We’ve all heard of people who’ve made millions overnight because they got their hands on shares of an amazing company. Such companies are originally inexpensive (meaning they’re undervalued) but have strong fundamentals. This makes them great investment options and since their price literally multiplies over a short span, they’re known as multibagger stocks.
Shares of MRF are a classic example of a multi-bagger stock which grew 147 times in a span of 17 years. But like like any other company, even MRF’s share price experienced a lull before rising to present levels. Those who held on to the shares during this time eventually became rich. While the others who sold their shares out of fear and impatience missed out on making some great money within a short span. Today shares of MRF tyres are the costliest on the stock market (even costlier than shares of Apple (Approx $218) and its journey is worth studying.
Here are 3 reasons why shares of MRF are so expensive-
Shares of MRF tyres have risen by over 14000% in just 17 years
Price in 1990- Rs. 500
Price in 2017- Rs. 73,339
Scroll over the image, to see the price change in MRF Tyre shares over 17 years.
1. It's a limited edition
There are only around 3 million (30 lakh) MRF shares available in the market for shareholders to buy.
Now compare this to India’s largest company based on the market capitalization- TCS-Tata Consultancy Services’s. It has around 1 billion (100 crores) shares but still, MRF’s price per share (Approx Rs. 67,000) is a LOT MORE than TCS’s price per share (Approx Rs. 2000).
What's market capitalization?
A company’s value calculated by multiplying its current stock price with the total number of shares held by its shareholders, aka outstanding shares. Example: ABC has 8,000,000 outstanding shares and its current share price is Rs.8. Company ABC’s market capitalisation = Rs 64 million 8,000,000 shares * Rs 8.
Lesser the number of shares more will be the price per share.
- Suppose a company lets say ABC is valued at Rs. 1000.
- Divide that company into 10 pieces. Now each piece’s value is Rs. 100.
- Instead of 10 pieces, cut it into 20 pieces. Now each piece’s value is Rs. 50.
Each piece here refers to a share of the company.
MRF tyres have decided that its company has to be divided into less number of shares instead of more. That’s why it’s share price is so high. MRF’s rationale behind this is to retain and attract investors who will stay for the long run and not speculate (i.e. buy and sell shares within a short span). Unlike other companies that often issues bonus shares and split shares, MRF follows a no-bonus no stock splits strategy since it’s inception.
What are bonus shares ?
When a company makes a profit they can either reinvest it back in the company for growth; distribute it as a dividend; or distribute it as bonus shares to existing shareholders for free in proportion to the number of shares they already own.
If a company announces 1:2 bonus shares then each shareholder will get 1 free share for every 2 shares they own. Companies usually announce bonus shares when they don’t want to give out cash (liquidity) as a dividend to its shareholders. Thus by issuing bonus shares, the company increases the number of shares. But the price per share reduces to keep the company’s value (market capitalization) the same as before bonus shares.
Now more people can afford the shares and investors are attracted to the company.
What are stock splits ?
A stock split means existing shares of a company are divided or split up into more shares. This increases the number of shares but reduces the price per share. And just like bonus shares, a stock splits also doesn’t increase the company’s share value.
Imagine a pizza for Rs.400 which can be divided into 4, 6 or even 8 slices but regardless of the number of slices the size & cost of the whole pizza will remain the same just that more slices means more people can share it and split the cost.
For instance, if a company whose share price is Rs.30 announces a stock split of 3:1, every 1 share owned by a shareholder will be split into 3 and its price per share will become Rs.10. Stock splits are announced when a company’s price per share increases too much and the company wants to attract more investors by reducing it.
In a nutshell – Bonus shares and stock splits both increases the number of available shares in the market and reduces the price per share. When this happens the number of shareholders increases and so does the trading activity. More trading activity means share prices fluctuate more. Companies like MRF tyres don’t want this constant volatility and want long-term investors that’s why they follow a no bonus no stock split strategy.
2. It's a ballooning business, (quite literally)
1946- KM Mammen Mappilai, founder of MRF-Madras Rubber Factory originally started off by selling balloons. He later diversified into making contraceptives, toys, and gloves, and finally set up an MRF office.
1952- By this year MRF started making tread rubber, which could extend the life of a used tyre if it was still in shape. And eventually, the company became a market leader in India.
1961- MRF got publicly listed on the stock exchange and established a partnership with the US-based Mansfield Tire & Rubber Company to make tyres.
1964- It started exporting its products overseas
1967- It became the first Indian tyre company to export tyres to the US.
Ever since it was listed in 1961 MRF tyres’ share prices have increased majorly because of its consistent progress. Experts say they’re the only Indian tyre company to show double-digit growth for a long time. They’ve maintained their focus on building a good dealer network and keep prices under check. They’ve paid keen attention to it’s exporting business, incorporated new technology and diversified into an array of products like conveyor belts, paints and ventures like toymaker Funskool.
3. It's a crowd favorite
MRF is a market leader in the motorcycle and car sector, controlling 24% of the Indian tyre industry. Despite the availability of cheaper Chinese tyres it still enjoys dominance here and is the only Indian company offering a complete range of tyres for all vehicles. Unlike other brands, MRF sells it’s products only in its own stores and not in multi-brand outlets. They’ve also worked with almost all car companies and have been associated with celebrities like Brian Lara, Sachin Tendulkar and Steve Waugh. Even it’s commercials form an instant connect with the audience because they revolve crowd favourites like sports and patriotism.
Why MRF's success didn't work in favour of all it's shareholders?
When it comes to getting rich on multibagger stocks like MRF only select few get lucky. That’s because they follow a strict ‘buy it and forget it’ strategy. But for many others following such a strategy is pretty tough because shares are transparent and liquid investments. This means an investor can track their price movements on a daily basis and buy and sell them instantly, unlike physical investments like real estate or gold. So the minute share prices fall people want to sell them to avoid making any loss. And the minute they rise(even a little) investor are tempted to sell it off to make quick profits.
Only some investors continue to remain invested because they understand that a company’s growth graph is never a straight line, it has many ups and down. Such investors who truly understand the principles and fundamentals of investing ultimately know how to control the situation and profit out of it.
Checklist to pick multibagger stocks-
- Check the debt of the company. Ideally, their debt shouldn’t be more than 30% of their equity.
- Look at the company’s revenues and profits. If they’ve outperformed themselves at a current operating level, then that’s a good sign.
- Review the scalability of the business and whether it has potential to grow
- Check the earnings per share and whether they’re growing at a faster rate than the growth of the stock price
- Keep an eye for future plans, structural changes in the company and management decisions
MRF tyres is the perfect example of Warren Buffet’s investment strategy: Buy, Hold and Don’t Watch Too Closely. To be a successful investor you should be in it for the long run (this goes for all commitment-phobics). Either you’re all in or all out, there’s no in between. So this year try looking out for such multibagger stocks and invest in them.