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

*Approximate

the table above I have presented a case for buying

companies at low market caps. About 10 years back

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

Capitalizatio

n 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

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!

Enterprise value = Market cap + Debt. Some companies take a lot of debt so on a market cap basis they appear cheap. In that case we look at enterprise value. On the other hand some companies have cash on their books in that case we deduct the cash from the market cap to arrive at enterprise value..

Let us say that a large cap has a market cap of US$ 750 million. It is very difficult to get a multibagger in a large cap unless you are sting at the start of any cyclical rally. For e g. In 2003 we could have made a multibagger out of cement or any metal but not out of Infy. So if we say a company that will grow 10 times in 10 years is it a multibagger in the true sense of the word we want to see it. 10 years is a long period of time and this means a CAGR of 26% only. There are many companies in the Cricket XI section that can do this kind of growth or even better that. So pls clarify, are you saying that chances are remote that since Pantaloon and F.T. are already large caps they will not be multibaggers going forward from current level (10 to 15 times in the next ten years) ?: These are unusual situations where the sheer size of the market is about 30 -40 times the current level of penetration. In fact we could see a 10 bagger in 5 years in both these companies if they are able to execute what they said. Here we should recall that Bharti Airtel moved from market cap of Rs 7000 crores to Rs 100,000 crores in 3-4 years because the market itself was growing so fast. So there could be relaxations to this theory but this relaxation is more of an exception then the norm.

I normally try and look at the market cap in conjunction with the size of opportunity. Some time back there was a discussion on an ice-cream company but the total size of ice cream as a business is restricted so even a Rs 200 crores market cap does not look compelling. Technology companies trade at 10 times market cap to sales whereas something like a pantaloon trades at 1.5 times sales that is because the former have higher profit margins compared to the latter. Also the market cap should

always be looked at according to the size of the opportunity .

Here is some interesting reading (courtesy: Money Life). Given below are excerpts, pleae click on the link for full text.

Stocks: Stunning winners of last 10 years! Company TSR

RankTSR (%) Mkt

Cap in1996

Unitech 1 34196% 73.74Matrix Laboratories

2 29910% 3.16

Phoenix Mills 3 28935% 5.26Donear Industries

4 28533% 3.96

Vimta Labs 5 27799% 1.16Pantaloon Retail

6 20412% 3.55

Infosys Technologies

7 19583% 751.82

Mercator Lines 8 19545% 3.84Wipro 9 17319% 580.89Patel Engineering

10 17075% 7.45

Satyam Computers

11 16942% 137.80

Financial Technologies

12 16342% 2.73

Havells 13 15928% 7.22Lakshmi Energy & Foods

14 12586% 6.01

Arrow Webtex 15 12281% 2.62Panoramic Universal

16 11587% 0.88

Prime Prop. Devp. Corpn.

17 11518% 0.94

Aban Offshore 18 10592% 32.49

Amtek Auto 19 10590% 10.62Jetking Infotrain 20 9557% 0.50 If you are in the middle of a crazy a bull run, you are likely to get the most unlikely names as wealth creators

The sheer force of speculation has pushed low-profile companies high up in the wealth-creators' list. Often, companies and sectors, which do very well for a few years, stagnate in the following years. Indeed, in every bull market, one or two sectors do extremely well where even garbage floats to the top.

Since value is a function of performance and perception, a slight change in either is enough to cause prices to tumble. Over 10 years, the Sensex had gained 347%.

Raising shareholder value is like mountaineering. To remain even a modest value creator you have to keep climbing. As you go higher, it gets tougher to climb the same distance.

To use another common metaphor, value creation is like being on a treadmill. You have to keep running (growing) to stay where you are (to maintain value).

Most people find it hard to understand that that for mature and large companies, even if 'performance is good', shareholder value may not keep rising

Also, in growing economy like, new sectors emerge, attracting smart capital and investment interest. Since the fastest growth is from the smallest base and there is always a fancy for new companies, investors like to bet on companies that are at the base of the mountain.

How does one measure wealth creation or shareholder value? This is a basic question and the answer is simple -- it is whatever a shareholder gets out of being invested in a company over a certain period. That means the difference in market price between two periods (adjusted for splits and bonuses) plus dividends. This is called total shareholder returns (TSR).

