Undervalued stocks or securities are equity shares with a market value less than their inherent worth. Numerous factors, including sector-specific, socioeconomic, or general market slowdowns, could be to blame for the undervaluation.
For example, the market price of a share of Company A is ₹ 1000, while its intrinsic value is considered to be ₹ 2000. Due to the unstable market, Company A’s shares are therefore not worth as much as they could be. Value investing is the process of making investments in undervalued stocks. Warren Buffet, Benjamin Graham’s pupil and protege, later carried on his pioneering work.
Investors who are patient, long-term oriented, and ready to face short-term market volatility should consider purchasing inexpensive shares. It’s perfect for value investors looking for chances to buy stocks at a discount to their actual worth and have faith in future price growth.
Contrarian investors who feel comfortable defying the market’s mood and who possess a solid grasp of financial research and the ability to recognise businesses with excellent fundamentals may also find this method appealing. But it’s imperative that investors exercise discipline, carry out in-depth analysis, and have the patience to wait for the market to recognise the value in undervalued shares.
What are the factors on which the value of stocks depends?
The factors on which the value of stocks in India depends are as follows:
- One important consideration is a company’s financial performance. Metrics like profits per share (EPS), sales growth, and profitability are frequently used by investors to evaluate the financial standing of a company.
- Paying dividends to shareholders can be desirable in a stock’s valuation. Income-focused investors may view companies that regularly pay dividends or have a history of rising dividend distributions as having more value.
- A company’s stock price and earnings per share are compared using the price-to-earnings (P/E) ratio. A stock is undervalued if its P/E ratio is lower; conversely, a more significant proportion may imply that it is overvalued.
- A company’s stock price and book value per share, or the value of its assets less its liabilities, are compared using the price-to-book (P/B) ratio. Reduced P/B ratios (less than 1) may indicate undervalued stocks.
- Investors frequently evaluate a company’s growth prospects, considering its market share, expansion strategies, and new product offerings. Businesses with promising growth potential could be valued higher.
- Stock prices can be impacted by investor sentiment. Prices can rise in response to positive news, upbeat analyst reports, or general market confidence, while costs might fall in response to negative emotions.
How do you invest in undervalued stocks in India?
There are several methods available for investing in undervalued stocks in India. Direct stock selection is a popular method in which you look for and select certain firms. A different choice is to use mutual funds, which are value-oriented investment portfolios that combine capital from several participants and make investments in various undervalued equities.
Exchange-traded funds (ETFs) focused on undervalued stocks also offer an easy option to invest in a basket of these stocks that follow an index. You can lower your risk if one of the most inexpensive stocks in India performs poorly by spreading your investment over several of them. Examine the balance sheets of the companies, read analyst reports, and keep up with industry news before purchasing any undervalued stocks.
Although undervalued equities may see short-term volatility, they may see a long-term increase in value. Don’t count on being wealthy soon. Instead, concentrate on long-term investing and progressively increasing your money. A stop-loss order is an order to sell a stock if its price falls below a certain threshold. If an inexpensive stock begins to lose value, this can help you control your losses.
Best undervalued stocks in India
The following are some of the best-undervalued stocks in India:
● Power Finance Corporation Ltd.
PFC offers long-term development potential to investors as one of the best undervalued stocks. The firm is a desirable investment due to its cheap Price-to-Earnings (P/E) ratio, outstanding financial performance, and solid fundamentals. PFC reported an impressive PAT for Q4FY23 of ₹ 34.9 billion, signifying a noteworthy 16% QoQ and 34% YoY increase. The ₹ 4.9 billion credit cost reversal was the primary driver of the rise. The company’s strong financial results show its resilience and ability to handle complex market conditions.
● Bajaj Finance Ltd
Loans, insurance, and investment products are just a few of the financial services and products offered by non-banking financial provider Bajaj Finance Ltd. Based on market capitalisation, it is the biggest non-banking financial company in India.
● Rural Electrification Corporation Ltd
Rural Electrification Corporation Limited (REC), a Navtrana Central Public Sector Enterprise under the Ministry of Power, has a market capitalisation of ₹ 74,072.59 cr. The company’s primary goals are supporting and funding nationwide rural electrification initiatives. For rural electrification initiatives, it offers financial support to State Electricity Boards, State Government Departments, and Rural Electric Cooperatives.
● Coal India Ltd
Coal India Ltd., one of the biggest coal producers worldwide, is essential to the Indian energy industry. Its market position is primarily due to its large coal deposits and government support. Still, other considerations, such as changing energy patterns and environmental concerns, should also be considered.
● Hindustan Aeronautics Ltd
One of India’s top aerospace and defence companies is Hindustan Aeronautics Ltd. HAL has been producing aircraft and helicopters for many years. It also provides necessary maintenance, overhaul, and repair services. HAL’s growth trajectory is significant, given its strategic importance in defence.
Conclusion
Investing in undervalued stocks in India can be profitable for investors looking to build wealth over the long run. Investors who find and purchase stocks undervalued in the market set themselves up for a significant capital gain should the market finally correct its pricing. With this strategy, investors can reduce downside risk by buying undervalued and selling high while still having a margin of safety. This disciplined and contrarian approach can offer the chance to profit from market inefficiencies, capitalise on market pessimism, and create a more robust and diversified investment portfolio—all while requiring patience, as undervalued stocks may take some time for the market to recognise. However, to successfully navigate the undervalued stocks in India and optimise their potential rewards, investors must do in-depth research, have a well-defined investment plan, and keep a long-term view.