Exclusive | Raamdeo Agrawal reveals his simple 2-step formula for finding multibagger stocks

In a market teeming with noise, legendary value investor and Motilal Oswal Financial Services co-founder Raamdeo Agrawal believes the formula for spotting the next multibagger is surprisingly simple but understood by very few.

“No one really understands compounding,” Agrawal said in a candid conversation with ET Markets. “Even in an IIT class, maybe just one person gets it.” The power of compounding, he said, is rarely appreciated because “you cannot see the future.”

The billionaire investor broke down his multibagger framework into two key factors: early-stage tailwinds and good management. “When there is a combination of good management and tailwind, and you are in the early stage of that tailwind, you are sitting on a multibagger formula,” he said.

The Power of Compounding — Misunderstood by Most

Agrawal emphasized that compounding remains a mystery even to those trained in the best institutions. The reason? It deals with the future — something abstract and often uncomfortable for most people to internalize. “If I understand compounding and others don’t, I’m like a one-eyed king among the blind,” he quipped.

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To illustrate its power, he offered simple math: A 25% annual return multiplies wealth tenfold in ten years. At 35%, it’s 20 times. At 45%, the return becomes 40x. That’s the wealth creation potential he believes more investors need to grasp — not just theoretically, but with conviction.

Why High-Growth Stocks Can Command Lofty Valuations

Agrawal also addressed how to value fast-growing businesses. If a stock can grow earnings 40x over a decade, it makes sense to pay a premium upfront — even a P/E ratio of 100, he said.

“You start by looking at the index valuation,” he explained. “If the market gives 15% return at 20 P/E, then you must reward companies with higher growth prospects with higher multiples.”

Valuation, according to him, is always relative and dynamic. “There’s no absolute value in the world. It’s like real estate. You want to know the value of a new building? You look at the old one next door.” Market prices, he added, get reset daily, sometimes hourly, based on fresh information and sentiment.

“100 PE Smallcaps Were Wrong, and They’ll Correct”

Asked about the frothy valuations of certain smallcaps in the recent bull market, Agrawal was unequivocal: “They were all wrong, and they will correct.” Valuations may vary among investors, he admitted, but not by absurd degrees. “If I say the price should be ₹300, my friend may say ₹350–400. But if someone says ₹4,000, then either you come to my place for tea, or I’ll come to yours. We need to reconcile.”

This, he explained, is where market discipline eventually kicks in. Retail exuberance can distort short-term prices, but long-term fundamentals prevail.

The New Market: Informed Core, Noisy Periphery

India’s retail revolution has changed the character of its stock market. From just 2 crore demat accounts in 2020, the figure has exploded to 20 crore today. But Agrawal noted that beneath this surface lies a sharp divide.

“The real control is still with the one crore serious investors,” he said. “They own 90% of the market. The remaining 90% of demat holders own just 10%. So while the new entrants may create volatility, they don’t control direction in the long run.”

Still, he acknowledged that this influx has made the market more unpredictable in the short term. “You’re now dealing with a disproportionately large number of misinformed or ill-informed traders.”

Agrawal believes all valuation metrics are valid — depending on the investor. “There are four or five moving parts: sales growth, profit growth, ROE. These are core. Then valuation depends on your perspective.”

For a pension fund from Canada, a 5% dollar return may be sufficient. For an Indian investor, the bar is higher — maybe 18%. “This market is made up of everyone,” he said, adding that one yardstick won’t work for all.

No Two Companies Are Truly Alike

The human tendency to group companies — like "cement stocks" or "banking stocks" — may help simplify investing, but Agrawal warned that each company is unique. “You have to understand that uniqueness to value it. Every cement company is different. Every bank is different.”

This depth of understanding is often what separates successful investors from the rest.

Inflows, Oil Prices, and the Current Market Setup

Agrawal sees the current market as being held up by consistent domestic inflows and a relatively benign macro backdrop. “The Pakistan tension is gone. Oil at $60–70 is fantastic for India. It changes our trade balance and strengthens the rupee,” he said.

He also noted the mean reversion underway. “Last year, the index rose just 7–8% while portfolios were up 25–30%. I had warned of reversion to mean — and it’s playing out now.”

The biggest takeaway? Don’t try to time the market every day. Instead, look for businesses with early-stage tailwinds and strong leadership — then stay invested.

“The real money is made by holding long term,” Agrawal said. “If you want a multibagger, look for the tailwind before it becomes obvious.”

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)