Can a large-cap company become a multibagger?

The common perception is that most large-cap companies don't make good wealth compounders. They are usually at the latter stages of their growth cycle and hence don't have much legroom for growth. But is there any truth to this belief, or is it a market myth?

To test this claim, we looked at companies that had a market cap exceeding Rs 80,000 crore 10 years ago and currently have a market cap of at least Rs 1,00,000 crore.

After applying the above filter, we landed on 15 companies. Out of the 15, 12 have more than doubled their market cap in the given time frame.

So, large caps can indeed be multibaggers.

But their capacity to compound is dependent on the following two factors:

A long growth runway

What determines a company's growth is the growth prospects of the industry it operates in. India underwent a revolution in IT, banking, FMCG, telecom and other sectors. These companies, each of them the market leaders in their respective industries, were able to capitalise on this growth opportunity.

Robust earnings growth

No matter the industry prospects, the market will not reward a company that does not have consistent earnings or has a below-par return on capital. Of the 15 companies we have mentioned, 13 have reported a median return on equity (ROE) of more than 10 per cent.

Your takeaway

Sanjoy Bhattacharya once said, "You are not buying a cap, you're buying a business. It doesn't matter what the bloody cap of the business is. It's what the business is about that matters" . We agree with the renowned Indian investor on this.

It is not the market cap but the business that births growth opportunities. Hence, multibaggers can be found anywhere. The secret of equity investing success remains the same: find a business you believe can grow, do the due diligence and perform fundamental analysis, and play the long game.

Also read: Mid-sized companies for wealth creation!

This article was originally published on July 31, 2023.