How to find multibaggers

If you had invested Rs10,000 on April 1, 2002, how much would that money have grown by now? The answer is simple. It depends on where you had invested it. Rs10,000 invested in real estate company Unitech's stock would have been worth Rs1.20 crore by now. If you had missed out on Unitech, the next best bet would have been BF Utilities. Rs10,000 invested in BF Utilities, a company formed by the demerger of the financial services and windmill divisions of Bharat Forge, would have bloated to Rs66.8 lakh by now.

The other top wealth creators since 2002 are stocks like Anant Raj Industries, Praj Industries, Aban Offshore, Kirloskar Brothers, Gujarat Flourochem, Sesa Goa, Areva T&D and Pantaloon Retail. "These are clear examples of hyper wealth creation. If you were lucky enough to have any one of these stocks it would have changed the performance of your entire portfolio," says Raamdeo Agrawal, joint managing director and co-promoter of broking house Motilal Oswal Securities Ltd.

The problem: how does one spot these companies before they hit the big time? "Bargains are found when the markets are blind to change. You have to buy when the company is not visible to the market," says Agrawal, whose company has been tracking wealth creating companies for the last decade and more.

The study gives out some hints. The trick is to find young companies which are less than 10 years old. These tend to report higher growth in profits. Take the case of BF Utilities: it was formed only in 2001. The study also indicates an inverse relationship between the market valuation of the company and the returns it generates.

In other words, the smaller the market valuation, the larger the returns over time. Stocks with a market capitalisation of less than Rs2,000 crore in 2002 have given a return of 136% per year from 2002 to 2007. The bulk of the wealth created has come from stocks that, at that point of time, had a price-to-earnings (P/E) ratio of less than 10. (P/E is the price of a share divided by the company's net profits per share).

Other than this, private sector companies on the whole performed much better than their public sector counterparts. The study attributes this to deregulation in most sectors. Multinational companies (MNCs) underperformed their Indian peers. Having said that, the Indian markets still believe in the long-term potential of MNCs, as indicated by their higher price to earnings ratios.

However, such fantastic growth in the days to come might be difficult to sustain. "I expect the next financial year to be a year of modest performance with returns of around 15-16%" says Agrawal.

So what are the sectors that will perform well in the days to come? "Predominantly domestic businesses such as banking, real estate, engineering and construction are likely to enjoy a higher share of wealth created," the study points out. There will be continued rise in the demand for luxury goods and services such as cars, ACs and travel.

Comforts such as low-end household appliances (TVs, refrigerators), cellphones, healthcare and education will also grow much faster than necessities. Hence, listed entities in these areas will make for good buys.