Elephants Can't Dance

Market cap has nothing to do with value creation

The best in the lot ONGC had a CAGR of only 20% while wealth increased 6.5 times. So the concept that elephants

cannot dance should be taken with that perspective that the maximum wealth that can be created is 20% CAGR while in case of a small cap Unitech (freak buy if only someone could do it) was only 80% CAGR which made a 340 bagger on the stock. Though I have not checked it most of these gains would have been in the last 3 years.Yes, I have thought about that. That is why I keep saying that at Rs 1500-Rs 2000 we would reach terminal value for

Company

Mkt Cap in1996

TSR (%)TSR Rank

ONGC 29,301.43 614% 438IOC 24,514.98 245% 758HLL 15,538.42 252% 750MTNL 15,343.35 -27% 1367SBI 14,717.86 259% 735Reliance 12,077.68 821% 333I T C 9,458.98 940% 288Tata Motors

9,213.26 148% 948

VSNL 9,064.01 166% 916SAIL 8,588.96 302% 694

Bharti Airtel. Anything more then that does not seem possible as of now. At Rs 438,000 it would be around Rs 2300+ and that looks stretched.It is common knowledge that India Inc. has had its dream run since the early years of this decade and this has been well manifested in the valuations accorded to them in the equity markets. While the corporate growth has been holistic with contribution from companies across sectors, select majors in each of the sectors have made their presence felt.

A comparison of the compounded annual growth clocked by a sample of few sectors selected by us to the compounded annual growth in the market share of the top few companies in those sectors, gives us an interesting perspective on this. While it is a given that the low base effect has magnified the growth numbers for the smaller companies, it is also worthwhile noting that a few of the companies have displaced some of their larger counterparts in the respective product segments by clocking relatively superior level and quality of growth.

The trailblazers

%Marketshare FY01 FY03 FY06CAGR

Cement (Rsm)220,062

234,042

330,139 8.5%

Grasim+Ultratech* 9.8 11.6 21.116.6%

ACC 11.9 10.3 11.3 -1.0%GujaratAmbuja 5.9 6.7 9.2 9.3%Detergents (Rsm) 51,788 44,785 53,547 0.7%HLL 35.9 43.1 40.4 2.4%Nirma 21.4 21.6 20.3 -1.0%P&GHealth&Hygeine 2.3 2.7 6.2

21.9%

Fabrics (Rsm)1,483,679

1,559,295

1,689,418 2.6%

ArvindMills 0.7 0.8 0.8 2.7%

AlokIndustries 0.3 0.5 0.510.8%

Raymond 0.1 0.1 0.214.9%

Hotels (Rsm) 40,775 39,543 65,54110.0%

IndianHotels 16.9 14.4 16.5 -0.5%EIH 11.7 9.7 11.5 -0.3%

ITC 3.3 4.9 11.929.2%

Passengercars (Rsm)

169,973

189,800

331,989

14.3%

Maruti 48.2 44.5 41.6 -2.9%

HyundaiMotorIndia 17.0 20.0 23.7 6.9%

TataMotors 7.3 11.4 13.613.3%

Pharmaceuticals (Rsm)

320,618

368,652

461,152 7.5%

Ranbaxy 5.9 8.6 8.7 8.1%

Cipla 3.3 4.2 6.514.5%

Dr.Reddy's 3.0 4.6 4.7 9.4%

Steel (Rsm)492,750

618,453

1,172,113

18.9%

SAIL 28.1 27.6 24.3 -2.9%TataSteel 9.2 11.4 10.4 2.5%

JSWSteel 2.7 3.8 5.214.0%

Software (Rsm)216,849

278,363

504,850

18.4%

TCS N.A. N.A. 21.2

Infosys 8.8 13.0 17.915.2%

Wipro 8.2 11.0 16.314.7%

Source:CMIE Industry market size and shares - March 2007* The market share of Grasim for FY06 includes that of

Ultratech (9.4%)

In case of manufacturing companies like Grasim, capacity addition (standalone as well as acquisition of Ultra Tech) and higher utilisation levels apart from better realisations and improved efficiency has helped the company report stronger numbers. While Ultra Tech was one of the major propellers of the company's growth, savings in operating costs resulting from ongoing modernisation efforts, up-gradation of plants and energy optimisation have aided the gain in market share.

Similar capex led volume game was the case with JSW Steel in the steel sector. In the detergent market, P&G Health & Hygiene's 'Tide' garnered better realisations as compared to peer HLL's 'Surf Excel' and 'Rin', thus scoring higher over the latter. The strong performance of the company was also on the back of focused marketing initiatives and deeper distribution.

Both Raymond and Tata Motors derived the benefits of 'exclusivity' in their respective sectors by regularly launching new products and catering to a niche segment. Cipla, on the other hand, focused on stability of revenues through its contract manufacturing business, against the volatile generic business (subject to pricing pressure) of its peers Ranbaxy and Dr. Reddy's.

Players in the service sectors, like Infosys (software) and ITC (hotels), focused on expanding their capacities in terms of employees and rooms. Better pricing power in terms of billing rates and average room rentals (ARR) respectively, also supported their case.

The point that we wish to drive home is that while companies with bigger balance sheets, higher turnover and wider reach may offer a comfortable hedge in times of short term volatility, the smaller and equally promising entities may seize a larger chunk of the growth pie in the longer term.

