BackIndia stock market offers attractive long-term opportunities: Goldman Sachs
Goldman Sachs sees India as an emerging market with intriguing long-term beta and outsized alpha prospects. Goldman Sachs also noted that the 269 multibagger stocks all share six common traits.
PremiumIndia is one of the emerging markets (EM) that international brokerage, Goldman Sachs feels provides intriguing long-term beta and outsized alpha prospects. In the last 20 years, India's economy has increased sevenfold, with a nominal GDP compound annual growth rate (CAGR) of 10%, claims the global brokerage.
Equity returns have also been outstanding with the BSE 200 offering 16%/13% annualised returns in local currency/USD, over twice the 7% offered by the MSCI EM index. This is in line with the solid economic performance. Nearly 40% of the BSE 200 stocks below the main index have produced more than 20% annualised returns over the past two decades, which is twice the ratio for EM and suggests there are plenty of alpha chances, according to the brokerage.
The brokerage also noted in its analysis that the 269 multibagger stocks all have six characteristics, with India having produced the highest percentage of multibaggers.
"We analyse 10 major markets across EM/ developed markets (DM), covering 6700 stocks and examine '10-baggers' – stocks that have generated at least 10 times total returns within a rolling 5-year period over the past two decades. In India, more than half (54%) of the NSE 500 (269 stocks) generated 10-bagger returns, the largest proportion of multibaggers among the 10 markets (vs. 30%/20% averages for EM/DM). The 269 multibagger stocks all share a number of common traits," said brokerage in its report.
Let's look at the six traits that Goldman Sachs identified as being shared by 269 multibaggers in India.
Growth – High realized sales and profit growth
Multibagger stocks have demonstrated strong profit and revenue growth. During their times of outperformance, almost 60% of the multibaggers were able to produce at least 20% increases in sales and at least 30% increases in profits. While the median profit CAGR was 37%, the median CAGR for sales was 25%.
"This reinforces the core investing principle that earnings growth is the fundamental driver of long-term equity returns. Moreover, 80% of the multibaggers have seen a margin increase during their outperformance periods, likely reflecting high efficiency of the businesses and high pricing power, in our view," said the brokerage.
Capital allocation – High return ratios
Multibagger stocks also have high return ratios and are effective capital allocators. During their outperformance periods, the majority of multibaggers achieved ROE (Return on Equity) and Cash ROIC (Cash Return on Invested Capital) of more than 15%. Increasing ROEs were present in about three-fourths of the multibagger stocks.
Size – Small/mid-cap bias
Smaller companies tend to have more capacity for growth and, given all factors being equal, a favourable low base effect for stock returns (measured by market cap and initial share in profit pool). As a result, multibaggers are more likely to emerge from smaller businesses with fast growth rates.
“We note that about half of the multibaggers in India had an initial market cap of less than US$50mn. While market cap categorisations and thresholds vary over time, about 70% of the multibaggers belonged in the bottom 250 of the NSE 500 constituents in their initial year (typically small caps) and only 12% belonged in Top 100 NSE 500 constituents (large caps), suggesting multibaggers historically have been dominated by small and midcap stocks," said the global brokerage.
Sector tilt – Domestic cyclicals concentration
According to the brokerage's analysis, domestic cyclical sectors (investment and consumer cyclicals) have generated the most multibagger bets (54%). The most multibaggers are found in the cement, chemicals, capital goods, consumer durables, and retail sectors.
While certain multibaggers (IT/exporters, commodity cyclicals, etc.) belonged to non-domestic sectors as well, domestic cyclical sectors accounted for the bulk of multibaggers in 70% of the years over the last two decades. This shows a persistent historical inclination for internal cyclicals.
Inexpensive starting valuations
Before becoming multibaggers, almost 70% of the companies in the brokerages universe either traded at less than 1 time LTM P/B ratio or less than 10 times NTM P/E. However, it appears that multibaggers' "low starting valuation" is tied to the current wide market valuations. In the years 2001–2002 (dot com crisis), 2008–09 (GFC), 2013–present (taper tantrum concerns), and 2020–present (Covid-19 shock), over 60% of the multibaggers was emerged.
“This suggests that external crises/shocks or low prevailing market valuations have offered good entry points historically for picking multibaggers. This also partly explains why the previous decade (2002-12) produced more multibaggers than the recent decade (2013-22)," said the brokerage in its report.
High promoter holding
Promoters often had a majority equity position (58%) in multibagger companies, whereas institutional investors had a relatively lesser ownership (23%) at the start of the multibagger period. In terms of ownership, 60% or more of the multibaggers were founded with promoters holding the majority of the shares (> 50% holding).
The brokerage stated that it understands that the list of the above six qualities is not exhaustive and that there may be additional, difficult-to-measure elements that also contribute to the high returns.
However, at least one of the above 6 traits is shared by each of the 269 historical multibagger stocks in India over the past 20 years, and around 75% of them share at least 4 traits.
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