROCE has been 96.6%.
3) Capital structure
An investor must also scrutinise the cash flow apart from reviewing the growth rate across the top line and bottom line, as it has a direct bearing on the capital structure of the company.

A company generating a high level of free cash flow is likely to have low debt. The debt level in a company’s book can be evaluated as per the sector it is in.

For example, FMCG companies currently have a debt-to-equity ratio of 0.6x (FY22) as they are cash generators.

Whereas companies in capex-heavy sectors such as power, infrastructure, and real estate reported debt-to-equity ratios of 1.55, 1.01, and 0.85, respectively in FY22.
In such sectors, a generally debt-to-equity ratio of 1 to 1.5 is preferred. If the ratio goes beyond this range, it would be difficult for such companies to service debt, especially during a slowdown in the sector. An increase in interest rates could also prove detrimental.

4) High promoter holding and excellent management quality
The destiny of a company is linked to its promoters. Therefore, it is preferable to consider companies with a promoter holding of more than 50%. This indicates a high level of promoter confidence in the company.

One could also check whether the institutional holding is above 10%. Typically, institutional investors invest for the long term and bring in accountability.

They perform extensive due diligence before investing in a company. Additionally, the quality of the top management must be excellent.

One may also want to consider the educational qualifications and experience of key management personnel of the company.

5) Robust moats
During ancient times, a moat would protect a castle from invaders. Similarly, a moat is a competitive advantage in business that allows a company to protect its market share.

For example, India's leading paint company Asian Paints has developed two moats - high brand equity and a peerless distribution network.

6) Scuttlebutt
Renowned investor and author Philip Fisher in his best-seller popularised Scuttlebutt in his book - Common Stocks and Uncommon Profits.

Scuttlebutt is used to discover 'company grapevine'. An investor can collect such information through customer, vendor, distributor, and ex-employee interactions. These entities would provide insights that may not be readily available.

Multibaggers or not, investors must do their due diligence before they consider investing. Being patient and holding good businesses for the long term is one of the best ways to create wealth.
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