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The Journey of a Multibagger - Views on News from Equitymaster
 
 
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  • Mar 2, 2009

    The Journey of a Multibagger

    It is every investor's dream to see the price of the stock he or she has bought double, triple and then go even higher in a short span of time. In colloquial market lingo, such a stock is called a 'multibagger'. But what is most interesting to note is exactly how the price actually goes up so quickly. Is it only the profits that have to go up that many times for the same to happen with the price of the stock? Or is there something more to it? This article aims to throw some light on that very topic. We will use the stock of Titan as an example.

    Source: CMIE
    The price of a stock, among other things, is the earnings per share (EPS) of the company in most recent twelve month period multiplied by the price to earnings (P/E) that buyers in the market are willing to pay for the shares of the company. Similarly, it could also be thought of as the book value (BV) or net worth of a company multiplied by the price to book value (P/B) given to the stock by the market. Both the equations ultimately lead to the same value, which is the market price quoted on the stock exchange. So let's have a look at Titan in this context. The stock of Titan was trading at about Rs 30 during September 2001. Subsequently, it kept gathering pace, eventually reaching a peak of about Rs 1,700 in October 2007. If you would have invested Rs 100,000 in Titan in 2001, it would be worth about Rs 5.6 m in October 2007. How did such an amazing appreciation in price come about?

    Source: CMIE
    One part of the equation is the company's profits which grew at a compounded annual growth rate of about 55% from the start to the end of the period under consideration. Each time the company made profits and retained a part of those profits, those retained earnings got added to its book value. During that period, the company's book value per share grew from Rs 36 to Rs 87. But that is just half of the story. That's because Titan traded at a P/B multiple of 0.8 times in September 2001. If that were to remain the same till the end of the period, then the stock would reach a price of only about Rs 70 by October 2007.

    Source: CMIE
    But that was not the case. Titan was a beneficiary of a rising appraisal of its business by the market. It thus started trading at a hefty P/B multiple of 20 times by October 2007. That set the stage for the amazing rise in its stock price from Rs 30 to Rs 1700.

    Thus, it is the interaction of the above two factors that come together to determine the market price of a company. The next time you see the price of a company shoot up, try to go behind the scenes and have a look at which of the factors is at play and why. It can be quite an insightful exercise.

     

     

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