Want to discover a multibagger? Here are 7 tips

Finding a multibagger: This is more like investing in a structurally strong penny stock today that sprouts its wings over five or even 10 years

Indian markets have seen a spectacular run-up in 2023, with record runs, day after day, towards the year-end.

With bulls powering markets higher into 2024, identifying a potential multibagger in an already-expensive market will be quite a tumultuous task, say market-watchers. However, every market presents opportunities; only, the whole process gets tougher.

So, how do we identify potential multibaggers – stocks that have the potential to go up 5-10x -- over a 5-10 year period in 2024? The idea here is not to look for stocks that sky-rocket in weeks, only to come crashing down in days. This is more like investing in a structurally strong penny stock today that sprouts its wings over five or even 10 years.

The foremost principle in identifying such stocks is to understand the company well. Like ace investor Peter Lynch’s wisdom goes, ‘never invest in an idea that you cannot illustrate with a crayon’. Simply put, buy what you know inside out. In this manner, an investor is confident about his holding and is aware whether to hold or exit in any changing environment.

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Apart from this, there is not one but various secret sauces to find diamonds from the coal. Here are 7 key tips from market experts to identify multibaggers in 2024.

Find travelators

The most basic behavioural economics principle – herd mentality, where investors buy or sell just because everyone else is buying and selling – is a strict no-no. Going against non-conformity by understanding the business well and finding out whether it hasn’t been valued by the rest of the market or not is a key step to discovering a multibagger.

Market experts advise investors to find a company that is trading below its intrinsic value, offers high earnings growth potential and has a good chance of a re-rating in the form of higher price-earnings multiples. This is like you walking on a travelator or autowalk, where you walk and the floor escalator (the ones you see at the airports) also moves, so you get to the destination doubly faster.

For example, look at how auto air-conditioning solution provider Subros emerged as the biggest wealth creator. From Rs 27 apiece 10 years ago, the stock has seen a remarkable rise of over 2,000 percent to Rs 656 per share on January 5, 2024.

To put this into perspective, if a trader would have invested Rs 1 lakh a decade ago, his investment would have ballooned into Rs 23 lakh. The company commands a 42 percent market share in the passenger vehicle segment and 51 percent in the commercial vehicle segment, supplying thermal products for automotive applications in India. It is the only integrated manufacturing unit in India for auto air-conditioning system products.

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Eye on the future

Pick up themes that will bode well for the future. Market experts advise that emerging themes like renewable energy, electric vehicles or artificial intelligence, which may not be the current market flavour but can be so tomorrow, are potential multibaggers.

Companies proactively investing in newer product lines, technology, or research and development will create new and improved iterations of its line in order to stay ahead of the competition.

“A business that makes significant technological investments is likely to stay ahead of the curve and pay off later,” said Aamar Deo Singh, Senior Vice President, Research, at Angel One.

One example is Olectra Greentech. The stock of this electric bus manufacturer has soared over 400 percent in five years. Over the course, it has tied up with BYD, a Chinese battery and EV maker, and has received significant orders from the Maharashtra State Road Transport Corporation for supply, operation, and maintenance of electric buses.

Currently, Olectra is running over 1,200 e-buses on Indian roads and has plans to expand its operations into newer market segments.

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Falling debt: money saved is money earned

Market experts stress that investors should keep an eye on a company’s debt-to-equity ratio. Several companies are shedding their high debt burden, because their business may be bringing in cash flows that were disrupted by the pandemic. Lower debt levels will make sure they will throw up more cash in future, if the business keep growing, as interest costs fall. Thus, looking for companies that are consistently lowering debt will be a good hunting ground as well.

Watch the cash flows

The most important characteristic all market experts talk about in a multibagger is that it should generate free cash flow (FCF). FCF refers to the cash flows with the company after it has taken out whatever is required for capex to grow further.

This is, however, difficult to see too often in a country like India because most companies are investing for future growth. The ones that throw FCF are too expensive in the current market. Thus, the next best thing to do is to look for companies which consistently generate cash flows.

For example, pharma player Abbott India’s positive FCF since 2019 has made it a popular investment among investors. The company’s FCF has grown to Rs 859 crore in 2023 from Rs 486 crore in 2019, suggests data. Over the course of these years, it has always generated strong FCFs. The stock price was also reflective of the same, surging nearly 200 percent during the same period.

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Track changing government priorities

If the government goes on an overdrive to accelerate growth in a particular segment, you might see the complexion of stocks in that beneficiary segment change entirely.

For example, higher spending in defence and government thrust on indigenisation triggered growth in defence stocks. Ditto for stocks in the railways segment. Again, segments like EMS, API etc., also received a boost because of a combination of the China-plus-one factor and government thrust on the segment through production-linked incentive (PLI) schemes. What could be the next triggers to watch out for?

Moving ahead, in 2024, the focus will be on Lok Sabha elections, with a continuation of economic reforms and policies as the present BJP government is widely expected to retain power. The Reserve Bank of India (RBI) might consider rate cuts in the second half of CY24, contingent on the overall inflation picture, and the monetary policy stances of global central bankers. That apart, markets may see robust capital-raising this year as well. More than 65 IPO documents have been filed with the Securities and Exchange Board of India (SEBI). Of these, 25 have already received approval.

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Bet on good managements

A good governance and transparent management will ensure that the company’s growth is sustained without any financial manipulation. The management should also have a proven track record of handling crises, such as recessions and downturns.

“If a business is good and the management is not good, future growth will ultimately suffer -- the same way that a good horse would need a strong jockey that races him faster on track,” said Siddhartha Khemka, Head of Retail Research, Broking & Distribution, Motilal Oswal.

Recounting an instance, Ambareesh Baliga, independent market analyst, cited the example of FMCG firm Jyothy Labs, which is a leader in many Indian micro-markets, especially in southern India.

The company operates across various categories such as dish wash, fabric care, household insecticides, etc. Baliga said that the first major crisis and achievement for Jyothy Labs was the takeover of loss-making Henkel and the huge debt which bloated the company’s balance sheet. However, they proved everybody wrong and turned around the operations and became brand leaders across various categories - from a one-product wonder like Ujjala.

“This was about a decade back. The stock was languishing till about a year back due to flat revenues, and ,more importantly, the resignation of CEO Ullas Kamath, who was the face of the company and seen as the person responsible for Jyothy's growth.

However, the true leadership of a person is proven when the leadership baton is passed over smoothly and the company continues to grow. The next-gen takeover has opened new avenues of growth for the company, the balance sheet was getting healthier and this is why we took the call that the management which handled past crisis well, will successfully manage this, too. The stock grew 3x in last 9 months,” he said.

Look for leaders

The final hack to finding a multibagger in 2024 will be identifying its unique business potential and whether it is operating in a market where it commands a good leadership or not.

It is usually a good idea to take a closer look at businesses that have an advantage over their rivals in an industry which offers significant growth potential.

For example, NRB Bearings, the oldest needle-bearing manufacturer in the world, commands a formidable 70 percent share of bearings used in Indian vehicles. This dominance translates to a trusted brand, with every car on Indian roads humming with NRB technology.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions