The Indian stock market with only 4% of population directly involved in stock investing is now expected to grow rapidly in upcoming years. Especially the young Indians are keen to make investing as a passive income and restlessly working to find the next multi-bagger stock. It may be the US stock market, Australian stock market or a Chinese stock market wherever we go the philosophies of stock market remains the same. Over years there were many aphorisms about the stock market. There are periods of bulls and bears but all those times only a group of people are major benefiters. Because they inherit the art of investing and one such method is QGLP framework which can be used to find the next multibagger stock for 2022.
QGLP Framework
The fundamental analysis is the core part of stock market investment. To find a multibagger stock it’s necessary to understand the company in 360 degrees. QGLP framework is one such framework that is very less known but very effective which allows the investor to find next multibagger stocks.
Here the letter
- ‘Q’ denotes Quality of the business and management.
- ‘G’ denotes Growth in earnings and sustained return on equity.
- ‘L’ denotes Longevity of the competitive advantage or economic moat of the business.
- ‘P’ denotes buying a good business for a fair price rather than buying a fair business for a good price.
QUALITY
By years of analysis every multibagger stock has quality business and quality management. As an investor we should understand this in detail.
Quality business is the competitive advantage of the business like Amraja Batteries in battery production which has quality products via strong partnerships & strong brand establishment other examples are Cummins India in power and ITC in cigarettes. Further, the investor should also check the following criteria to find a multibagger stock,
- Quality business should have higher return on capital employed (RoCE) i.e., the Indian companies such as TCS and Infosys which has over 35% RoCE.
- The companies leadership in position i.e., monopoly, duopoly, or oligopoly.
- Stable businesses like Reliance Industries,
- Consumer facing business like Nestle and Britannia.
Quality management is competence and it can be seen in the industry leading margins they command. Indian companies like Muthoot Finance, Hindustan Zinc and HDFC AMC has good profit margins. Further, the investor should also check the following criteria to find a multibagger stock.
- Rational capital allocation policy like allocation of capital to its core business that provides higher rate of return makes the management to be more competent i.e., the recent multibagger, Indian Energy Exchange.
- Management that announces regular dividends over decades like NMDC, Bajaj Consumer and Tide water oil can be considered to have quality management.
- The Management that thinks innovatively in terms of their company’s products like Bosch. Management which has the honest and trustworthy approach in processing and selling their products like Tata Groups are having Quality Management among India companies.
GROWTH
Start-ups expand at faster rate, but they burn investors cash. For example, Paytm, the Indian listed company have lesser return than the cost of capital. This kind of growth is not worth for investors to invest and it can’t be the next multibagger. Growth that every investor should be interested is only when return on capital is higher than its cost of capital. The return should exceed the cost of capital for a company to become a multibagger. Higher growth rate adds value for the high-return businesses but detracts value for low return businesses.
The company should grow in large and addressable market. For example, the Indian company, Borosil Renewables which has the competitive edge in its solar glass technology and has huge potential to grow for next 10 years. The company should gain its market share with growth in profit margin and should leverage the growth, preferably in a profitable segment.
LONGEVITY
The crucial task for an investor is to evaluate how long will a company earn above its cost of capital and its continuous effort in finding productive investment opportunities. For example, Indian companies like Reliance Industries, HDFC and HDFC Banks often reflect 10 – 20 years of value-creating cash flows.
Longevity can also be identified as a competitive advantage over a period. Example – Pidilite industries in the field of chemical adhesives. Longevity can also be a factor of growth potential. Example – Companies like Airtel and Jio shares the huge market in data over next 10-15yrs.
PRICE
The price of the share depends on Mr. Market’s mood but still there can be some exceptionally good multibaggers which are not identified by the market makers. The challenge is to find them. Stocks are attractive only when they are priced less than the value perceived. The evaluation of the share price entirely depends on comparison with peers and from its historic value. Further companies are selected based on several criteria like,
- High dividend yield companies like Coal India, but for multibagger stock there should be zero dividend yield as the company should have cash to grow.
- Lower discount to historical P/E (Price-Earnings) companies like Vedanta, HPCL and BPCL with good P/B (Price-to-Book) can be a multibagger in short term. Indian companies like Tata Steel, Hindalco and Tata powers which have Lower PEG (Price-Earnings to Growth) ratio are some of the companies which can become a future multibaggers.
Conclusions:
Every multibagger stocks will have a free cash flow which periodically increases the reserves of the company and thereby its book value with a good growth in return on equity. Its good to invest in companies which have a track record of at least 10 years. By using QGLP framework, the investor can find his/her multibagger stock. If you have no time to analyse, wait for our next post on potential multibagger stocks list in medium and small cap segment.
PhiGrowth Capital and Consultants 