Undervalued stocks in India : Bargain Hunting

Undervalued stocks in India and the Indian market often carry significant profit potential because their market prices don’t reflect their true intrinsic worth. This discrepancy offers investors the opportunity to buy low and potentially sell high. For Example: In 2008, during the global financial crisis, stocks of Indian companies like Infosys (INFY) were undervalued due to market panic. Those who invested in quality Indian tech stocks at that time saw their investments grow substantially in the following years.

Finding undervalued stocks is something that skilled value investors are good at. They can spot these stocks when they are priced lower than they should be. This skill pays off when the stock market and the specific industry these stocks belong to start doing really well in the long term, and investors make good profits. Following the value investing principles which include looking for discounted companies and holding them for the long term, has helped renowned value investors like Warren Buffett, Benjamin Graham, Mohnish Pabrai, and others make their mark in the financial world.

What is an Undervalued Stock?

An undervalued stocks in India is a stock that is trading at a price below its intrinsic value or its true worth. In other words, it is a stock that is considered to be priced lower in the market than it should be based on various fundamental factors such as earnings, assets, growth potential, and other financial metrics. Undervalued stocks provides a margin of safety. Even if the stock price doesn’t immediately rise, the gap between the stock’s market price and its intrinsic value can safeguard investors from significant losses.

Example: Think of buying a piece of property in a prime location for a fraction of its real market value. Even if property values dip temporarily, you have a cushion against potential losses.

Undervalued Stocks in India

The top undervalued stocks in India in 2023 are: Coal India Ltd, REC Ltd, D. P. Abhushan Ltd, GI Engineering Solutions Ltd, Consolidated Finvest & Holdings Ltd, Andhra Paper Ltd, Oil India Ltd, Brightcom Group Ltd, Cochin Minerals & Rutile Ltd, POWER FINANCE CORPORATION, Bombay Metrics Supply Chain Ltd, Amara Raja Batteries Ltd, Bharat Petroleum Corporation Ltd, Raymond Ltd.

Let’s discuss about the fundamentals and financials of some of these stocks.

REC Ltd

52 Week High: 249.25| 52 Week Low: 91.05| PREVIOUS CLOSE: 240.30

The stock maintains strong profitability metrics with an ROCE of 9.14% and an ROE of 20.4%. Its P/E ratio is 5.3, lower than the sector’s 24.3. The stock’s EPS TTM is 44.36 Rs per share. The Debt to Equity Ratio is high at 6.6, indicating significant reliance on debt for asset financing. The stock offers a solid dividend yield of 5.28%.

Annual Revenue increased marginally by 0.5% to Rs 39,520.2 Crores in the last year. Annual Net Profit showed robust growth, rising by 11.3% to Rs 11,167 Crores. The Stock Price surged by an impressive 120.9%, outperforming its sector by a remarkable 95.2% in the past year. Promoters hold a 52.63% stake, and there are no promoter pledges. FII/FPI holdings increased slightly from 21.52% to 21.90% in the June 2023 quarter.

Also read: Fundamentally Strong Midcap Stocks: Untapped Opportunities

Consolidated Finvest & Holdings Ltd

52 Week High: 164.70| 52 Week Low: 93.55 | PREVIOUS CLOSE: 140.70

The stock maintains strong profitability metrics, with an ROCE of 66.0% and an ROE of 50.2%. Its P/E ratio is 1.40, significantly lower than the sector’s 24.3, indicating that the stock is undervalued and has growth potential. The EPS TTM is an impressive 99.42 Rs per share. The company has a pristine balance sheet with a Debt to Equity Ratio of zero, indicating that it is debt-free. However, it does not pay dividends, resulting in a 0.00% dividend yield.

Annual Revenue experienced an astounding growth of 3,315% in the last year, reaching Rs 417.3 Crores. Annual Net Profit surged by an astonishing 51,149.6% in the last year to Rs 312.9 Crores. The Stock Price declined by 2.6% and underperformed its sector by 28.2% in the past year. Promoters hold a significant stake at 74.41%, and there are no promoter pledges. FII/FPI holdings decreased slightly from 4.29% to 3.58% in the June 2023 quarter.