Thus instead of concentrating only on the blue chips, investors must also evaluate the prospects of some of the smaller entities in the sector that have an equally compelling business model, with the potential to generate higher growth and returns as compared to their larger counterparts. The catch also lies in the fact that you may find the most opportune moment to buy the Infosys' and HLLs in the making at attractive valuations! I think that you have not been able to understand my strategy so let me repeat my investing strategy for you:

A) I never hold any large caps. In fact I sold out Bharti once it hit Rs 120 (Market cap Rs 20,000 crores) after getting in at Rs 25 (Market cap Rs 4000 crores) because it was approaching a market cap I was not comfortable with. That eliminates all the established blue chip from my portfolio. I am constantly in search for emerging blue chips and not the established ones. That is why I invest in small/midcap companies. I believe that you can get the next Infosys in a small cap only.

B) I hold at most between 3 and 5 companies in my portfolio. Yes only 3 to 5. Once I finish analyzing a company I ask myself one question “Is the company good enough to take 20% of my portfolio. When ever I get an answer as yes the next question is OK what can I replace it

with. If I get another yes I would buy that stock. I prefer putting all my money into one company but just for the event risk I have divided it into 3 to 5.

Since I hold concentrated portfolios 3 to 5 companies I forecast a best case scenario with only the target price of 2 to 4 companies assuming that one will go bust and get me a zero value in the defined time span. If still the overall result looks exciting I would invest taking the mathematical premise that errors will cancel out each other (I do not know which one will under deliver and by how much).Robert Hagstorm the author of a book on Warren Buffet did a study where he found that concentarted portfolios give out better returns I have lost many 30% to 100% returns by missing on opportunities because those companies did not fit my style of investing. But I have no regret because the ones I hold have more or less made up for that.

It takes me hardly one hour to analyze a company but making up my mind (the second part of B above) takes a few days or a even a few weeks at times. This is so because I believe in concentration.

C) This is how I like to zero down on a company.

1) I look at the management first. The management is the most important and lest talked about aspect of a company.

2) I like to know what business the company is into and then look at whether it is scalable. I prefer new sectors since the growth is highest there. I avoid cyclical because I cannot predict the peaks and troughs.

3) I then look at the market cap. If it is below Rs 1000 crores I think we could pay a higher PE to that company

4) I would then look at the RoE to see if the company is using its capital efficiently. RoCE is a better concept though because you could hike the RoE by using debt but not the RoCE

5) I would then compare the PE with the growth and the RoE. If there is a big difference between RoE and growth then the company does not merit investments. This is so because for a company to grow at higher rates of growth compared to its RoE it would have to dilute capital. That hurts

6) Dividend, book value is something that I look but do not base any of my decisions upon. I think that they tell you what the company has done and not what it will do.

D) Once a stock is bought and the price falls without any change in fundamentals and if I have the required cash I will buy at each fall.

Now I do not stop at step 1 of phase C above. I do look at steps 2,3,4 and 5 of phase C above but there is a difference in priority. That is all. For instance I like Financial technology. MCX could be HUGE but I am worried by valuations so each time I want to buy the stock I think in terms of phase B above and give it a pass.

So it is just a matter of prioritizing the tools of analysis. No analysis is complete without putting all tools at work. In none of my reports will you find the valuation parameter missing because irrespective of the strategy you use the final objective is to make the

stock price a slave of its earning. The question is which one are you more comfortable using when compared to the others i.e. prioritizing the tools.

And finally, I have made my 30 baggers this way so I have become used to investing in this fashion. I have an eye on Tata Coffee. WIth coffee we might see the same demand supply situation as we have with other commodities. China's Coffee consumption is rising and no one is talking of it. Sooner or later coffee prices will move far far ahead then what it used to be. Coffee is getting into the modern day culture and hence more demand. Supply constraints are temporary may be in one or two years things might change but the point is about demand and there lies the big opportunity.Tata coffee could be a four digit stock. I use maths never said I do not. But what I said was that maths has to be used in conjunction with a lot of other things. I do not use maths in isolation. Also the priorities of using the various tools differ!

Coffee is the only commodity that has not moved much. The next few years could be very interesting for coffee producers. Jim Rogers owns a lot of coffee futures in his commodity fund.

Pantaloon retail - How I have managed to hold on from Rs 8(rights/split adjusted) till date.

Manish:

You know I bought Pantaloon Retail at Rs 50. Today Rights adjusted I am getting Rs 1850 for that the journey between Rs 50 and Rs 1850 is listed below:

1) Since I did not have enough money or expertise to start something on my own I wanted to buy the right company in the high growth sectors. Retailing as a sector was poised to grow so the question was getting into the right company in the sector.

2) At that Pantaloon traded at a market cap of Rs 80 crores against a sale of Rs 450 crores and traded at a PE of 7 times so it was a case of value with growth.

