Searching for multibaggers?

Searching for multibaggers? Look for these traits: Raamdeo



Ahead of the launch of the 20th edition of Motilal Oswal's Wealth Creation Study, the brokerage's co-founder Raamdeo Agrawal says the 'Lollapalooza effect' is a powerful driver of outsized investment returns.

There are plenty of approaches which one can take trying to create wealth in the stock market. While some investors are the hands-off types, looking to invest in a well-diversified portfolio that will likely mirror the market's returns, others are more active, constantly evaluating the prospects of one stock versus the other.

For the latter, Raamdeo Agrawal, co-founder of Motilal Oswal, has an advice: look for the Lollapalooza effect.

The term, coined by Berkshire Hathaway vice chairman Charlie Munger, who describes it as a state in which several factors act at the same time in the same direction. In the investing context, it means investing in a company that has several factors going for it.

Agrawal was exclusively speaking to CNBC-TV18 ahead of the launch of the 20th edition of Motilal Oswal's marquee Wealth Creation Study, authored by him.

The study's theme this year is 'Mid-to-Mega', or companies that can go from being ranked between 100 to 300, market capitalization-wise, to the top 100 in five or so years. "These could give returns of 10-12x," he said.

While the report shies away from naming names, it lays down a strong investing framework from which to draw, and underlines the importance of having the lollapalooza effect of MQGLP (mid-size, quality, growth, longevity and price).

Citing examples from the past, Agrawal said Eicher Motors was blessed with each of these factors back a few years back when its leadership in the cruiser bikes, a segment that exploded with the consumption boom, drove it from a market value of Rs 2,000 crore to about Rs 43,000 crore currently.

Below is the verbatim transcript of Raamdeo Agrawal's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Latha: It would be always great if you can catch a midcap stock which is about to become a mega stock but give us your experience, what kind of times of earnings a person can make if he caught the right stock?

A: As far as the amount of money one can make, if you look at this current Wealth Creation Study which we are talking about, we have three categories of companies - the largest, the fastest and the most consistent. So if you look at the faster ones, among the fastest wealth creating companies is Ajanta Pharma . It has moved from almost like nowhere. In 2010 it was more like 900-800 rank company. So it was kind of a mini company and not a mid company and from Rs 200 crore marketcap, it is about Rs 12,000-13,000 crore marketcap now. So in five years it has done about 50 times of the money what one invested and you could buy and even sell today at about Rs 12,000-13,000 crore.

Eicher Motors , the larger one, has gone up from about Rs 2,000 crore to Rs 43,000 crore. So almost 25 times in the same five years period. So when you get the midcap or slightly smallercap company at the right point of time, the study has gone about how to figure out these companies when they are at that stage. So the amount of money you can make. One 5 percent allocation in your portfolio can change the entire profile of what you can make in that five-seven years in the market.

Sonia: It is a very interesting report you have and you have pointed out to us a couple of stocks that have moved successfully from midcaps to megacaps but what do you see as the way ahead in 2016 and 2017? After doing this research, have you identified any companies that are on their path to crossover from midcap to megacap?

A: We have avoided this time putting a specific recommendation on to the companies which are going to crossover. Yes, there are going to be at least 10-12 companies in this year which in next five years will move from midcap to megacap and they will create 40-50 times of the wealth.

One of the reasons the last year we did the study of 100x but that is very operational and probability of getting those kind of companies are very low. So we said let us go to the next best that is about 10-12x in next five years or seven years. So in that context if you look at the companies, I would avoid giving a name of a company which is going to move out there but the kind of companies even among the largercaps -- look at the companies like the biggest wealth creator has been Tata Consultancy Services (TCS) , ITC , HDFC Bank . Even these companies have moved at a price of upwards of 20-25 percent CAGR.

So these four-five years have been the period of complete stagnation in terms of corporate profits in this stock market. So even in a very stagnant market, it is possible that a business or a company would move. Instead of focusing on which company, I think we have to do our own hard work but one must accept that -- now probably market is headed towards the situation where overall market may not move but individual stocks, individual businesses will get realigned. So my sense is there will be a lot of opportunities at a stock level, not so much at a market level. Definitely there will be 10-12 stocks, which will make a major move in next two-three years.

Latha: I was looking at your history of fastest wealth creators. This includes Dr Reddy's Laboratories , Cipla , it also includes the likes of Satyam and Unitech . So at what point do you get off the fast generators and preserve your wealth?