Oil India Ltd

52 Week High: 296.65 | 52 Week Low: 167.85 | PREVIOUS CLOSE: 280.60

Oil India Ltd is the next stock in the list of undervalued stocks in India. The stock maintains decent profitability ratios, with an ROCE of 26.8% and an ROE of 25.2%. Its P/E ratio is 4.2, lower than the sector’s 20.6, indicating that the stock is undervalued. The EPS TTM of 67.79 per share is impressive. The company has a reasonable Debt to Equity Ratio of 0.5, which is less than 1, signaling a healthy balance sheet. The current year’s dividend for Oil India is Rs 20, with a yield of 7.12%.

Annual Revenue surged by a remarkable 36.1% in the last year, reaching Rs 36,816.7 Crores. Annual Net Profit experienced significant growth, rising by 55.3% to Rs 8,728.6 Crores. The Stock Price increased by 46.1% and outperformed its sector by 42.1% in the past year. Promoter Shareholding remained stable at 56.7% in the most recent quarter, with zero promoter pledges. FII/FPI holdings decreased slightly from 11.41% to 11.03% in the June 2023 quarter.

Also read: EKI Energy Fundamental Analysis: Profit Potential Or Pitfall?

Cochin Minerals & Rutile Ltd

52 Week High: 405.00 | 52 Week Low: 191.35 | PREVIOUS CLOSE: 274.90

Next stock in the list of undervalued stocks in India is Cochin Minerals & Rutile Ltd.

The stock maintains strong profitability metrics, with an ROCE of 62.0% and an ROE of 47.4%. Its P/E ratio is 4.23, significantly lower than the sector’s 55.2, indicating that the stock is undervalued and has growth potential. The EPS TTM is an impressive 64.19 Rs per share. The company has a pristine balance sheet with a Debt to Equity Ratio of zero, indicating that it is debt-free. The current year dividend for Cochin Minerals & Rutile is Rs 8 and the yield is 2.93 %.

Annual Revenue experienced an astounding growth of 54.3% in the last year, reaching Rs 447.8 Crores. Annual Net Profit surged by an astonishing 808.5% in the last year to Rs 56.4 Crores. The Stock Price rose by 31.9% and outperformed its sector by 34% in the past year. Promoters hold a significant stake at 50.4% and there are no promoter pledges. Institutional Investors holding remains unchanged at 0.62% in Jun 2023 quarter.

Raymond Ltd

52 Week High: 2,240.00 | 52 Week Low: 965.10 | PREVIOUS CLOSE: 2172.45

The stock maintains robust profitability, with an ROCE of 21.7% and an ROE of 22.9%. Its P/E ratio is 9.6, lower than the sector’s 65.5. The EPS TTM is an impressive 227.31 Rs per share. The company has a healthy Debt to Equity Ratio of 0.7, indicating a strong balance sheet. The current year’s dividend for Raymond is Rs 3, with a yield of 0.14%.

Annual Revenue surged by a remarkable 31.3% in the last year, reaching Rs 8,337 Crores. Annual Net Profit experienced substantial growth, rising by 103.2% to Rs 528.9 Crores. The Stock Price increased significantly by 122.3%, outperforming its sector by 89.9% in the past year. Promoter Shareholding remained unchanged at 49.1% in the most recent quarter. Promoter Pledges also remained steady at 21.9% in the last quarter. FII/FPI holdings increased slightly from 16.72% to 17.76% in the June 2023 quarter.

Also read: Trident Fundamental Analysis : From Numbers To Insights

Undervalued Stocks In India

How to Identify undervalued stocks in India ?

To identify an undervalued stocks in India, several financial ratios and metrics can be useful for value investors. Here are some of the key ratios and metrics to consider:

Price-to-Earnings (P/E) Ratio

The P/E ratio compares a stock’s current market price to its earnings per share (EPS). As a general guideline, a P/E ratio lower than both the stock’s historical average and the average P/E ratio of its industry peers may suggest that the stock is undervalued.

