7 Best Undervalued Stocks to Buy Now in India

Are you hunting high and low for top undervalued stocks in India 2021?

No matter be it a bull market or bear market, find businesses that aren’t on the radar of Mr. Market. But, applying what strategies you can find quality businesses that are trading much lower below their underlying values remains a big question.

Let’s Dive in.

How to pick the best undervalued stocks to buy now in India?

There are 5000+ stocks listed on major stock exchanges namely the Bombay Stock Exchange and National Stock Exchange. It’s a tuff call to pick the best stocks that are trading much lower than their underlying values. To pick the quality undervalued stocks legendary value investors namely Warren Buffet and Benjamin Graham hunt high and low for those companies that are trading much lower than their intrinsic value.

Additionally, they maintain a safe margin of safety to maximize the investment return in the long run. But how do you know whether the stock is undervalued or overvalued? Here we will offer a 10-point checklist to calculate whether the stock is undervalued or overvalued.

Parameter #1. Debt to Equity Ratio,

The debt to equity ratio gives a breath of fresh air. This ratio reveals whether the company is running its operations by its cash flow or by pumping external capital to run the business.

How to Calculate the Debt to Equity Ratio

From the above equation, a retail investor can gauge the risk profile of a company before investing. The debt to equity ratio highlights the liabilities a company has either in short term or long term.

But different companies have different Debt to Equity ratio. Historically, banks and non-banking financial institutions, Power sectors have a higher debt to equity ratio.

When you find a company with a debt to equity ratio is Zero, you are free to invest in it, as the company is debt-free. It is worth investing in companies that have a debt to equity ratio of less than 0.25.

Parameter #2. Price to Sales Ratio,

By dividing a company’s market capitalization with its total revenues over a period of the past 4 quarters, you will find the Price to Sales ratio of any company.

How to calculate Price to Sales Ratio

The price to sales ratio reveals what investors are willing to pay when a company makes $1 in revenue. The lesser the price to sales ratio is the better value it will deliver in the long run.

Parameter #3. Free Cash Flow,

Free Cash Flow represents the cash a company has in their bank account to pay the shareholders in lieu of dividends or buy their own share via share buyback or for expansion of their business. By analyzing the Free Cash Flow you can get a preview of profitability and management’s efficiency to generate profit by making use of shareholder’s capital.

The higher the Free Cash Flow of a company has in comparison to peer companies, the higher the EPS, Dividends, are in the long run.

Parameter #4. Earnings per Share,

When you divide the company’s net profit after deducting dividends payable to its shareholders with its total shares outstanding, you will get earnings per share.

How to calculate Earnings per Share

Earnings per Share reveal the profitability of a company. The higher the EPS of a company is, the more value shareholders will get via dividend payments and appreciation of share price.

Parameter #5. Dividend Yield,

The Dividend Yield gives a snapshot of the returns that the shareholders get by counting dividend payouts only.

How to calculate Dividend Yield

When the dividend payouts of any company don’t rise consistently year on year to its market price of a share, the dividend yield will plummet. On the contrary, when a company’s market prices decline and the dividend payouts do not rise, the dividend yield surges.

It’s worth investing in a company that has witnessed a surge in dividend payout during the past 5 years.

Parameter #6. Price to Earnings Ratio,

When you are hunting high and low for the best undervalued stocks in any sector/industry Price to Earnings ratio gives a snapshot of whether the company is undervalued or overvalued by comparing the market price of a stock to its earnings per share.

How to calculate Price to Earnings Ratio

The Price to Earnings Ratio helps investors about what the market is willing to pay right now for its $1 earnings from running a business operation. For example, a company is likely to surge its earnings and thereby dividends payouts to its shareholders, that will lead the share price to a higher level.

To pick an undervalued stock, analyze the stock with its sector’s peer companies. When you find a stock that any stock with robust earnings has a lower P/E ratio in comparison to its peer companies, it’s worth investing in.

Parameter #7. PEG Ratio,

Since the PEG Ratio has taken an account of the expected earnings growth of a company, this will provide a clear picture of a company’s valuation. By analyzing PEG Ratio a retail investor can gauge whether the stock is undervalued or overvalued by calculating earnings of the current financial year and future earnings growth of a company.

how to calculate PEG Ratio

When a company is with a PEG Ratio<1, it’s a good bet that will yield better returns in the long run.

