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to be a somewhat of a hidden opportunity. If you are going after tried and tested stocks, those will give you returns. Those are good stocks to invest in, and majority of your money should go into those types of stocks only. But you will not find multi baggers. So which brings us to a third quick concept that a multi bagger will be volatile. Right? It will go up in price, it will go down in price,
so on and so forth. Why? Because it takes time for 95% of these people to jump onto this boat. So that is the honest analysis of the trades of a multibagger. Now let me jump into JP Power and help you develop a framework for identifying multibaggers. So here is JP Power, and you can see that the market cap of a company is only five and a half thousand crore. So it’s not a very big company to begin with.
So the size of the company is small, so it has potential to go up. This is the first key thing now, the second key reason why I felt that something like JP Power can give a lot of return was very simple, that it was an undervalued opportunity. Now let me explain that by taking you to a graph. So I started purchasing JP Power somewhere here at approximately 4.2 levels. Now, why did I do that? If you take a look at the five year graph, you will see that it was deeply undervalued.
Right? I mean, you can see that this stock was barely moving. Now you’d say actually this sounds like fascinating. By this logic, we can just go and invest our money in any random stock where the prices are fallen. Now that will be senseless buying. Which brings me to the third point that whenever you are purchasing an undervalued asset, you must have an investment thesis.
Right. This is the most important part, because this helps you differentiate between actual useful opportunities and opportunities that are pretty much pointless. Now what do I mean by having some kind of investment thesis? So let me explain that by taking you to the balance sheet of JP Power, here you will see is that borrowing for JP Power had been going up and up until the 2019. So you can clearly see that the borrowings were up and from 2020 onwards it started repaying a lot of the borrowed amount and its borrowing came down significantly. It’s just not a small drop. They have cut down their borrowings by roughly 75%, which is like a huge dip in borrowing.
Now what is the nature of a company like JP Power? So JP Power essentially produces electricity and they sell it off. That is the basic business model. Now, what happens with these type of utility companies now in utilities companies? If the debt is very high, then a lot of the money that they are making goes in terms of paying interest. For example, let me explain it to you in a very simple language. So let’s say that JP Power the revenues that it made in a particular year was RS100.
Now it would have certain kind of expenses. Right. So there will be costs associated in terms of generating this electricity. So let’s assume that they spent Rs90 to generate these revenues. So the profit becomes Rs10. Now what happens is that if the borrowings are high, then you have to repay interest. For example, when you go take a loan from a bank, then you have to repay principal plus interest on it.
Right. So yes, here JP Power was still profitable firm, but it was repaying a lot of amount in terms of interest. So therefore its financial performance was really weak. And why was the financial performance weak because its borrowings were very high to begin with. So it started working on a fundamental issue that was plaguing the firm. And that was depleting the performance of the company.
And you could have easily figured out by looking at the borrowings tab of JP Power that borrowings were high until 2019. So I did not even invest Rs1 in JP Power till 2019 till the time borrowings were going up. Then the borrowing started coming down and borrowing started coming down consistently despite the pandemic, despite suppression and demand, despite a bunch of different different things. Now if you read further about JP Power, you’ll realize that they sold some of their inventory,
they lightened their assets and a bunch of other good good things that were happening with the firm. So from that perspective. From 2020 onwards, our investment thesis in JP Power changed. Now the investment thesis was that okay? This company knows how to generate profits. It was struggling because of very high debts. It has started reducing that debt and it will become even more profitable going forward.
Therefore, there was a lot of interest from investors like me who started in JP Power here. So you can see all this volume accumulating here and Resultantly. Now JP Power has become a rocket. Now, can it fall? Of course it can fall. I’m not
