The Process of Creating Multibaggers

“How do you know that this stock will become a multibagger?” This is a question that we get asked the most whenever talking about our smallcases and their performance.

Our answer to this question often disappoints the person who’s expecting a complex answer, but the fact of the matter is that the discipline of investing is a simple process. The keyword in this sentence is ‘process’, the process is actually an elaborate one, and to understand the process better, we must look at some case studies to find the key triggers of a multibagger stock, but before we do, there is one more thing we must understand. Finding potential multibaggers through research is only half the story, the other half requires patience.For many investors, holding a stock when it gives you a decent profit (say 50-60%) is tough, they try to peel the skin before the stock ripens, whereas riding the tide with multibaggers requires an altogether different level of patience.

Over the past few years, we have picked stocks that went on to become all the way from 2x to more than 10x in our portfolios. Taking a look at some of the multibaggers that created wealth for our investors recently helps us understand the process of picking multibagger stocks.

Balaji Amines: Balaji Amines is an amines producer of Ethylamines and Methylamines, speciality chemicals and intermediaries for pharma and agrochem.

We witnessed a rapid growth in the pharmaceutical sector and agrochem sector which are the key end users for Balaji Amines. While this happened, we saw strength in the balance sheet of the company. Strength in the balance sheet is important not only in economic downturn to survive the cycle but also during growth phase to be able to fully utilise the opportunity available. With that settled, we also saw a clear mismatch between valuations of Balaji Amines versus its peers such as Alkyl Amines, as much as 60%. This helps in creating a comfortable margin on safety for the stock. Up until 2018, China produced upto 60% of amines for the world, but in the same year, almost 30% of China’s amines capacities were shut down due to pollution concerns, leading to a massive supply crunch. To top it all off, worldwide sentiments about dependency on China for key materials started to change and the China+1 theme came into existence. Balaji Amines was well placed to reap maximum returns from this macro setup due to the strength in its fundamentals. As a result, the Balaji Amines saw good profit growth of 32.83% CAGR over the last 5 years.

TATA Chemicals: Tata Chemicals engages in the manufacture of inorganic chemistry products with plants spread across four continents America, Europe, Africa and Asia. They are the world’s third largest Soda Ash and India’s leading vacuum evaporated iodised salt producer.

The company saw a demerger wherein they demerged the high return bearing Consumer Products division and merged into Tata Consumer Products Limited (TCPL) (formerly Tata Global Beverages) in march 2020. This unlocked a lot of value opportunities for Tata Chemicals as it helped them focus on their key product segments of basic chemistry products and specialty products. Here is a pre and post demerger look at the revenue break-up of TCL.

Post demerger, TCL was now largely a Chemistry oriented business with a portfolio focussed on its Basic Chemistry Products, Specialty Products and other related products like highly dispersible silica, lithium battery and nutritional supplements. With the chemical focused Capex that was going to take place, and the China + 1 theme starting to play out in favour of indian chemical players, the increase in capacities helped TCL in realizing the benefits of the chemical opportunity.

Aarti Industries: Aarti Industries is a leading Indian manufacturer of Speciality Chemicals and Pharmaceuticals with a global footprint. Chemicals manufactured by Aarti are used in the downstream manufacture of pharmaceuticals, agrochemicals, polymers, additives, surfactants, pigments, dyes, etc.

Aarti was already a very well placed player in the pharmaceuticals space, with really strong financials and consistency of performance and growth. With the world leaning towards indian players for their API needs. Aarti being a strong player was well positioned to grow their business rapidly.Another advantage that Aarti had among its peers was that of being a fully integrated played in case of some of its products like xanthine derivatives, and a backward integrated player in API, wherein they manufacture the intermediaries as well, which gives them a considerable cost advantage over competitors. Moreover, the companies’ focus on adding high value products in its value chain and scaling plans meant that growth would be seen in operating margins as well.

So far, after mentioning just 3 multibaggers that Green Portfolio has identified for its investors in the last few years, we see a pattern emerging, the traditional process of investing in companies that are fundamentally strong companies with sectoral tailwinds that can be verified with on ground developments and changes,capability to grow the business in a consistent and predictable manner and a valuation mismatch in favour of the investor are all things that make the recipe for a multibagger.

It’s not an extraordinary process, but it definitely is one which requires depth in knowledge and breadth in skill to interpret the signs that the economy is giving, and heaps of discipline to grow and more importantly protect the wealth of investors. At the same time, it’s important to remember that investing is not a game of certainties, but a probability play, and it is our research and discipline that helps us bring the odds in our favour on a long term consistent basis.

Green Portfolio has created more than 30 multibaggers other than the ones discussed here, and we continue to find the next multibagger with our research.

Karan Arora

Investment Operations and Research

You can have a look at our High Quality Right Price Multibagger Portfolio here:

“High Quality Right Price” Multi-bagger Portfolio smallcase by Green Portfolio