Parameter #8. Price to Book Ratio,

The Price to Book Ratio helps an investor to compare the company’s market value relative to a company’s book value. The Book value can be calculated after deducting the company’s total debt from its total value of assets after liquidating.

How to calculate Price to Book Ratio

how to calculate Book Value per Share

A company with a P/B ratio of less than one is treated as undervalued. On the contrary, value investors look for stocks with a P/B of 3. From the above example, there is no fit for all equation especially when you are looking for undervalued stocks. Analyze each sector and find stocks that have lower P/B ratios after comparing the P/B ratio of peer companies.

Parameter #9. Current Ratio

By analyzing the Current Ratio, a retail investor can gauge the company’s ability to pay short-term debt obligations by liquidating the company’s current assets.

How to Calculate Current Ratio

When a company’s current ratio is slightly higher than one this indicates that the company is able to repay the debt quite efficiently by liquidating its current assets. Contrary to that when a company’s current ratio is less than one, it signifies that the company’s liabilities that are to be repaid within a year are higher than the assets of its own. The chances are higher that the company will make a default in case of a deep in earnings.

Invest in those companies that have a Current Ratio of 1.5. When a company has a current ratio of 1.5, it’s likely the company is able to carry out its business operations without interruption when earnings show a decline in the near future.

Parameter #10. ROE & RoCE,

ROE gives a snapshot of what investors will get from a company’s net profit when they invest in any company. The Return on Equity will give you the profitability and the efficiency of the management in respect of generating profit from a business operation.

How to calculate ROE

The Return on Equity doesn’t take into account what shareholders will get via dividends. A higher ROE means that the company is quite efficiently managing the money of the shareholders to deliver profit that leads to the growth of the shareholders’ capital in the long run.

Where ROE gives a snapshot of how the company manages to make a profit from the shareholders’ capital, ROCE measures how the company is utilizing the assets and capitals to generate more profit from its operations.

How to calculate ROCE

The ROCE is quite helpful to gauge the profitability since this ratio has taken account of debts and liabilities of capital-intensive sectors. When you invest in companies that have a stable and rising ROCE, the company is likely to deliver better returns in the long run.

7 Best Undervalued Stocks to buy in India

Don’t believe blindly in the stock advice of the market barons who recommend 10-15 stock tips daily. No matter you are rich or poor, the market isn’t biased and does not reward and punish accordingly. So before investing in any stocks that are given by the market wizard, do independent research.

Polyplex Corporation

This company was incorporated in 1984 and has been operating in the Packaging Sector. The company producesBiazially Oriented Polyester Film. This is the fifth largest Polyester film manufacturer around the globe. This company has a presence in 83 countries across, Asia, Europe, North America, South America, and Australia. The company’s headquarter is located in Noida, India.

Let’s take a glance at its numbers,

  • Debt to Equity Ratio – 0.23
  • Compounded Sales Growth – 12%
  • Compounded Profit Growth – 13%
  • Earnings Per Share – ₹111.20
  • Return on Equity – 16%
  • Price to Earnings Ratio – 6.91
  • Price to Book Ratio – 0.53
  • Dividend Yield – 2.21%

Paushak Limited

This company was incorporated in 1907 and has been operating in the Pharma Sector. The company produces phosgene and its derivatives namely Isocyaniate, Choorofomates, Carbamoyle chlorides, etc.

Let’s take a glance at its numbers,

  • Debt to Equity Ratio – Nil
  • Compounded Sales Growth – 15%
  • Compounded Profit Growth – 22%
  • Earnings Per Share – ₹104.28
  • Return on Equity – 17%
  • Price to Earnings Ratio – 34.52
  • Price to Book Ratio – 4.85
  • Dividend Yield – 0.17%

Kilpest India

This company was incorporated in 1972. It works in the fields of Agro Chemicals Sector. The company produces crop protection products including anti-bacterial products, biopesticides, insecticides, etc., and Public health products namely Ann Rakshak, Repel-mos, Roach kill, etc.

Let’s take a glance at its numbers,

  • Debt to Equity Ratio – 0.11
  • Compounded Sales Growth – 21%
  • Compounded Profit Growth – 90%
  • Earnings Per Share – ₹106.16
  • Return on Equity – 26%
  • Price to Earnings Ratio – 2.94
  • Price to Book Ratio – 6.93
  • Dividend Yield – 0.22%

J Kumar Infraprojects

This company was incorporated in 1999 and operates in the Infrastructure Sector. The company makes the design and construction of roads, bridges, subways, flyovers, over bridges, etc. The company’s headquarter is located in Mumbai, India. 

