The Quest for Multi-Bagger
‘‘Multi-bagger’’ is the dream of every investor in the stock market. So it’s pretty logical that it’s also the most abused word in the markets. Every stock is touted as a potential multi-bagger, though most turn out to be ‘multi-beggar’ !
Yet, the quest for finding multi-bagger continues…
Recently, there were couple of nice examples of some multi-baggers.
Rakesh Jhunjhunwala discussed his investment in Prime Focus.
From Rs. 4 to Rs. 115 – that’s 29 times in 4 years, CAGR of 132%! Something to definitely probe deeper!!!
First, some basic stock history:
Looking at the chart and IPO prospectus, RJ is talking about the period 2004 – 2007. He invested the money in Jun 2004 before IPO at Rs. 6.6 (all share price adjusted), and the company came out with IPO in Jun 2006 at Rs. 41.7. The stock listed at a discount at Rs. 37 and reached Rs. 140 during the frenzy of Nov 2007 – Jan 2008. The stock subsequently tumbled to Rs. 5 in Mar 2009 and is now at Rs. 45.
Now the more important analysis:
The company reported a PAT growth of 4 times between 2004 and 2008. Great! (including through acquisitions, but we are not analyzing the company as of now). But what really explains his return of near 20 times is that his initial forward P/E was 7, and the high he was offered was around P/E of 40!! By the way, the P/E is back to 7-8 times!!!
The second example is of Bhavook Tripathi value hunt in FAG Bearings in Outlook Business magazine.
He bought FAG Bearings at Rs. 20 around the year 2000, and sold the bulk at Rs. 500 in year 2006. 25 times in 6 years – CAGR of 71% over 6 years!
Since we don’t have exact data points, I have tried to calculate the approximate timelines. Between Oct 2000 to Oct 2006, the company’s stock price rose from Rs. 33 to Rs. 590, CAGR of 62%. During the same period, sales growth was only 18% and PAT growth was 34%. Importantly, P/E grew from 4 times to 13 times.
In Prime Focus, the P/E expansion was 7 times, while PAT growth was 4 times. In FAG Bearings, the P/E expansion was 3 times, while PAT growth was 6 times.
For a multi-bagger, both P/E expansion and Earning growth are important. Buying a stock at 40 P/E is unlikely to yield a multi-bagger. However, a low P/E stock without Earning growth is also unlikely to get rerated to higher P/E.
Further, there is an interesting comparison between SKF India and FAG bearings (within industry comparison) in the same period. Look at the following chart:
SKF looks far better on every parameter in this period. But what about stock returns? Well, SKF India returned CAGR of 42% in this period. Great. How about FAG Bearings? 62%. What, how? FAG Bearings P/E moved from 4 times to 13 times, while SKF India’s moved from 25 times to 16 times, still justifiably higher than FAG Bearings.
So FAG Bearings outperformed SKF India by starting at much cheaper valuations, and showing good growth to deserve higher valuations.
To reiterate, for a multi-bagger, both P/E expansion and Earning growth are important. Buying a stock at 40 P/E is unlikely to yield a multi-bagger. However, a low P/E stock without Earning growth is also unlikely to get rerated to higher P/E.
What about the Test of Time? FAG Bearings stock is still 3.5 times up from 2006 levels and maintaining its P/E of 14 times, while Prime Focus stock is at a third of its 2007 peaks (and closer to 2006 IPO price), and has again fallen to single digit P/E. In this case at least, Bhavook has scored over RJ. His company has continued to perform, and his exit was not based on getting very high P/E to make a killing.
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