Considering market cap is number of outstanding shares X Share price, for a stock to become a multibagger, it will multiply its market cap as the share price multiplies. I have a question here. For example, I am taking the most talked about 100x stock, Granules India. Its market cap is 2433 Cr. For it to become 100x, its market cap should become 2,43,300 cr which even though possible, looks improbable (even after 10 years). Sun Pharma, Largest listed pharma’s current market cap is 1,61,975 cr. Is my understanding correct? For the sake of this question, lets assume that there is no equity dilution.
It will be a sanity check for me and help me tone down my expectations.
Note: I did try to google and find out historical market cap prices. Ajanta Pharma’s market cap in 2014 and current compared to its stock price confirms my understanding(with little deviation). Still I need confirmation from some senior.
I am not the expert but I will try to answer your question. Yes, when the stocks price get 10x or say 100x then its market cap will also be 10x or 100x.But it is not necessary that the share price will go 10x or 100x as the company may issue Bonus shares. For example if the comapany’s share price is 300 and it issues a 1:1 Bonus share then the share price will get halved but Market Cap will remain same.
I generally do the evaluation on Market cap. To explain we will take one example.So suppose if the company is having a Market cap of 500cr and it is making a Net Profit of 50cr then it is available at 10x PE. Then you can evaluate if the company can grow to reach a figure of 500cr or whatever Net Profit you desire the company will achieve.
Then next questions you may ask
If the company has to generate 500cr of Net profit is the company in the right direction to generate that profit
To reach the figure of 500cr, will the company be able to sell its products. If yes what is the market potential for those products and what is the what is the share the company can have in that market
At what rate the company can reach to the figure of 500cr Net profit
Can it grow sustainably without taking the Debt or it has to take debt each time it does the plant expansion
In finding the answers to these questions you will automatically get your results
In your case you can do the calculation and derive numbers for Granules and for that matter for any other company.
Thank you Nityanand. That resolves my query. I will focus more on Market cap and net profit going ahead. Will try to calculate the projected net profit for one of my favorite stocks.
First the current market cap what you see for Sun Pharma was unthinkable
even few years back. Not only Sun Pharma but all large cap more than 1 lac
crore. So what’s going to happen to future futile to predict?
Second if you want to compute X factor (no of times stock has appreciated
over years) use Morning star website. It gives you 10 year compounding
return, with a current market cap and CAGR you can calculated market cap 10
years back.
Third I suggest read a book 100 Baggers by Chris Mayers. It gives an
insight as how earnings, size etc has shaped 100 baggers in history.
Lastly Motilal had a 100 bagger decoding where they came out with SGQLP,
the word S precisely stands for Small size.
This is a very good way to looking at stocks, specially one which is for long term holding. It is important to get a sense of how much a company can grow from a market cap perspective. Some other points I think are relevant here are:
market cap to sales ratio and what it would mean from a sales perspective to get to a 10x or a 100x. i.e. how much sales would be required at that time
what is the total market size, and growing at what rate. Correlate this to the market cap a few years out and see if it makes sense. Sometimes, you will see stocks priced for getting a very large market share which may not play out and result in a disappointment in returns.
Thanks @The_Confused_Consult for pointing to the book.
Couldn’t immediately buy the book but came across this lovely video by MicroCapClub on 100 Baggers by Chris Mayers.
