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Hi everyone. The biggest factor that attracts investors to the stock market is the opportunity to earn high returns. Who doesn't want to see their investments multiply? Ever since Peter Lynch coined the term '10-bagger', the world has moved so fast that today people are looking for 100-baggers. Being a growing economy, Indian companies have unique growth opportunities.
On a broader level, the BSE Sensex is also a 100-bagger in itself. From January 1986 to date, the Sensex has risen almost 105 times. That is, if you had invested Rs 1 lakh then it would have become more than Rs 1 crore today. The chances of getting a potential multi-bagger in India are very strong. But the question comes about how to identify these potential multi-baggers.
We invited an ace investor of Motilal Oswal co-founder, Mr. Raamdeo Agarwal to Market Ki Baat. He shared his personal formula for finding multi-bagger stocks. Let's hear from him. Raamdeo's logic is very clear that multi-bagger stocks have certain fixed characteristics like high ROE, high revenue growth, and reasonable valuation in terms of P/E ratio giving you a margin of safety.
A stock that consistently shows 25% ROE, and 25% sales growth, has growth potential. But with that, if we have a P/E ratio of the stock less than 25, then it can give multi-bagger returns. ROE indicates a company's profitability and uses it to determine how efficiently the company is managing shareholders' equity.
If a company's sales are increasing consistently year after year, it indicates that the company's business is expanding and acquiring market share. P/E ratio is a valuation ratio that we can take as an approximate idea of whether a stock is undervalued or overvalued by its competitors and industry averages.
If you can identify a high-growth potential co. at an early stage, its future earnings and growth can help it grow the stock's value quickly and create tremendous wealth for its shareholders. All you need is a little courage, a lot of patience, and luck. But in this journey, we are with you to guide.
But remember that this video is just to show you a direction on how you can start the process of identifying stocks. And investing in stocks based on only 2-3 metrics is not a wise decision. You should also do detailed research about the business, management, and risks of stocks. For today's video, we have selected companies whose: The company that has the highest 5-year average ROE, which we will cover in the last.
We have considered the market closing prices of 30 August 2022. So come, let's start today's video. The first company in India Pesticides Limited. India Pesticides is an R&D-focused agrochemical manufacturer. The majority of their business comes from the technical segment within which the company manufactures fungicides and herbicides.
Also in the business of IPL formulations. They are registered to sell 125 formulations in India and have a license to export 25 formulations. The 5-year average ROE of the company is 32.52%. IPL is showing good growth in the last 5 years. It has become one of the fastest growing volume companies in India in the technology segment.
Their strategy has been to create niche products with less competition and higher margins. It is visible on the margins of the company improving. With a focus on R&D, it has helped the company to develop a diversified portfolio not only in niche products but also in its making. Developing new products and being in control of quality, IPL has an edge against its competitors.
It sources 60% of its raw material locally and is working on backward integration, but the volatility of raw material prices has negatively impacted its profitability. Simultaneously, rising energy costs have also hit the company's margins. Let us now look at some of the key financial and technical indicators of IPL.
The second company is Gufic Biosciences Ltd. Gufic Biosciences specializes in the manufacture of pharmaceuticals, medicinal chemicals, and botanical products. Gufic is the largest manufacturer of Lyophilized Injectables made in India. Lyophilization is a water removal or freeze-drying process used to increase the shelf life of products.
The 5-year average ROE of the company is 34.20%. Their business is very diversified. In the therapeutic segment, these are the manufacture of antifungals, antibiotic creams, and fertility drugs. The formulation comes in the form of capsules, syrup, ointment, and injection. The consumer care division deals in the business of sanitary napkins, anti-stretch mark creams, etc.
The revenue break-up of the company is as follows: In the first few years, the company has greatly improved its capabilities and has taken various initiatives to increase margins. Its results are visible in revenue growth and profitability. Their revenue has grown at a CAGR of 26% in the last 5 years and has grown at a CAGR of 55%.
There has also been an improvement in PAT margins. The working capital cycle of the company is very long. The company has got credit for more days than its supplier, but it is offset by giving more days of payment exemption to its customers. Gufic tried to reduce it last year, it has improved to some extent.
Since Gufic is in a very regulated space, not getting approvals from the regulators could have a negative impact on the company's projects. The company may also suffer revenue loss due to delays in contracts. Now let's look at some of this company's key financial and technical indicators. The third company is IOL Chemicals & Pharmaceuticals Limited.
