How Ashish Chugh Made Fortune With Portfolio Of Multibagger Penny Stocks

Ashish Chugh Chugh, founder and director of Hidden Gems Advisory, has over time come to be known as a leading penny stock picker in India. This Delhi-based trader has burnt his fingers many a time, but the few bets on which he got it right have made him more money than what he lost in half-a-dozen others.

“It is easy to buy such stocks. But you would have problems exiting them,” Chugh told an audience at a market conclave in Delhi over the weekend. The wisdom he shared reflected his personal experience in treading the minefield that penny stocks are.

Earnings growth are necessary for microcap and smallcap stocks to turn into multibaggers.

Hunting value bets among penny stocks is not everyone’s cup of tea. Ones who have done it and made money also learnt hard lessons – stuff that makes one a seasoned hand in the market place.

Ashish Chugh’s Portfolio of multibagger penny stocks

Hunting ‘multibaggers’ is almost an obsession among new generation Indian stock traders, majority of whom have entered the market after recent gains made Dalal Street stand out globally and projections for world-beating growth in the economy have raised hopes of quick wealth creation in stocks, drawing in a generation desperate for quick riches.

Patience is very important, insists Chugh, Director at the Delhi-based Hidden Gems Advisory.

While smallcap and microcap stocks lure retail investors, it’s not a safe place for them, he adds. “Investing in microcaps is very risky. If you dare to go out there and take some risk, make sure you chase growth.”

Growth vs value

Earnings growth is the common factor among the microcap and smallcap stocks that have turned out to be multibaggers. “Value remains value unless there is growth. Look for stocks where there is potential for growth,” said the market veteran.

Growth stocks often come at higher prices.

Growth itself can have layers, as there could be a huge variance between potential and actual growth. “A company with potential to grow but where actual growth has not come could prove a goldmine. Chances are, it is facing temporary setbacks, in which case you might get the stock at a reasonable valuation, thanks to the uncertainty surrounding the business,” says Chugh.

Where are these stocks?

Currently, the Indian market is crowded with stocks that show value but are down in the dumps because of massive debt loads accumulated over time, company-specific issues and sectoral headwinds – both external and internal.

Short-term negatives are an opportunity, says Chugh. Stocks and sectors that have fallen out of favour with investors because of temporary setbacks often end up delivering big gains to investors who stay put through the bad patch.

Chugh, who took to investing seriously in the early 1990s, says he looks for stocks with ‘curable’ negatives. “Make sure, you get this bit right. It is possible that you may believe a certain negative to be curable, but it ends up becoming a permanent damage. One has to keep tracking such stocks carefully,” he said.

The market veteran chuckles at the opportunity that the Indian market presents currently. There are stocks where enterprise values have fallen to equal 2-3 years of cash flow from the business, he exclaims!

How to identify price multipliers

Successful investors know how to distinguish between a company doing ordinary work and the one investing on future.

A quality company reporting good numbers and having healthy financial ratios and good management may still find its stock stuck in a trading range. Indian company managements, most of which are family promoted, are often not very forthcoming, which causes their stocks to trade below par.

When promoters are not interested in talking to analysts or investors, a stock may be evading radars of brokers and investors. When a company doing extraordinary work grows and reaches a certain size, the price multiple gets rerated. Then it sees multiplier effect. That’s the time when the company gets talked about and big money flows in. If you manage to spot that business before it begins to buzz, wealth is all yours, says Chugh.

Special situations such as merger, demerger and share buyback can also throw up opportunity to make big money. Institutional investors, focused on a core business or following thematic allocation, often do not show much interest in demerged entities, leaving them quoting at battered valuations.

Marico demerger of Kaya

Chugh recalls the Marico demerger. Most institutional investors were interested only in the FMCG business, which was the core. When Kaya was delisted, Marico’s m-cap was Rs 7,000-8,000 crore and Marico Kaya’s about Rs 200-250 crore at listing. An investor holding 4-5 per cent in Marico Kaya as part of Marico’s Rs 200-300 crore business may not be interested in a tick size of Rs 2-3 crore. Marico Kaya Enterprises was later merged with Kaya, another group demerged entity.