3) In 2003 Kishore Biyani had declared that he would do a sale of Rs 1000 crore in 2005 and I believed in what he said. In fact I always believe in the management’s projection unless they have failed in their previous targets.

4) AT that time Trent sold for Rs 150 with Rs 60 on its balance sheet as cash, paid good dividend 2.5% yield and was backed by the Tata.

5) Pantaloon had an inventory problem analysts said that there could be inventory write downs. I figured that could be about Rs 8 to 10 crores so while the issue was significant the amount was not. The problem remains till date

6) I must confess that I was not aware that this stock could go that long this fast. I did write an article on value notes stating that this stock could go up 40 to 50 times but the time zone was 2010 and not 2006.

7) The Management was not considered honest and trust worthy but I had no option. The retailers could only be played through pantaloon and Trent. Moreover the blemishes on the management were more subjective in nature. I saw that Kishor Biyani had mortgaged his personal property to take a secured loan for the company. Thought that he could not do any thing wrong intentionally – showed seriousness of the promoter.

8) This is the most interesting of it: I used to stand outside the Pantaloon showroom for 30 minutes and count the number of people who walked out

with Shopping bags from both Pantaloon and Westside .They are located adjacent to each other.

9) Whenever I used to take a Taxi, I used o tell the driver to take me to Westside. He showed ignorance then I would tell him to take me to pantaloon and he would immediately respond. I knew people were going to pantaloon more often then Westside.

10) I used to bite the head off the ladies in our family as to which store they shopped more from Pantaloon or Westside.

11) I used to get excited when I saw a Pantaloons bag being carried by any of the commuters and I often remarked to a friend that one day when we see this bag all around this stock could be at Rs 2000+

12) Was never worried about what happens Kolkata might not happen elsewhere. Rather I used to extract feedback from acquaintances in other cities.

Now these were the triggers for buying. How I managed to hold on is more interesting:

13) When ever I met an analyst he would tell me 3 different reasons as to why pantaloon should be sold. I panicked at 3 price levels

14) When it hit Rs 250, Rs 500 and Rs 1200. I panicked because I had never made that much money from one stock and the chance of losing what I had earned was one of the reasons to sell then anything else.

15) At each point I used to evaluate my down side and upside potential. For instance I thought that if Trent could double in 3 years and Pantaloon go down by 50% I would not look that stupid. I constantly evaluate my portfolio as a basket of stocks since it is a high risk high reward game.

16) Many times over the past three years the stock has got expensive but the sheer pace of growth is such that it kind of gets cheap a few months later. For this I must thank Fisher for his book “Common Stocks and Uncommon Profits”

17) For instance last month it traded at a PE of 20 times FY 07. Today after having recovered 50% from that price it trades at a pE of 30 times Fy 07.

18) I think once you have the downside levels in mind you can handle the situation much better.

19) I never looked for an ultimate target on pantaloon. That is because the company was constantly evolving. I was prepared to sell at any price if the signals were discomforting.

20) Even today I have no targets on pantaloon, just plan to take each year as it comes.

21) All through out I used to look at the market cap. The size of the opportunity is even today 300 times the market cap. In the multiplex business it is only 3 times the market cap. By the size of opportunity I mean the total sector sales for a particular year. For instance the pantaloon, Big Bazaar Food bazaar brand could be sold at a certain percentage of their market cap and also the roll out of stores will make it an ideal acquisition target.

22) There are talks of reliance getting into retail but then there are two ways to look at it.

a) The market is huge so it could absorb another 3 to 4 reliance

b) Try and see that if Pantaloon is marginalized the stock could come down to Rs 800 or Rs 1000 if they carry along at their pace then the upsides are open. So it is a question of risk & reward. I do not believe that we will have a Kmart in <ST1:COUNTRY-REGIoN w:st="on">India</ST1:COUNTRY-REGIoN> before 2011.

23) Over the years the set up at Pantaloon has changed they had taken in a lot of new talent. People were leaving Rel Info and Bharti to join this company. I thought that may be these guys could not be foolish.

But there were several factors the biggest being the “Buy what you see” that made me buy and hold it the others were only supplementing.

