Understanding Multibaggers (Part 2)
Issue #08 Different Characteristics
F) Operating Leverage
Few sectors and companies have huge operating leverage
Gross margins are high and so are fixed costs
There is room to produce more because capacities also exist
When revenues increase, the fixed costs do not go up in the same proportion, leading to a jump in reported profits
Example: ABB India Ltd
From CY17 to CY20, revenue were flattish and Fixed and Employee Cost Remained the same (%)
Sales grew sharply over the CY20 to CY22
Operating leverage kicks in as Expenses & Employee cost rose lower than revenues, leading to EBITDA margins jumping from 5% to 14%
Depreciation and interest costs remained the same, leading to a 6x jump in PAT.
The same got reflected in the sharp jump in the stock price.
Few more examples
Adani Power – Higher capacity utilization and stable fixed costs led to a sharp expansion in margins.
Reliance Industries – Jio and retail businesses scaled rapidly, improving margins with minimal cost additions.
Larsen & Toubro (L&T) – Strong execution of large infrastructure projects led to revenue growth outpacing cost increases.
Zomato – As order volumes surged, fixed costs (like technology and delivery infra) were spread over a larger revenue base, improving margins.
G) Completion of Major Capex
Companies take up capital expenditures from time to time
In some sectors, capacity increase is lumpy, takes time and is a step-up phenomenon
In initial years, the Balance Sheet size jumps (debt also increases) but revenues do not increase as the capacity increase in under implementation
Once the capacity comes on stream and is efficiently utilized, on the same balance Sheet the revenues jump. Leading to higher profits as well as all-return ratios
Operating leverage also comes into play
Example: Deepak Nitrite Ltd
The period till FY18 had no growth
It was a boring low growth business
Company undertook a bold capex that tripled its Gross Block
When the capex came on stream, the revenues, profits and scale of the company surged sharply
Stock price jumped 36x over 2016-2024
Few more examples
Reliance Industries (Jio) – Massive telecom Capex led to industry disruption and exponential growth.
Hindalco (Novelis Acquisition) – Global aluminum expansion paid off after initial challenges.
Ultratech Cement – Large-scale cement capacity additions and acquisitions drove long-term growth.
Polycab India – Expanded wire & cable manufacturing capacity, leading to multi-fold revenue growth.
APL Apollo Tubes – Structural steel tube Capex boosted scale and market leadership.
PI Industries – Heavy investment in specialty chemicals drove strong earnings growth.
H) Change of Perception
As humans, we all have past memories and preconceived perceptions
Negative memory is stronger than positive memory
Not so pleasant experience with a company or promoter lingers in our thoughts, leading to a closed mind in re- evaluating companies
Have seen many instances of a change in promoter behavior, move to professionalize management, forward looking next-gen joining management
The performance also improves, but more importantly, there is a sharp swing in perception (P/E)
Example: APL Apollo Tubes Ltd
Company operated in a commodity business
Low operating margins and no moat led to low multiples
Consistency of performance, high growth and branding focus led to the company being treated as a consumer company
High ROEs obviously helped
The stock price jumped 68x over 2014-2024
Few more examples
1. Cera Sanitaryware (Sanitaryware & Faucets)
Earlier: Operated in a commodity-like business with low margins.
Transformation: Focused on branding, premium products, and distribution expansion.
Outcome: Valuation multiples expanded as it was perceived as a premium consumer brand rather than just a manufacturer.
2. Kajaria Ceramics (Tiles & Ceramics)
Earlier: A tile manufacturer operating in a low-margin, commodity-like business.
Transformation: Invested in branding, premium product lines, and better distribution.
Outcome: Became India’s leading tile brand, commanding higher pricing power and better margins.
3. Astral Ltd. (Pipes & Adhesives)
Earlier: A pipes manufacturer in a commoditized market dominated by unorganized players.
Transformation: Strong branding, introduction of CPVC pipes (higher margins), and expansion into adhesives (like Fevicol competitor).
Outcome: Higher ROEs and a transition to a consumer-oriented company with strong brand recall.
4. Page Industries (Jockey India - Innerwear & Athleisure)
Earlier: Innerwear was mostly an unbranded, price-sensitive category.
Transformation: Premiumization with the Jockey brand, strong distribution, and consistent branding efforts.
Outcome: One of the highest consumer company valuations in India with superior margins.
5. Relaxo Footwears (Footwear)
Earlier: Footwear was a fragmented, price-competitive category.
Transformation: Built strong brands like Sparx, Flite, and Bahamas, focusing on affordability and branding.
Outcome: Margin expansion, better investor perception, and higher valuation multiples.
6. Polycab India (Cables & Wires to Consumer Durables)
Earlier: Low-margin cables and wires business.
Transformation: Moved into FMEG (Fast Moving Electrical Goods) like fans, switches, and LED lights under the "Polycab" brand.
Outcome: Became a strong branded player with improving margins and a consumer-centric valuation.
7. Tata Consumer Products (Tea, Coffee, FMCG)
Earlier: Mostly a tea and coffee commodity business (Tata Tea, Tata Coffee).
Transformation: Expanded into branded consumer products like Tata Salt, Tata Sampann, and Tata Soulfull.
Outcome: Higher margins and a re-rating from a commodity player to an FMCG company.
I) Cyclicals in Downturn
Quite a few investors say no to investing in cyclicals
However, returns made in cyclicals outpace most sectors. The only thing is buying time has to be right, as cycles tend to be shorter
The sheer size of the business (in qty) means that a small up move in product prices leads to a big move in reported profits
Integrated manufacturing is the key
Strong companies that survive sector downturn phases with good Balance Sheet end up making disproportionate profits
Returns tend to be also huge though cyclical
Example: Supreme Petrochem Ltd
Realization jumped from Rs 132/kg in 2020 to Rs 185/kg in 2023
Scale of Operations led to disproportionate increase in revenue, Ebitda and PAT
Stock gave 10x return during 2020-2024
J) Cheap by way of Valuations, Lagging Triggers
Kabhi chalta hi nahi hai, no growth, no triggers, some other reasons
Such companies usually trade at low P/E multiples but have decent operations and business track record
Any positive change in the historic parameters leads to a quick and significant rerating.
Many times markets wait for confirmation of changes and that gives the opportunity
Institutional ownership is zero or very low and thus when rerating happens, the momentum tends to be very high
K) New Themes / Trends
Fundamentals are fine but themes are the buzzword every time
Dynamic world and therefore new themes keep on popping up
Difficult for value-conscious players but returns tend to be sharp and high
Works well when one is right but invariably the in-themes lead to many other companies opting for listing in the same space
Example: Housing Theme, EV Theme, Consumption Theme, Renewable Theme, Tourism Theme
Let me know your thoughts! 📢
Much love,
Priyank
Source: Mr Sunil Singhania