How To Identify Multibagger Stocks, According To TCG's Chakri Lokapriya
Chakri Lokapriya gives examples of some multibagger stocks and explains how to select the right ones.
Multibagger stocks which generate higher returns come in different shapes and sizes, according to Chakri Lokapriya of TCG Advisory Services Pvt.
"Sometimes, it can be a growth company—the company that is adding new products and therefore, growing very fast. Or, it can be a turnaround company—whose fortunes have dimmed. Now, its valuations are so low, and now the business is turning and starting to do better. That is the second kind," Lokapriya, managing director at TCG Advisory Services, told NDTV Profit.
"The third kind could be any company, which has been growing at a steady state, but suddenly new avenues of businesses have opened because of the change and there is this landscape. So, they can be from any one of these categories," he said.
Identifying A Growth Company
He mentions Varun Beverages Ltd. from the consumer segment—one of the largest distributors that bottles Pepsi and other beverages.
"The company's stock has gone up 3.5 times in the last two years and its revenue is growing more than the sector average, because it has expanded into new markets and (has been) widening its revenue streams by new launches," he said.
The company has been constantly updating its business model, and exports to other countries have led to revenue and profit growth, according to him.
Identifying A Turnaround Company
"The turnarounds can be manifold. It can be a company that has been facing its own business problems because their stocks are falling, or second it can be due to the sector," Lokapriya said.
He gave the examples of REC Ltd. which is up by near 4.8 times, while PFC Ltd. has risen four times in the last two years. "Renewable push is making REC and PFC valuable bets," he said.
According to Lokapriya, being lead financers in the power financing sector and with strong balance sheets, both the companies are showing growth that may last for many years to come.
Even after 4-5 times returns, valuations continue to be reasonable and margin is going to improve, he said.
Investors can "continue to invest in such companies and expect a multibagger trend for the next 2-3 years", Lokapriya said.
Change In Business Dynamics
Titagarh Rail Systems Ltd. is another example, where the stock has risen 10 times in the last two years, he said.
"It is not just due to the regular replacement of trains, but also due to the government's push towards faster and better trains that have led to the expansion of the order book for new trains suddenly."
Newer trains mean higher margin, greater size and longer order book, he said. Also, metro trains have led to the opening of fresh export markets, which did not exist before, according to him.
The company itself has started exporting its products—railway wagons—to other companies, which is another key factor, according to Lokapriya.
"Now, the company is expected to grow on a far higher growth rate than it did before, with far more profit margin than it did before. And therefore, the stock will surprisingly turn out to be a multibagger," he said.
Key Risks
"It is important to keep a track of whether the company is actually converting the order book into actual revenue, and is that revenue adding to the growth and profitability of the company," he said.
Investors need to measure the metrics on an ongoing basis—both quarterly and annual—to ensure milestones are being met and forecasts are being achieved, Lokapriya said.