On Monday morning, Kaya had a market-cap of Rs 1,159 crore, a six-fold expansion. Marico, on the other hand, saw its market-cap swell five times to Rs 40,000 crore.

Most institutional investors also ignored Arvind Infra (Arvind SmartSpaces) when it got demerged from Arvind. It now has a market-cap of Rs 400-odd crore.

How to judge management quality of penny stocks

Good management is a key criteria for all kinds of stock investment, be it penny stocks or largecaps. India’s IT bellwether Infosys recently took a major tumble over management transparency issues even when there was a share buyback offer at a 20 per cent premium.

Chugh says while management quality is key, it is a subject often not easily understood. In most cases, the quality of the management is nothing more than a perception, which changes as stock prices move up, he says.

When a stock quotes at Rs 20 with PE multiples of 4 or 5, one tends to believe there is some problem with the management. Once a big investor enters the stock at Rs 200, the management issues go away from the mind of investors.

“What I would look for is well-managed businesses, where there has not been much equity dilution by the management over time, where growth is coming through internal accruals and sales and profitability are rising over the years,” Chugh said.

Ashish Chugh makes 6,000% return in 4 years from penny stocks and offers smart tips to pick multibaggers

Chugh says his best investment so far was Rs 11,000 he spent in 1992 to subscribe to The Stock Exchange Official Directory by BSE, a compendium in 18 volumes.

Chugh says his best investment so far was Rs 11,000 he spent in 1992 to subscribe to The Stock Exchange Official Directory by BSE, a compendium in 18 volumes.

Selan exploration, Natco Pharma

You need to lose some money in stocks to learn the ropes of the market. This wisdom comes from an investor who is known for picking multibaggers, some of which have swelled up to 6,000 per cent in last four years.

Ashish Chugh says stock investing is about being able to look at the big picture, and not about nailing big returns very next quarter.

He looks at the bears as taskmasters, who teach hard lessons. “Every investor needs to go through a bear market,” he insists.

Known for his ability to spot potential multibaggers early, Chugh says he has learnt the tricks of the trade after “whatever money I made in a bull market was lost in a bear market.”

Chugh’s preferred way of dealing with stocks is what he calls ‘Big Picture’ investing. “I am not too keen on identifying stocks that will deliver big the next good quarter. I am on the lookout for companies whose stock prices have got hammered because of one or two bad quarters but have good long-term outlook,” says he.

Some of his ‘pet’ stocks have delivered big returns over the years: Natco has surged 67 times in less than 10 years, Avanti Feeds has grown 60 times, or 5,900 per cent, in four years.

Chugh took to stock investing seriously in the early 1990s, when a Rs 1,000 investment in the IPO of Cadila Hospital Products grew into Rs 13,000 in two months.

“I was lucky to get allotment. This made me realise that stock market is a place where money does not just add up; it multiplies,” he recalls.

Chugh says his best investment so far was Rs 11,000 he spent in 1992 to subscribe to The Stock Exchange Official Directory by BSE, a compendium in 18 volumes. This enabled him to get balance sheets and other information about all the companies listed on the BSE, which was not so easy to get at that time.

Bears are true teachers

A stock investor needs to go through a few bear markets to evolve as a better investor, says Chugh.

“Bear markets change your perspective about investing. Most investors who have not seen or experienced a bear market would get seduced by rising stock prices and are focused entirely on returns and stock prices. Risk management is not important for them,” says the market veteran.

“A bear market makes you think and rethink your investment style and strategy, sobers you down and you evolve as a mature investor,” he says.

Chugh says he started doing better after witnessing bear markets from 1996 to 1999 and from 2001 to 2003. “My entire focus on investing has since switched from chasing stock price to risk management.”

Top multibagger picks of Ashish Chugh

Ashish Chugh has a knack for spotting multibaggers among microcaps. He picks up stocks that are beaten down because of short-term negatives, but have inherent strength to bounce back once the negatives are out of the way.