NOTE: High-growth companies often have higher P/E ratios because investors are willing to pay a premium for anticipated future earnings. In such cases, a stock with a slightly higher P/E ratio than its industry average may still be undervalued if its growth prospects are significantly stronger.

Price-to-Book (P/B) Ratio

The P/B ratio compares a stock’s market price to its book value per share. A P/B ratio below 1 implies that the stock may be undervalued since it is trading for less than its book value. This ratio is particularly useful for assessing the value of asset-heavy companies.

Dividend Yield

Dividend yield is the annual dividend income a stock provides relative to its market price. A higher dividend yield, especially compared to industry averages, may indicate that the stock is undervalued and offers an attractive income stream.

Earnings Growth

Analyzing a company’s historical and projected earnings growth is crucial. A company with consistent and robust earnings growth may be considered undervalued if its stock price does not reflect this growth potential.

Price-to-Sales (P/S) Ratio

The P/S ratio measures a stock’s price relative to its revenue per share. A lower P/S ratio compared to peers may suggest that the stock is undervalued, especially if it operates in a high-growth industry.

Debt-to-Equity (D/E) Ratio

A lower D/E ratio indicates a healthier financial position. Stocks with low debt levels relative to their equity may be considered undervalued, as they are less exposed to financial risk.

Free Cash Flow

Analyzing a company’s free cash flow, which is the cash generated after expenses and investments, can help assess its financial health. A company with strong and consistent free cash flow may be undervalued if its stock price does not reflect this financial strength.

Return on Equity (ROE)

ROE measures a company’s profitability in relation to its shareholders’ equity. A consistently high ROE may indicate that a stock is undervalued if the market is not fully recognizing the company’s ability to generate profits from its equity.

Enterprise Value-to-EBITDA (EV/EBITDA) Ratio

The EV/EBITDA ratio considers a company’s entire enterprise value, including debt, and compares it to its EBITDA (earnings before interest, taxes, depreciation, and amortization). A lower EV/EBITDA ratio relative to peers can suggest undervaluation.

Price-to-Cash Flow (P/CF) Ratio

Similar to the P/E ratio, the P/CF ratio compares the stock’s market price to its cash flow per share. A lower P/CF ratio may indicate that the stock is undervalued, especially if it has consistent cash flow generation.

Also read: Top 20 Highest Share Prices In India: Exploring The Market Titans

The concept of an undervalued stock is subjective, and different investors may have varying criteria for identifying undervaluation. Additionally, undervaluation doesn’t guarantee that a stock will increase in value; it simply suggests that it has the potential to do so based on its fundamentals. Hence, these ratios should be used in conjunction with qualitative analysis and a deep understanding of the company’s industry and competitive position.

Benefits of Undervalued Stocks

Challenges of Undervalued Stocks

Summing Up undervalued stocks in India

Undervalued stocks often requires contrarian thinking. When the market is bearish on a particular sector or stock, it can create opportunities for those who go against the crowd. Example: During the dot-com bubble in the late 1990s, many technology stocks were overvalued, but some traditional, undervalued companies like Johnson & Johnson (JNJ) offered stability and growth prospects. Contrarian investors who chose JNJ over the tech hype were rewarded.

In conclusion, undervalued stocks in India is like looking for hidden treasure on the stock market. It entails spotting chances that others would pass over, providing the chance for significant returns, safety via a margin of safety, and the opportunity for long-term wealth creation.

Disclaimer

The blog is meant for informational purposes and serves the general analysis of the stocks. Contents provided here are based on careful research and analysis utilizing the fundamental and technical indicators over a period of time. The post does not consist any direct recommendation about Investing or trading in the securities market. Thorough research and careful consideration are necessary for individuals to fulfill their personal responsibility in making financial decisions. Seeking professional advice before making any financial decisions is always advisable.