Putting the money in an open-ended fund appears a risky decision....the basic problem I find with a MF company is that they invest at their own choice and exit under unitholders' pressure. So, although their stock picking skulls may be excellent but unless you make an exit properly I dont think major gains may be expected. Also, the time one spends doing research on what finds to buy, you can also utilise that to cherrypick individual stocks.However, with a close ended find, they have more epriod at their disposal, and are available at a discount to their NAVs, with no entry loads or exit loads payable(although brokerage is, which is generally less than the loadings) always appeal more to me..... although for me, a stock like TICL appears the best choice in the pack which is available at a discount of 45p.c. to its NAV.... I beleive there's a lot of confusion to the word safety/risk......the biggest risk is not knowing your personal orientation....its not absolute returns which should be the giuding light, it should be risk-adjusted returns.....the biggest trap in the market is low risk-high return type of stocks.....for the very term is a mis-nomer. People think that high betas are only dangerous, in my opinion negative betas are no less dangerous.....its a perception, that those who had not rose till a particular point in the bull markets are high returns and low risk stocks..... however, those stocks are equal risky as the bull market may continue its march without they getting out of their range. In that very sense, I am quite a risk taking investor and hence I tend to use debt instruments as a safety tool, and hence my regard for fixed income securities. Most of the value stocks, will fit this bill of riskiness.... rather

someone can also say they are low-return and high risk stocks, which they may turn out to be.... So, Vipul may say I am contradicting myself.....but the scenario may change totally, if the bull markets chages its shape......thats the point valie stocks become extremely valuable.....thats when their character changes to low risk high return ........dont know Vipul, but I beleive the markets are making a march to this safety now.....some companies price behaviour is baffling me.... Castrol, GE Shipping, ONGC etc....utilities which are considered to be very slow movers are doing their bit as well......some high profile performers like IT, Construction etc. are reeling under pressure....its not a comment....but an observation and may be wrong in that....

70 Times Better Than the Next Microsoft

I recently found this chart from the ever-helpful moneychimp.com:

Value

Growth

Large Cap

12.4%

9.6%

Small Cap

15.4%

9.3%

Those are historical returns from 1927 to 2004 (not adjusted for inflation). The terms "value" and "growth" are taken from data from Fama and French, whose work is highly respected.

That's a persuasive case for putting small-cap value stocks to work in your portfolio. (We'll get to just how persuasive later.) And you've probably seen plenty of other data showing that small caps outperform large caps and value outperforms growth. Why, then, doesn't small growth

outperform large growth? And why does small growth, on average, end up being the worst choice for your money?

Moneychimp.com offers a theory, and I think it's worth seriously entertaining, at least when it comes to how you invest in small caps. Just think about how investors might mentally categorize large- and small-cap value and growth companies. It might look something like this:

Value GrowthLarge Cap

Well-known boring businesses.

Well-known exciting businesses.

Small Cap

Unknown boring businesses.

The next Microsoft is in here somewhere!

Thanks, moneychimp. You're on to something.

What do value and growth look like?What's the price difference between what might be "the next Microsoft" and the unknown and boring? Let's look at the data.

There's never been an official ruling on what separates "value" from "growth." There are dozens of ways to make those distinctions, and the data that Fama and French produce comes from their own method of sorting out what makes a value stock and what makes a growth stock. Let's look at a more accessible listing of stocks, to give you an idea of what value and growth look like according to recent data. We'll take the two largest holdings from each of the Vanguard small-cap and large-cap value and growth index funds as of the end of November 2005.

Price-to-book

Price-to-earnings

Large-Cap ValueExxonMobil (NYSE: XOM) 3.5 11.5Citigroup (NYSE: C) 2.2 11.1

Large-Cap GrowthMicrosoft (Nasdaq: MSFT) 6.0 22.8Procter & Gamble (NYSE: PG)

10.7 21.5

Small-Cap ValueColonial BancGroup (NYSE: CNB)

2.0 16.0

Martin Marietta (NYSE: MLM)

3.1 20.9

Small-Cap GrowthJoy Global (Nasdaq: JOYG) 8.6 38.9Intuitive Surgical 11.9 87.5

These companies aren't selected to imply that any one or two is likely to do better than another over time. Rather, they're selected to show you what some of the larger players look like when you compare their price to both their book value and their earnings. Obviously, to justify their prices, those companies categorized as "growth" need to grow their earnings much faster than the companies in the value quadrants. The numbers attached to these small-cap growth companies are particularly startling. That's not to say that Joy Global and Intuitive Surgical are necessarily overpriced, nor that they won't grow their earnings sufficiently to be good investments. But to the extent that they represent the other brethren in the small-cap growth field, we can see why the returns for the quadrant as a whole end up disappointing investors.

Taken as a whole -- as measured by thousands of companies, not just two -- small-cap stocks are going to be more inaccurately priced than large caps in the market, but not necessarily better-priced. The inaccuracies work both ways. Those that are overpriced (growth) will be more overpriced than their large-cap brethren, and those that are underpriced (value) will be more so than their large-cap cousins.

What's the cost?The rewards of being aligned with the right quadrant instead of the wrong one over 78 years are absolutely staggering. Consider: Compounded over those 78 years, $100 would translate to:

Value Growth

Large Cap

$898,967

$130,165

Small Cap

$7,307,903

$103,626

Is 78 years a relevant investment period? Sure. It's just slightly longer than an average American life span. So the difference between small-cap value and small-cap growth over a lifetime has been a multiple of more than 70 times the end result. That's right: 70 times.