Natco Pharma

Many of the stocks he has picked over the years have risen 50 to 70 times. He picked up Natco Pharma when the stock got hammered down after the company acquired some drug stores in US.

Valuations came to a point, where the stock was available at sub-Rs 200 crore market capitalisation with a PE value of less than 8. The company had huge underlying assets, leadership position in the oncology segment and was still discovering new molecules. Chugh knew he won’t go wrong on this. The stock has risen nearly 70 times since then.


He picked up Greenply in 2009, when the construction sector was going through a rough patch and the leader of plywood and laminate sector was available at a PE value of less than 3 and a market cap of Rs 90 crore.

The combined market cap of Greenply and Greenlam Industries (demerged company) have since risen to Rs 5.500 crore. Chugh raked in 45 times return.

Top multibagger picks

Today’s failure is tomorrow’s success

“I have been a risk taker, and am not afraid of losing in market. You are bound to make mistakes when you want to be a contrarian and want to buy out-of-favour stocks. I am even prepared to see some of my investments go to zero. The ones that go up 5 to 10 times take care of the overall portfolio,” says Chugh.

He says some of the prominent stocks that did not work for him include Selan Exploration, GVK Power, Deccan Gold.

Chugh says he lost money in Selan because he failed to anticipate that crude prices could dip to $40-50 level and sustain there for long.

GVK Power

He bought GVK Power with the hope that the company would sell off a few power plants and pare debt to manageable limits. GVK’s airport business also fascinated him. But problems worsened for GVK as it failed to pull off the asset sale for years and the debt swelled. These stocks are still not making money, but Chugh still plans to hold them.

How to spot potential multibaggers

Chugh says he believes in ‘Big Picture’ investing. He is not too keen on identifying stocks that will turn out good the very next quarter. Instead, he is on the lookout for companies whose stock prices have got hammered down because of one or two bad quarters, but they have good long-term outlook.

He keeps an eagle eye on stocks that are beaten down below their intrinsic worth because of short-term negatives. “This has been a characteristic common to many of the multibaggers I bought in the past,” he says.

Future growth is one of the important parameters. A value stock remains a value stock unless there is growth.

Cash flow is another important parameter he watches closely. Most investors think only about returns. But risk management is important because equity investing is less about returns and more about probabilities and risk management, he insists.

Management quality is important

Chugh says while investing in microcap companies, it is difficult to select a good management as they are not talked or written about too often.

In a number of the multibaggers that he has discovered, the market had initially perceived their managements to be questionable, as these stocks were available at low PEs with small market caps. The perception changed after the stock prices grew 5 to 10 times and large HNI investors and then institutional investors got into these stocks.

Chugh says for him a good management is one which is focused on the business, has high promoter holdings and shares the wealth with investors through share buybacks and dividends.

Often, companies do not pay dividends because of high dividend distribution tax, but uses earnings for regular capital expenditure to scale up a business without equity dilutions. This also enhances shareholder value.

Stocks worthy of being bought now

Chugh refused to talk about his stocks due to Sebi regulations. However, he said: “I am sector agnostic in investing. I keep my eyes and ears open to anything that satisfies my investment criteria, which is about future growth, low valuations owing to curable, short-term negatives or past legacies. I am looking for companies that have done capex in last few years, but it has not started yielding results because of lack of adequate demand or teething startup problems. Profits would be lower today because of higher depreciation and interest cost, which is why there is lower investor interest in these stocks. This enables me to buy these stocks at lower prices.”

The thesis: as and when demand picks up or the teething issues get resolved, revenues and profitability shoot up substantially due to operating leverage.

At present, Chugh is looking for stocks in sectors such as ancillaries to housing, infrastructure, building material and rural plays, where the demand pickup is due.

“I am looking for select plays in cement and e-commerce segments, and in the microcap space. One more theme I am working on is companies with great brands and brand recall. They did not do well in the past because of change in business dynamics and may be restructuring or reinventing their business models. Value migration from unorganised to organised space post GST is another theme that interests me,” Chugh said.

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