All multibaggers started with small market caps

One of the most loved after words in the stock market is the “multibagger”. Typically multibaggers are stocks that go up a number of times. I plan to post a series of write-ups on the similarities in specific financial attributes for the multibaggers of the past ten years.I have named the series as " How to identify the next Infosys?". This is so because Infosys was a shareholder's delight not only in terms of price appreciation but with respect to other financial attributes as we would notice once other write ups are posted. I have excluded companies like Bharti Airtel, Unitech and Pantaloon Retail because they have not completed 10 years of listing.

Markets capitalization also known as Market cap means the amount of money required to buy all (100%) shares of a company it is computed as the number of shares multiplied by the market price of each share. For instance if BEML Rs 900 and there are 3.67 crore shares issued the market cap would be 3.67 crores X 900 = Rs 3303 crores

The market cap of a company is inversely proportional to whether that company could be a multibagger or not. In other words companies with small market caps are more prone to going up a number of times compared to companies with large market caps.

In the analysis that I did for the multibaggers for the Indian stocks markets an interesting phenomenon was identified. All multibagger companies started from a base of very small market capitalization

All multibaggers started with small market caps
Company	Price as on Dec 31 1995	Market Cap * as on that day (Rs crores)	Price as on Jan 02, 2006	Market Capitalization today (Rs crores)	CAGR
Infosys Technologies	26.15	708	2996.75	81221	59.68
Satyam Computers	7.12	228	737.80	23641	59.05
Wipro	9.13	1290	463.45	65516	48.09
Sun Pharma	19.13	354	682.15	12635	42.96
Hero Honda	24.40	479	859.70	16890	42.78
HDFC Bank	29.50	928	707.45	22266	37.40
Cipla	21.66	646	443.40	13228	35.24
Zee Telefilm	12.87	534	156.90	6513	28.41
HDFC	135.75	3352	1205.35	29766	24.40

*Approximate

In the table above I have presented a case for buying companies at low market caps. About 10 years back these companies were available at market caps that were less then Rs 1000 crores. The PE for quite a few of them were over 30 and the stock price kept going up because the earnings went up in all cases and the PE kept on expanding in some select cases.

In the initial years of growth these companies were very different from a greater fool theory. The greater fool theory states that a fool buys an overvalued stock and sells it to a bigger fool who looks for a greater fool to dump the same. The idea is not to become the last fool in the chain. How ever unfortunate it may sound almost all multibagger companies enter into the greater fool mode. The better ones recover while the bad ones falter.

The figure to look for in the above table is column (c) which reflects the market cap at which these companies were available about 10 years back. Column (e) tells us the current market cap. In some cases stocks have gone up by over 100 times over the said period!.

So looking at the table one can easily observe that except WIPRO and HDFC all the other companies were in a range of less then Rs 1000 crores market cap. At that time the total market cap of the Indian stock market was less then Rs 400,000 crores. Today the market cap of all the stocks has gone up by about 7 times. Therefore the yardstick to look for companies below Rs 1000 crores market cap can be extended to Rs 6,000 crores.

Any ides anyone on companies with small market caps and which are ready to become multibaggers!