Eye on the prize: Ten-baggers still abound amid tepid benchmark returns

The number of companies that return ten-fold investments has kept rising despite increasing volatility and recession fears looming over the market.

A total of 251 companies returned ten times their investments (called ten-baggers in market parlance) over a 10-year holding period ended September 2022, compared to 224 during a similar holding-period in the previous year. The number of 10-baggers within a three-year holding period also rose from 16 in September 2021 to 55 in September 2022. The five-year holding period shows 34 stocks as of September 2022 compared to 38 in September 2021 (chart 1).

The analysis is based on 1,401 companies with their September-end price data since 2004. The number may be higher since the data will exclude stocks that had their initial public offers in the intervening period.

The Sensex was down 2.9 per cent between September 2021 and September 2022. It has increased 48.5 per cent over the last three years, 83.6 per cent over the last five years and 206.1 per cent over the last 10 years.

Foreign portfolio investors turned net sellers, with Rs 2.1 trillion sold between September 2021 and September 2022. Meanwhile, mutual funds were net buyers (Rs 2.1 trillion) in the same period.

The number of ten-baggers declined during the initial part of the pandemic. There were four (from 1,401 stocks) over a three-year period as of September 2020. There were 16 for a five-year holding period, and 77 for those with a ten-year holding period.

The probability of picking a ten-bagger appeared closely related to the holding period of the stock. There was a 1-4 per cent chance that a stock from the sample would be a ten-bagger for a holding period of 3-5 years. It increased to 16-18 per cent for a ten-year holding period (chart 2). The market capitalisation of Indian companies has increased from $1.4 trillion in 2009 to over $3.4 trillion as of Tuesday.

Any reversal of foreign portfolio outflows could help act as a tailwind for markets, according to a September 28, 2022 India Equity Strategy note from Morgan Stanley, authored by equity analyst Sheela Rathi, research associate Apurva Jain, and equity strategists Ridham Desai and Nayant Parekh.

“FPI ownership is at multi-year lows and persistent selling since mid-2021 (except for the past few weeks) implies that as a cohort, it has missed out on one of the best performing large equity markets in the world,” it said.

George Thomas, fund manager, Quantum Mutual Fund, said India’s current valuation premium relative to its peers was likely to persist, given factors like favourable demographics in an equity outlook note in October. Global events would be closely watched, suggested the note. “The valuation of Indian markets indicated by the price-to-earnings ratio of benchmark indices is marginally higher than its historic average, supported by a stable earnings trajectory. Nevertheless, we could see volatility in the near term due to uncertain global macros,” it said.