How to spot multibaggers like Abakkus' Sunil Singhania

In our previous story, we explored Abakkus Asset Manager founder Sunil Singhania's playbook for identifying multibaggers, touching on strategies like management changes, consistent earnings growth and business restructuring. We further explore additional indicators that Singhania believes can help investors identify multibaggers.

The benefit of fixed costs

A key signal when looking for multibaggers is operating leverage, according to Singhania. He puts it simply: "Fixed costs remain fixed. When revenue increases without a corresponding rise in fixed costs, you see a huge jump in operating profits and EBITDA margins." This concept underpins the idea that once a company's fixed costs are covered, any additional revenue could lead to a disproportionate rise in profits.

Singhania points to ABB, which struggled between 2016 and 2019. Its revenue saw no increase, while employee costs remained unchanged. Margins remained low as employee costs ate into operating profits. However, once the pandemic eased and revenues began to rise, these fixed costs didn't scale up at the same rate. In fact, as a percentage of revenue, employee costs fell from 9.8 to 7.4 per cent. The result was remarkable—a fourfold increase in profits and a tenfold surge in the stock price.

For Singhania, it's not just about looking at a company's profit margins but understanding how those margins will expand as revenue grows. "When evaluating a company, ask yourself: if revenue doubles, will fixed costs double? If not, the company may have significant operating leverage."

Completing a capex cycle

Another important element in Singhania's multibagger strategy is understanding the capex cycle. "When businesses expand, the capex cycle is typically 3-4 years long. During this period, expenses rise, debt increases, and profitability suffers. But once that capacity comes online and is utilised effectively, revenue sees impressive jump", he explains.

Singhania points to Deepak Nitrite as a clear example of how capex can turn the corner for a business. Between FY16 and FY18, the company invested heavily in expanding its capacity. During this period, annual revenue and profit grew modestly at 12 and 10 per cent, respectively. However, once the new capacity came online in FY19, the company saw a 61 per cent jump in revenue, with profit after tax growing by an astounding 120 per cent. This growth was further amplified by the favourable chemical industry cycle, leading to a massive uptick in stock price.

For Singhania, tracking companies at the tail end of their capex cycles can reveal great opportunities. These businesses often experience muted growth during the initial years of investment, but when capacity utilisation ramps up, the returns can be explosive.

Change in perception

Singhania considers market perception as another key factor. A negative view of a business or its management often leads to mispricing, but when that perception changes, the value of the stock can be unlocked. "We all have preconceived notions about companies. Bad past experiences with a business or promoter often prevent us from reassessing it. But when perception changes, stocks can see outsized returns."

He recalls the case of APL Apollo. Once considered a low-margin commodity steel company, it was valued at a discount due to its lack of a clear competitive advantage. Over time, however, APL Apollo's strong growth trajectory, improved branding, and better focus on key financial metrics like return on equity (ROE) and return on capital employed (ROCE) began to change the market's perception. As a result, the stock was re-rated—not as a steel company, but as a high-growth company akin to an FMCG business.

Essentially, when a business fundamentally improves, the market may start to reassess it, and a shift in perception can result in a massive re-rating.

Surviving cyclical downturns

Cyclicals can be some of the most challenging stocks to hold, but Singhania believes that with the right timing, they can yield extraordinary returns. "Cyclicals are frustrating," he says, "but when timed correctly, they can deliver exceptional returns. The trick is to buy them when they are completely ignored, but they're still maintaining profitability."

He gives the example of Supreme Petrochem. During a challenging industry downturn, the company managed to remain profitable even at reduced demand levels. As the price of its products increased by Rs 20-30 per kg, its EBITDA surged, and the stock experienced a sharp rise.

"Be patient with cyclicals," Singhania advises. "If they survive downturns, they can deliver exceptional returns when the cycle shifts."

In short

Singhania's approach to spotting multibaggers includes paying attention to overlooked signals like operating leverage, the completion of a capex cycle, or shifts in market perception. These subtle catalysts can be effective indicators to uncover opportunities with explosive growth potential long before they gain widespread market attention.

Also read: How Li Lu, the Chinese Warren Buffett, spots market gold

This article was originally published on March 24, 2025.