Multibagger stock: Magellanic Cloud soars 8166% in 5 years, 4078% in 3 years; should you invest?

Magellanic Cloud has proven to be an exceptional long-term investment for its investors. The stock has given multifold returns to its investors, skyrocketing 8166 percent in the last five years from ₹7.44 in May 2019 to currently trade at ₹615. In the last 3 years as well, the stock has performed surprisingly well, rallying 4078 percent from ₹14.72 in May 2021.

Meanwhile, in the last 1 year, it has soared 201 percent and it advanced 34 percent in 2024 YTD.

This year so far, the scrip has given positive returns in 4 of the 5 months to date. The stock is up around 1 percent in May following a 28 percent surge in April. However, it fell 22.6 percent in March. Meanwhile, it was positive in the first two months of this year, gaining 15.6 percent in February and 16 percent in January 2024.

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The scrip is currently just 8.5 percent away from its record high of ₹672.05, hit on May 9, 2024. However, it has jumped 203 percent from its 52-week low of ₹203.05, hit on May 30, 2023.

It is important to note that the stock is currently trading under ASM LT: Stage 2

What is ASM?

ASM LT Stage 2 refers to a regulatory framework implemented by the Securities and Exchange Board of India (SEBI) and the stock exchanges to monitor and manage trading activities.

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ASM Stage 2 is a more stringent level of monitoring than ASM Stage 1. When a stock enters ASM Stage 2, it indicates that the stock has exhibited certain unusual trading patterns or volatility that warrant closer surveillance. The criteria for a stock being placed under ASM Stage 2 include, but are not limited to, high price variation, high client concentration, price fluctuation, and other factors that may indicate potential market manipulation or speculative activity.

Stocks in ASM Stage 2 are subjected to higher margin requirements, meaning traders must maintain a higher level of collateral to hold or trade these stocks, reducing speculative trading. There may also be trading restrictions, such as limitations on intraday trading or compulsory delivery-based trading, to curb excessive volatility and speculative trades. 

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Additionally, stocks in this stage may be subjected to narrower price bands, restricting the extent to which their price can move within a single trading session to prevent large, sudden price movements that could destabilise the market. These stocks are reviewed periodically to determine whether they should remain under surveillance or move back to Stage 1 or normal trading status based on their trading behavior and compliance with surveillance measures.

About the firm

Magellanic Cloud Limited, an IT service organisation, provides software solutions for mobile and desktop. The company offers digital transformation, product engineering, product development, quality assurance, DevOps, data analytics, multi-cloud and DevOps automation, process automation, drone solutions, e-security and surveillance, enterprise security, and human capital solutions. In addition, it provides IT consulting services. The company was formerly known as South India Projects Limited. The company was incorporated in 1981 and is based in Hyderabad, India.

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Earnings

In the March quarter (Q4FY24), Magellanic Cloud reported a multifold rise in its consolidated net profit at ₹3.97 crore versus ₹1.44 crore in the year-ago period. However, on a sequential basis, the profit fell from ₹5.2 crore in the December 2023 quarter.

Its revenue for the quarter under review, however, declined 26 percent to ₹15.42 crore as against ₹20.8 crore in the year-ago period. On a QoQ basis as well, the revenue fell 18 percent from ₹18.77 crore in the December quarter.

Brokerage view

Brokerage house ICICI Direct has highlighted several strengths for Magellanic Cloud, including high trailing twelve months (TTM) EPS growth, growth in net profit accompanied by increasing profit margins on a quarter-over-quarter (QoQ) basis, and growth in quarterly net profit with rising profit margins year-over-year (YoY).

Meanwhile, its only weakness, as per the brokerage is declining net cash flow. The company has not been able to generate net cash.

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Investing in shares of small companies with low market capitalisation offers significant potential for substantial gains due to their lower stock prices. However, this investment path comes with notable risks. These stocks often face limited liquidity, resulting in fewer transactions compared to larger companies, and they typically lack the rigorous financial reporting and oversight seen in bigger corporations, making them vulnerable to price manipulation and fraudulent activities. Given their constrained liquidity and reduced oversight, small-cap stocks often exhibit increased volatility, heightening risks for investors. Therefore, thorough research and careful risk management strategies are essential to navigate the uncertainties associated with these stocks and mitigate potential losses.

Disclaimer: This story is for educational purposes only. Please speak to an investment advisor before making any investment decisions.