Patience is the key to getting multibagger returns from your high-conviction bets in the equity market. There are at least 146 stocks in the BSE 500 index, which have surged over 500 per cent in the past 10 years. With a rally of 16,393 per cent, Tanla Platforms emerged as the top gainer in the list. Shares of the company have soared to Rs 744.60 on October 27, 2022 from Rs 6.10 on October 26, 2012. This means an investment of Rs 1 lakh in the stock a decade back would have turned to over Rs 1.20 crore today.
On the other hand, Sensex gained 220 per cent during the same period. Over the years, the Indian market stood highly volatile due to the demonetisation of currency notes, implementation of GST and RERA, eruption of Covid-19 cases and rise in raw material prices, among others.
Among other significant gainers in the list, Deepak Nitrite, Alkyl Amines Chemicals, HLE Glascoat, KEI Industries, UNO Minda, Navin Fluorine International, Caplin Point Laboratories, Garware Technical Fibres, APL Apollo Tubes, Tata Elxsi, SRF, Bajaj Finance also gained between 5,000 per cent and 11,400 per cent during the same period.
How to spot such multibaggers?
According to Research and Ranking, an investor must look for multiple qualitative and quantitative factors to discover companies that could become multibaggers.
“Some of them are - considerable promoter holding, high management integrity, efficient capital allocation, high margin business, return on capital employed of greater than 18 per cent, return on equity should be over 15 per cent, the company should have low debt or debt free with a consistent increase in net profit and cash flow. There should be encouraging tailwinds and attractive,” the equity investment advisory firm said.
However, it further added that rather than looking at individual stocks, a better approach would be to focus on constructing a potential multibagger stock portfolio.
How to invest Rs 20 lakh?
The research firm in a note said that instead of investing Rs 20 lakhs in one go, you may want to stagger your investment over 6 months as it is difficult to predict market direction over a short period of time.
“Rather than searching for multibagger stocks, an investor may want to focus on constructing a potential multibagger portfolio. Such a portfolio could have a mix of 20-25 stocks as this helps one to avoid the risks of under-diversification and the pitfalls of over-diversification. These stocks could be across different market capitalisation and sectors based on an investor’s goals and risk appetite,” Research and Ranking said adding an investor could either use a top-down or a bottom-up approach to portfolio construction.
It further said that an investor should also be aware of allocation percentage and should preferably allocate 3 per cent to 7 per cent of the overall portfolio in a single stock.
Things to note
The journey of a multibagger stock isn’t linear. There will be multiple times during which it will fall. For example, the share price of Bajaj Finance plummeted by more than 15 per cent at least six times between September 2016 and September 2022. However, during this period, its share price has gone up by 6.2 times, which means an absolute return of 522 per cent.
“An investor will need to evaluate whether a company’s share price has fallen due to changes in its business fundamentals. Hence, it is vital to keep tracking the company's fundamentals in which one has invested. Apart from scrutinizing the financial statements, one must also read brokerage reports, earnings concall transcripts conducted with institutional investors and annual reports,” Research and Ranking said.