There are literally thousands of companies in that small-cap value quadrant that you should be concentrating on, none of which can possibly be described as "the next Microsoft." They might not carry the wallop of a potential Microsoft over the short term, but over many decades, and taken as a group ... wow.

Yes, visibility is quite important. At least a 3 year visibility for me. Thank you for your valuable inputs as always and thanks for that reaffirmation for a 20 PE entry for a 40% grower. In fact, this 20 PE and stuff is the job that I do last.

It's like being a "construction company". Once the whole design and plan is setup for building a colony, the last part is employing the construction workers who will actually lay those bricks down. Hence, my "water purifier" system for healthy water:

1) Management filter(credibility, vision, shareholder-friendliness, transparency, aggressive): 50% of the system 2) Past growth rate filter (viewing financial reports, visiting websites for news): 20% of the system 3) Future growth rate possible: 20% of the system 4) Getting a "value-zone" price entry(Usually, try my best to keep a PEG of less than 0.5 between Forward PE and Future Growth Rate.): 10% of the system. Once something goes through all these filters, then I drink the water. Others can share their views too, so we all can learn together.Here's are excerpts from an article written by Mohnish Pabrai almost 5 years ago. Well....some arguments are debatable.

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The Danger in Buying the BiggestBy Mohnish Pabrai

There is a French saying: "Buy on the cannons, and sell on the trumpets!" Whether they were speaking metaphorically or not, that's exactly what Sir John Templeton did. Templeton is considered by many to be, perhaps, the greatest global stock-picker of the 20th century, so it seems worthwhile to subscribe to his proven theory of buying beaten down-stocks at points of maximum pessimism. The reverse of Templeton's approach would be to buy stocks at points of maximum optimism -- and a good place to find optimism is among the most valued businesses in the world. If you started with $10,000 invested in the most valuable business when the Fortune 500 list was released in April

1987 (that year it was IBM and every year thereafter reinvested the funds in the new (or same) most valued business, by 2002, you would have realized an annualized gain of just 3.3%. Over the same period, the S&P 500 delivered about 10% annualized.

The Most Valuable Fortune 500 Business

(1987-2002) A strategy based on this

table would have trailed the S&P

Year Company

Market

Cap*

Revenue*

Net Incom

e*1987 IBM $89 $51 $4.81988 IBM 68 59 5.81989 IBM 70 63 5.21990 IBM 61 69 6.01991 IBM 75 65 2.11992 Exxon 69 103 4.81993 Exxon 78 100 5.31994 GE 90 40 5.91995 GE 92 43 6.61996 GE 126 46 7.31997 GE 170 49 8.21998 GE 260 56 10.7

1999Microsof

t 419 20 7.6

2000Microsof

t 492 23 9.4

2001 GE 407 68 14.12002 GE 401 73 16.6

*Figures in billions. Source: 1987-2002 Fortune

500 lists and Value Line

While the data demonstrate the superiority of the maximum pessimism investment approach, there is something interesting at work here. An examination of the table shows that none of the most valued businesses got much beyond $100 billion in revenue or $10 billion to $15 billion in net income. Is there a natural upper limit on revenue or profitability of a business? Nature provides some possible answers. Mammals rule the world, but the largest land-based mammal is the elephant. Mammals have to eat a lot to generate energy. As a result, mammal size is bounded by the energy a given area of land can consistently supply. It is also bounded by internal organs like the heart, which have to pump blood to the body's extremities. Thus, these extremities are physically constrained from being too far from the heart, and that imposes another size constraint.

Lumbering

Large businesses have their own extremities. There is a critical need to rapidly get data back and forth between the central organizational heart (CEO) and all the extremities (customers and foot soldiers). Over the last 100 years, the speed and breadth of these arteries have increased dramatically, and with them has grown the size of our largest companies. There is, however, an upper limit to senior management's ability to accurately process the various inputs regardless of the size or speed of the arteries. This limitation translates into a size constraint on most businesses. In addition, the most valued business is under constant attack from the marauding invaders who want to unseat it. This leads to what Clay Christensen, author of The Innovator's Dilemma: When New Technologies Cause

Great Firms to Fail, described as the disruptive innovation phenomenon -- against which the incumbent is virtually powerless.

The Law

All of this leads to Pabrai's Law of Large Numbers. The ultimate principle of this law is that one would be best off never making an investment in any business that generates more than $3 billion to $4 billion in annual cash flow and is considered a blue-chip. These businesses are very unlikely to be able to endlessly grow cash flow.