Let’s take a glance at its numbers,

  • Debt to Equity Ratio – 0.31
  • Compounded Sales Growth – 23%
  • Compounded Profit Growth – 20%
  • Earnings Per Share – ₹9.65
  • Return on Equity – 10%
  • Price to Earnings Ratio – 13.91
  • Price to Book Ratio – 0.74
  • Dividend Yield – 0.93%

Granules India

Granules India was incorporated in 1991. It operates in the Pharmaceuticals Sector. The company is engaged in the production and distribution of generic drugs namely Paracetamol, Metformin, Ibuprofen, and Guaifenesin. The company exports generic medicines in not only the USA but also Europe. The company’s headquarter is located in Hyderabad, India.

Let’s take a glance at its numbers,

  • Debt to Equity Ratio – 0.43
  • Compounded Sales Growth – 15%
  • Compounded Profit Growth – 28%
  • Earnings Per Share – ₹17.42
  • Return on Equity – 18%
  • Price to Earnings Ratio – 22.04
  • Price to Book Ratio – 5.11
  • Dividend Yield – 0.33%

Excel Industries

This company was incorporated in 1960 and is operating in Agro Chemicals Sector. This company is engaged in the production of industrial and specialty chemicals namely soil enricher, bio-pesticides, etc.

Let’s take a glance at its numbers,

  • Debt to Equity Ratio – 0.03
  • Compounded Sales Growth – 15%
  • Compounded Profit Growth – 67%
  • Earnings Per Share – ₹42.64
  • Return on Equity – 18%
  • Price to Earnings Ratio – 20.12
  • Price to Book Ratio – 1.57
  • Dividend Yield – 1.17%

Balrampur Chini Mills

This company was incorporated in 1975 and has been operating in the Sugar Sector. Balrampur Chini Mills is one of the largest sugar manufacturers in India. The company is engaged in the production of not only sugar but also ethanol. The company’s headquarter is located in Kolkata, India.

Let’s take a glance at its numbers,

  • Debt to Equity Ratio – 0.58
  • Compounded Sales Growth – 10%
  • Compounded Profit Growth – 60%
  • Earnings Per Share – ₹25.30
  • Return on Equity – 26%
  • Price to Earnings Ratio – 7.09
  • Price to Book Ratio – 1.54
  • Dividend Yield – 1.39%

7 Golden rules to follow while investing in the stock market

Before jumping into the best undervalued stocks to buy, let’s take a glance at 7 golden rules you should follow when investing in the stock market.

Rule #1. Invest surplus funds only

Since you can start investing in the stock market with as low as Rs. 500/-, invest your surplus funds only. Don’t take a loan to start investing. The stock market is volatile in the short run. Invest the amount that you don’t need in a decade.

Rule #2. Avoid ‘Multibagger Stock Tips’

Don’t invest in any company when you have got a message on your smartphone or a mail in your account. Promoters and insiders of shell companies use the ‘Pump and Dump’ strategy to sell their stake to retail investors.

Rule #3. Avoid the herd mentality

Don’t invest in any stock blindly, since your colleagues, relatives, or your friends have invested in any stock. You will lose your money significantly when you invest in any stock without doing any research.

Rule #4. Analyze the company

Do you understand how businesses make money? When you find the business model of any company, you will find the best businesses that will yield better returns in the long run.

Rule #5. Avoid timing the market

Even the ace investor Warren Buffet doesn’t try to time the market. In this process, retail investors lose their invested capital significantly. When you are investing in the stock market, stay invested in the long run to get fruitful returns. In the short-run stock market is a voting machine, and in the long-run stock market is a weighing machine.

Rule #6. Diversify your portfolio across various sectors

To minimize risk, diversify your capital across various sectors. Do remember, diversify your stock portfolio across those sectors whose business model is clear to you well.

Rule #7. Monitor your investments 

Unlike Fixed deposits, stock market investing requires the attention of the investor. When the company’s fundamentals are deteriorating it’s time to sell the stock. The stock prices are likely to plummet with the deteriorating earnings.

Multibagger Stock Pick

Have I missed the best undervalued stocks in India 2021? Make a comment so that I can add.

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