Double-digit stocks to multibaggers? Daljeet Singh Kohli on 2 stocks that can do it

"While investing in double-digit stocks, the important thing is to see what are the drivers of growth for this company? What is the change that is happening? Normally these low ticket items go through a very bad phase over a period of time and if there are things changing in that period, if things are now improving, then probably markets try to pre-empt and normally the institutions or the sophisticated investors come later," says Daljeet Singh Kohli, CIO, Stockaxis.com

What is the best way to identify multibaggers or when we talk about double digit stocks or multibaggers under Rs 100, what would you look at?
The most important criteria will obviously be the fundamentals of that company because ultimately that is going to drive the stock price. So whether you want to buy anything in two digit or four digit, it will not matter unless the company performs.

Now usually, in these two-digit stocks, one will be pre-empting things which will happen over the next few months to years. That is where the trick lies because many companies will promise the moon but when it comes to delivery, they might falter. So, a high risk appetite is needed. The risk comes from that part because you are assuming that things will change in the next three months, six months, one year, but actually they do not turn out that way. In that case, the two-digit stock might ultimately become much less than that also.

So the important thing is to see what are the drivers of growth for this company? What is the change that is happening? Normally we have seen that these low ticket items have gone through a very bad phase over a period of time and if there are things changing in that period, if things are now improving, then probably markets will try to pre-empt and normally the institutions or the sophisticated investors would come later. You and I can invest in any small stock and we do not have to answer to anybody. But if I am a fund manager sitting in an institution, I have 50 people to answer to. So I will have to wait for the expected things to actually happen.

When we just talk about how to identify multibaggers, a lot of companies start small. One of your interesting picks is Shree Renuka. This almost went to the verge of bankruptcy and now it has started to do well. Now, sugar is a cyclical business. Where do you see the cycle for sugar and why invest into this name?
Shree Renuka Sugars is not a small company. A two-digit stock does not mean it has to be a small company. It can be a very big company. It is India’s largest sugar company and not a small company and that is why we are looking for it. Now the point here is that since 2010-2011, this company went into a bad phase. They had a lot of debt and then they had a Brazilian operation. They had to sell it and do all sorts of things and it took them 10 years to do that.

In between what has changed is that in 2020, Wilmar has formally taken over the company. As of date, Wilmar owns 62.5% of the company, Wilmar as we know is the world’s largest food processing company. It has presence in 50 countries and it is well known for agri businesses all over the world.

Now the first thing is the change in the promoter. As for the sugar cyclicality, the biggest change which the Government of India has done is the ethanol part. Now this policy was there always but it was not remunerative enough for the sugar mills. In 2020, the Government of India made lot of changes in the ethanol pricing policy which has given ethanol an option to convert from sugar. Like in Brazil, we know that most of the sugar companies flourish very well because they always have an option either to go for sugar or to go for ethanol.

The same thing is happening in India now and if we know the capacity of Shree Renuka Sugars. In distillery, from 770 kiloliters per day they are going to 1,400 kilolitres per day which will make them the biggest capacity in India of ethanol availability and the full benefit will come from FY24.

These are the two major changes which have happened in the company between 2020 and 2022. In this period, the stock has also moved from being a penny stock of Rs 10-15 to Rs 55. Now the good part is that the company is right on the trajectory and from almost Rs 2,000 crore losses in FY19, today in FY22, they had a loss of Rs 136 crore. On a TTM basis, they had a loss of only Rs 60 crore which means very soon, they will become a profitable company.

So there is a transition happening and we are going to pre-empt that and we are going to take advantage of that. That is why we are saying that from Rs 55, probably the stock can go back to Rs 80-Rs 90 as the numbers start coming in and because the sugar cyclicality is coming down.

You just mentioned that it is always important to look at the price at which one is buying. Can you just talk to us about what you make of any stock idea that comes to viewers? One has to look at the price. What has been the past performance? Can we wait for a cool down?
Obviously, price is the most important criteria to buy, especially in those stocks at this time when we are saying that the stocks have already moved two times-three times from their initial points. One has to be careful about the entry point also.

I agree that we should start nibbling in or start doing some bit of it so that you do not miss out the entire opportunity because what happens is normally if we keep saying that I will buy at such and such price, then it will not happen. For example, in Renuka, if I say that I will buy only at Rs 30-Rs 40, then it will not happen. We do not have to wait for that. What we do is we allocate some portion today and see if it is moving in the right direction. We always suggest to people never to average down but to scale up as the stock or the thesis builds up.

So if you have bought 10-20% today and the thesis which we are talking about will come into lag, they will do this on ethanol. If all of that is playing out, you keep adding on the upward. While your average cost of ownership will go higher, ultimately you are on the winning side and there is a difference between averaging down and this staggered buying approach when the thesis is working your way. We always want to do it that way so that if things are working our way, we will add more and then take advantage of it.

Your next idea is EIL India. Again it is a stock which has been in focus for the last few weeks or so. It has been doing well, It is like an infrastructure play but what is the trigger?
The biggest trigger now is that ESG is out of the way. For the last 10 years, all the ESG proponents have made a fool of us all around the world. That was in the name of environmental protection. No investments were happening in fields where there is a lot of carbon content. So no investment was happening in oil and gas energy.

EIL incidentally is a company which is involved in all of these only. There is no refinery, there is no fertiliser plant in India which has not been built without the help of EIL. Anybody who wants to do anything in oil and gas, chemicals, fertilizers will need the help of EIL. It is a kind of monopoly. Now the problem was that in the last 10 years nobody was investing and this was the phenomenon all over the world.

Now with Ukraine war and Covid, most people have understood that we need to put ESG behind and come to the reality and start investing and that is happening now. Some small announcements have started happening and we believe that once the sector starts getting investments, first thing will be the consultancy which will come; second will be turnkey. Both these things, EIL does very well and it is a go-to company and top of mind for anybody who would want to make these investments.

A lot of chemical companies are doing it. Then there are a lot of other areas within the chemical space, water treatment and all those things. Just to give you an example, despite so much of negativity on all these sectors, EIL has an order book of Rs 8,800 crore even now and they are expecting another Rs 4,000-5,000-crore order in the next one year. That will mean a Rs 12,000 crore order book, which is not a small thing as that will give a lot of visibility

Also because of non-investment in these sectors, their consultancy business, which is a 30-35% margin business, has come down to 14% margin business. Turnkey business in terms of revenue, is stuck at where it was in 2014-2017 and even in 2021 it was the same number. So for the last 8-10 years, there has been no growth.

But for the first two quarters – H1 of FY23 – the numbers have started improving and there is now a lot of commitment coming in. People have started saying that they will invest and the biggest trigger has come few days back when Government of India has announced a mission project for green hydrogen.

So green hydrogen again is a kind of fuel, energy security kind of thing and there again if somebody has to start something and put up a plant, the first person to go to would be EIL. In 2011-12, they used to have Rs 800 crore profit. That had gone into losses in 2017-18 and even now it is only Rs 400 crore profit.

Our expectation is that this Rs 400 crore will go back to Rs 800 crore profit in the next two years and that will be when this stock should double up again. So that is the trigger point which will play for Engineers India. I have not looked at the stocks business because they are two-digit stocks, I am looking at what is changing in these stocks and if that change is visible and that visibility improves, the stocks will give a much better returns also.