Indeed, cash flows are most likely to tread water or start dropping almost immediately after your investment. A few companies will buck the trend, but they're probably not the ones that end up in your portfolio. Over the years, I've taken a pass on many supposedly stellar businesses purely on the basis of the Law of Large Numbers, and I've never regretted it. Taking insurance while playing Blackjack seems very logical, but it's a sucker's bet. Investing in the most valuable businesses around is no different

Prof Mankekar and his Multibagger Portfolio Prof. Mankekar and his family have made some of the biggest multibaggers of the Great Indian bull run. Pantaloon Retail (100 times) and Financial Technologies (50 times) are amongst his best known bets.

The Prof. is media shy (so much so that I could not find his photograph on google) does not want to be in the public domain and like some of the smartest minds in the Indian markets loves to think and act in isolation. He does not come on chat shows, does not provide opinion on Tv but still teaches at the Jamunalal Bajaj Institute in Mumbai.

I tried making a list of his portfolio from the stocks that he owns and are disclosed in the public domain. Please note that these are the stocks which are in the public domain and it should be assumed that the actuals might differ because certain purchases would not have been disclosed or if disclosed would have inadvertently been omitted. But this portfolio does give a broad idea of his investing styles and habits.

CompanyCMP

Shares Value % of

Rs crores

portfolio

Pantaloon Retail (India) Ltd. 520

2154480

112.03 32.56

India Infoline Ltd. 820994235 81.53 23.69

TV18 890568504 50.60 14.70

NIIT 985220000 21.67 6.30

Balaji Telefilms 270660000 17.82 5.18

Zee News 712400000 17.04 4.95

Asian Electronics1100

150000 16.50 4.80

Champagne Indage Ltd. 628

221420 13.91 4.04

Radico Khaitan 177541000 9.58 2.78

Galaxy Entertainment Corpn. Ltd.

115 297302

3.42 0.99

Total value of portfolio (Rs crores)

344.09

Piquant observations:

o Just like Rakesh Jhunjhunwala the Prof believes in the benefits of portfolio concentration. His top 3 holdings account for close to 70% of his portfolio and he holds only 10 stocks in his disclosed portfolio.

o It is very hard to find a cyclical or commodity stock in his portfolio.

o All the stocks that he bought were at the time of buying a small cap. Just that the sheer pace of growth made it into a large cap is another thing. Maybe the Prof believes that money can be made in small and mid caps only.

o With respect to Pantaloon the Professor expects it to become a Rs 100,000 crores market cap company He likes buying stocks with a huge external scale of opportunity

o We do cover companies with huge scale of opportunity in The Equity Desk - Report Card section.

o These shares are held by the Mankekar family and form a part of their disclosed portfolio. They could be holding more shares through companies, trusts, proprietary accounts which are not in the public domain.

o To know more about investing legends see the section World's greatest Investors.

o Over the past few months the Professor is buying into Tv18, Balaji Telefilms, Zee News and Asian Electronics. His recent buys into the media shares reflect his new found conviction for the broadcasting sector.

o His portfolio does see some churn but not before he has made a multibagger out of his stocks. Stocks that he has either reduced exposure or exited include Financial Technologies, Astra Microwave Rishi laser (suffered a loss here) Pantaloon Industries etc.

Uday Kotak on Shivanand Mankekar I must mention that one of the very important influences in my life was Shivanand Mankekar who was our professor in the MBA course. I used to go with him to the stock market almost every day, it was a great learning experience. I remember the first lecture of Prof.Mankekar. He asked,"How do you value a company?" Someone said by net profit, somebody else said by assets. He said,"All wrong.You value a company on its cash flow."Investor BillionairesBUSINESSWORLD - SEPTEMBER 2006 RAKESH JHUNJHUNWALA:Titan Industries 8.08 285.26Nagarjuna Construction 7.14 266.50Bharat Earth Movers 3.75 203.92Lupin 4.30 176.07Praj Industries 11.1 132.84Punj Lloyd 1.93 109.11Pantaloon Retail 1.85 97.31Bilcare 11.62 86.66

Matrix Laboratories 1.38 59.84CRISIL 4.55 51.84Karur Vysya Bank 4.88 43.10Viceroy Hotels 14.23 36.76Infomedia <ST1:COUNTRY-REGIoN w:st="on">India</ST1:COUNTRY-REGIoN> 6.39 31.88Hindustan Oil Exploration 2.74 24.13Federal Bank 1.29 22.23Mid-Day Multimedia 5.03 17.75Geometric Software 2.96 16.99Provogue (<ST1:COUNTRY-REGIoN w:st="on">India</ST1:COUNTRY-REGIoN>) 2.96 16.97TV Today 2.74 16.75Agro Tech Foods 4.31 14.94JB Chemicals & Pharmaceuticals 1.38 12.88Ramco Systems 2.20 7.96Zenotech Laboratories 2.55 3.23Vadilal Industries 2.86 0.96TOTAL 1,735.87ANIL DHIRUBHAI AMBANI ADAG:GROUP3,4Anant Raj Industries 6.88 104.03Jyoti Structures 7.42 55.91Madhucon Project 3.88 54.57TV Today 7.29 44.56TV18 <ST1:COUNTRY-REGIoN w:st="on">India</ST1:COUNTRY-REGIoN> 3.09 42.17Magma Leasing 14.99 30.85Saregama <ST1:COUNTRY-REGIoN w:st="on">India</ST1:COUNTRY-REGIoN> 6.04 26.06ICSA (<ST1:COUNTRY-REGIoN w:st="on">India</ST1:COUNTRY-REGIoN>) 6.67 24.15Subex Systems 2.33 22.09Ruchi Soya Industries 1.67 17.63Zodiac Clothing Company 7.17 17.20Mercator Lines 1.78 14.80Pitti Lamination 14.67 12.24OCL <ST1:COUNTRY-REGIoN w:st="on">India</ST1:COUNTRY-REGIoN> 1.83 10.35