A: My 20 years experience is that typically the big ones -- they do last at the top but the fastest ones - they burn out the pace at which they go. So companies like even SSI in the feet of technology boom in 1999-2000, you saw Satyam , Wipro , Infosys but you also saw Pentasoft Technologies. Then in the realty boom in 2005-2007 you saw emergence of Unitech and all these kind of companies hovering the limelight.

So clearly when the companies don’t have -- it is a growth trap, earnings were growing but there was a complete lack of quality in underlying corporate management and the business itself. It was cyclical. So clearly one has to be very careful when one rides a very high growth company. That is what this study is all about.

When you look at these growth companies, either you are in the growth trap or you are in a quality trap. If you buy quality without growth then also you don’t make money but if you buy growth without quality then also you will not make money. So you have to buy growth, definitely with the quality and not without the quality. That is the message in the companies which have fallen.

Sonia: If you had to line up one-two-three in terms of the key parameters that one has to watch, where would you put growth, where would you put industry leading market share, where would you put management quality, how would you stack it up?

A: If you look at the qualities one is looking for, clearly one must look for traits of leadership even if the company is small. What happens is it looks that you can find industry leadership only in the large companies. It is not so. Even when the companies are mid in size -- for whatever maybe the business itself is new or it is in a niche when we looked at Eicher Motors -- four-five years back it was in cruiser bike, which was part of two-wheelers but it was very small, 4-5 percent shares but clearly, it was a leader in that particular segment and hence you can find that kind of leadership even when the company is Rs 1,500-2,000 crore kind of things. Today it has become Rs 40,000-50,000 kind of company so you can find.

When we looked at Bharti Airtel in 2003, it was about Rs 4,000-5,000 company. It was the leader of the wireless regulation, which was just knocking the door. So clearly, you have to look for leadership traits first and one of the things is that when you identify a midcap company, look at whether there is a leadership trait. Very recently, we saw the listing of Interglobe Aviation and it is a clear leader with 36-37 percent share of the market and almost 80-90 percent of the total profits of the industry. So clearly it is a big leader, though it has started off as almost as a large company maybe in the rank of about 105-110 but those ranks will move. If they are successful and the growth comes, the ranks can move from 100 to maybe 50-60. I would put the possible rank for this company to be more like around 50 in next two-three years. So clearly this kind of a rank change, position change can give a large perspective.

Latha: You borrow the phrase from Charlie Munger and you speak about the Lollapalooza effect, basically that refers to a whole host of factors coming together. Since you referred to Bharti, a huge new technology from landline to mobiles as well as the time when India was in the cusp of a very big growth rate from 5 percent for the last 10 years to 8 percent to the next six years. Tell us more, is that combination of factors needed to make a mid stock a mega stock?

A: Yes, the way we have gone up about writing the report and the way I look at personally, is that we call it MQGLP. M stands for mid-sized company, quality of business, quality of management, growth in the business and the longevity in growth and longevity in quality and then at a reasonable price. When all these five-six factors, size, quality of business, quality of management, growth and the long-term growth and long-term quality at the reasonable price, when all the six factors come together, it is some kind of a Lollapalooza effect. It is all forces coming together.

Can you buy a leader company growing very rapidly and growing for five-ten-fifteen years at a very reasonable price? So whenever you get this kind of opportunity, you must buy a lot. In the world of 3,000-4,000 listed companies, these things keep happening. Eicher is a Lollapalooza effect or emergence of Infosys in 1993 -- it is up 6,000 times in last 20 years. This is not a normal phenomenon. So when you want to make extraordinary money, you have to look for extraordinary confluence of events around that particular company and you can keep watching. It is not that one gets a notice of these kind of phenomenon but you can see over one-two years -- even if you have missed out two-three years of their story then in next 7-8 years, you can make a lot of money.

So we have seen companies like HDFC Bank . This is not an ordinary phenomenon that they get private sector bank license in 1995 and from after listing at Rs 40 that was about Rs 800-1,000 crore kind of marketcap today it is Rs 2,60,000 crore marketcap and still going at about 25 percent compounded. Till about 2000 you bought it, you still made it 100 times in next 15 years. So this confluence of event has to be worked in the corporate world.


Happy Investing
Source:Moneycontrol.com