IOL Chemicals & Pharmaceuticals Limited is a leading API manufacturer. Especially ibuprofen, which is used in making pain relief medicine, and the company has a 35% market share in it all over the world. IOL Chemicals & Pharmaceuticals Ltd. is also a major player in the specialty chemicals space. The company has a 5-year average ROE of 35.29%.
The biggest strength of the company is its integrated manufacturing facilities. Since the company has to make the raw materials and chemicals used in its products, this gives IOL Chemicals & Pharmaceuticals Ltd an edge over its competitors. It also protects the company from volatility in the price of raw materials and the company has been able to protect its margins to some extent.
One issue for IOLs is their product concentration. About 80% of their revenue comes from just 2 products – Ibuprofen 30% and Ethyl Acetate 48%. Less growth on either of the two products can have a negative impact on the company's top line and bottom line. Let us now look at some of the key ratios and technical indicators of the company.
Let's move on to the fourth company which is Share India Securities Limited. The core business of Share India Securities is stock broking and strategy-based derivatives trading. Apart from this, they also offer good capital market-related, technology-based products and services to their clients. The 5-year average ROE of the company is 38.85%.
The company has been improving its EBITDA and profit margins. In Q1 of this year, as compared to the previous year, Share India Securities has seen a growth of 63% in EBITDA and 73% growth in PAT. This improvement is due to increased buying and selling by market participants. They have also improved their broking yields.
Broking Yields simply mean the profit generated from broking. Share India Securities has almost doubled its returns in a few years. This leads to a direct improvement in profits. Recent cash market yields have reduced, but their overall yields have been significantly expanded due to increased volumes in derivatives segments and better yields.
With the growth in the broking business such as new, technology-focused entrants, the competition has become intense. It is a very difficult challenge for it to maintain its revenue growth. The market share of Share India Securities is not significant in any segment in broking. Let us now look at some of the key ratios and technical indicators of the company.
Let's move on to the last company of today which is EKI Energy Services Limited. EKI Energy Services is involved in the business of Climate Change Advisory Services, Carbon Credit Trading, Business Excellence Advisory, and Electrical Safety Audit. Let us understand the consultancy service of EKI Energy with an example.
No company can emit more than a fixed amount of carbon. In the example shown on the screen, Company B's carbon emissions exceeded the limit. So carbon credit is the buying power from Company A, which is emitting less carbon than the mandated level. In this whole process, EKI Energy Service gives consultancy and advisory to both sides.
EKI Energy Services also provides related advisory and consultancy services if a company wants to reduce its carbon emissions. EKI Energy handles the entire process including maintaining carbon credits to global standards, legal formalities, and trading of credits. The company offers its services in 40+ countries.
The 5-year average ROE of the company is 170.25%. Its biggest strengths are growing climate change awareness across industries globally as well as an increasing focus on environmental, social and governance (ESG). Due to this, the demand for the services of the company is increasing rapidly. Also, trading carbon credits is a complicated process.
In such cases, the demand for the services of the company increases even more. The company is generating significant revenue from carbon trading and the company's sales have grown rapidly in the last 3 years. The company's revenue has grown by 843% in the last year and there has been a significant improvement in operating margin as well.
But the demand for EKI Energy's services depends on a particular industry and the seriousness of the client company to comply with ESG norms. Voluntary ESG compliance of an industry/company is likely to decline in the absence of any mandatory norms. Because of this, there is a possibility of uncertainty in the demand for the company's services going forward.
In addition, carbon pricing is directly dependent on the demand and supply of carbon credits. Due to increased supply or demand for carbon credits, there could be a negative impact on the company's pricing, which in turn could hamper the company's margins. As you can see on your screen, we have shown some key financial and technical ratios of the company.
So these are 5 stocks that fit Raamdeo Agarwal's potential multi-bagger formula. We remind you that this video is for educational purposes only, and is not a buy or sell recommendation of any kind. Also, we have launched a new trading channel where we will explain to our audience all the concepts related to trading - like charts, indicators, futures, options, etc in a simple way.
So you must check out our channel, we have given the link to the channel in the description of the video. Don't forget to subscribe to the Groww channel for the latest updates about the market. Bye
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