Hindustan Dorr-Oliver 1.72 8.50Ramco Systems 2.18 7.91K Sera Sera Productions 2.50 2.77Sarla Polyester 3.01 2.69TOTAL 498.46 AZIM H PREMJI:AZIM H. PREMJI3United Phosphorus 1.20 58.53Novartis <ST1:COUNTRY-REGIoN w:st="on">India</ST1:COUNTRY-REGIoN> 3.08 58.00Himatsingka Seide 3.37 54.58Pfizer 1.55 54.34Aventis Pharma 1.03 46.81Monsanto <ST1:COUNTRY-REGIoN w:st="on">India</ST1:COUNTRY-REGIoN> 1.83 29.67Gujarat NRE Coke 1.96 19.24Merck 1.58 15.53Rallis <ST1:COUNTRY-REGIoN w:st="on">India</ST1:COUNTRY-REGIoN> 2.63 10.40Fulford (<ST1:COUNTRY-REGIoN w:st="on">India</ST1:COUNTRY-REGIoN>) 1.97 4.22Todays Writing Products 3.90 3.85Jindal Drilling 1.17 3.27TOTAL 358.40 HARISH C. BHASIN & ASSOCIATES:HARISH C. BHASIN & ASSOCIATES5Jaiprakash Associates 1.60 142.94DCM Shriram Industries 5.61 14.80Hotline Teletube 8.77 0.68Kerala Chemicals 1.17 0.36Haryana Leather 1.93 0.07TOTAL 158.85 NEMISH S SHAHNEMISH S. SHAHLakshmi Machine Works 2.44 65.87Motherson Sumi 1.44 35.89Rico Auto Industries 2.45 27.02Elgi Equipment 1.71 10.12

Hi-tech Gears 3.09 4.95Kar Mobiles 4.33 3.11Super Spinning 1.38 2.93TOTAL 149.89VALLABH BHANVALLABH BHANSALI & ASSOCIATES:SALI & ASSOCIATES6MRF 4.95 65.19Munjal Showa 7.09 23.05FDC 1.52 14.25Prithvi Information Solutions 1.66 11.09Rane Engine Valves 3.92 10.10Polyplex Corporation 2.60 6.50IP Rings 7.12 5.74K Sera Sera Productions 1.92 2.14Sterling Tools 1.75 1.42Elder Health 2.75 0.30TOTAL 139.78LAXMI SHIVANAND MANKEKARLAKSHMI SHIVANAND MANEKAR:Pantaloon Retail 1.6 84.51Astra Microwave 1.29 13.44Pantaloon Industries 3.07 7.40Champagne Indage 1.17 4.94Galaxy Entertainment Corporation 1.39 4.80Rishi Laser Cutting 4.65 2.20Zen Technologies 1.52 1.95TOTAL 119.24a lot of people win 1 crore lottery or many have won in KBC or other such programs or many have insider info to speculate..how many of them are as rich as RJ....how many of em are followed by people ??....how many of em are amongst richest indians??....it takes vision and a purpose to be where rj is today....how much he wud have made by shorting the market...he started with 20000 or so bucks way back then... make that 50 times (suppose he invested it initially and made a 520 bagger)...10 lacs...he speculated with 10 lacs ...made 40 times ...4 crores.... he s worth 1000 crores today...still multiplied that money by more than 250

times....its not that easy.....buffet made money in a more investor friendly mkt...its not easy to invest in indian mkts and still be among the richest men in india.....even if george bush sneezes sensex sheds a few points why cant we appreciate our heroes? he actually started with 10000 in 1985...before shorting acc how much he wud have made of those 10000 ... ??? Rakesh Jhunjhunwala started with a meagre Rs 10,000 somewhere in 1985 and with some trading profit was on a leverage capital of Rs 10 lacs in a few months now if you compound that Rs 10 lacs at 57% for 22 years, You do get to the figure of Rs 2250 crores. Rakesh Jhunjhunwala is one example of compounding.