How to Find Undervalued Stocks in India?

5 Ways How to Find Undervalued Stocks in India
5 Ways How to Find Undervalued Stocks in India

What is an undervalued stock? What comes to your mind when you hear the term “Undervalued”? Let me tell you “Undervalued stocks are nothing but the stocks trading at a market price significantly lower than what their actual value should be” or in simple words we can say that an undervalued stock is a stock that is trading at its lowest.

Great investors like Benjamin Graham and Warren Buffett have always spoken about picking undervalued stocks.

Here comes the big question “How to find undervalued stocks in India?” Here in this article, we are going to discuss this question. We will provide you 5 key takeaways that you can apply before deciding if a stock is undervalued or not.

Improved Fundamentals

Fundamentals are the most important parameter for Investors to invest in a company. Where a negative fundamental change can destroy the company similarly a positive fundamental change such as a better management, better cash flows better Price to earnings Ratio or increased return on equity ratio etc, can lead the company to outperform.

But, yes you have to be patient because it may not reflect immediately but sooner or later it will be visible through its appreciated share price.

Read This Article: How To Do Fundamental Analysis Of Stocks

Disruptiveness of the Business Model

The Disruptiveness of the Business Model is another major factor to find undervalued stocks in India. You have to figure out the growth potential of new companies in the market. Have a Look at the company’s products and services.

Are they disruptive enough? For example, iPhones created by APPLE aren’t the most advanced or most affordable smart phones in the market but still, they are leaders because of various reasons such as privacy and status symbol.

This helped APPLE to become the most valuable company in the world. Similarly, Infosys literally disrupted the global IT space, back in the 1990s, by offering high-quality IT solutions at cheaper prices and a positive tax environment. This helped Infosys to create wealth for their Investors.

High dividend yield

It is clear that dividend yield has no direct relation with wealth creation, but it’s still a significant factor. Let’s take an example, Assume you bought 100 shares of a company at RS.1000 each. For the next 4 years, the stock price keeps increasing and reached at RS.2000. (RS.1 Lac investment has doubled) But in the 5th year, the stock price suddenly crashes to RS.1000 due to some internal issue of the company.

Here comes the significance of dividend. If the company was giving dividends each year, Assuming 5% annually, you are still profitable with RS. 25,000. Means you can exit profitably. But in case you were not getting any dividends you got in the mess, Because if you sell those shares now at a price of RS.1000 each, not only you have to pay charges and taxes but the time value of money and inflation ruined it.

News affects the markets

You have often heard of “buy on rumours and sell on news” This is one of the most popular proverbs in the stock market. Stock market is news driven, both Good and bad news affects it heavily.

Sometimes, an unknown company may give multi-bagger returns in a very short span of time whereas bad news can lead to stocks becoming undervalued for a short period even though their financial fundamentals remain strong. For example, a few days ago, ADANI group stocks were hitting lower circuits and became undervalued, but in a few days, they recovered the loss.

Company Debt

Generally, debt is only one side of the story. One should not take decisions only on this basis. But we cannot neglect it also. If the debt of the company is zero or at least the cost of debt is consistently coming down then it is a sign of an undervalued stock. When you buy stocks with low debt or low cost of funds, you have an advantage since financial risk plays to your advantage.

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Investing in Undervalued stocks in India in 2021 can be a great strategy to make profits from the stock market if done correctly. There has to be a balance between tracking some important ratios of the company and your analytical judgement about the impact of changes. It is not very hard to identify undervalued stocks if you play smartly.

Frequently asked questions (FAQ)

Q. Should you buy undervalued stocks?

Buying undervalued stocks is one of the safest investing strategies in the stock market. Buying a stock that’s undervalued means your risk of losing money is reduced, even when the company doesn’t do well. And, if the company do well in future you can expect multi-bagger returns.

Q. How do I know if a stock is under or overvalued?

Below are the most common characteristics of undervalued stocks-
1. Disruptive business models
2. High dividend yield
3. News effect
Also checking improved fundamental ratios is a must such as-
4. Price-earnings ratio (PE)
5. Return on equity (ROE) & (ROCE)
6. Debt to equity
7. EV/ EBITDA ratio etc.

Q. What are the best ways to find undervalued stocks?

Fundamental ratios analysis is the most common way to find undervalued stocks in India 2021 such as-
1. Price to earnings ratio (PE)
2. Return on equity (ROE) & (ROCE)
3. EV/ EBITDA ratio
4. Price to cash flow ratio
5. earnings per share
6. Debt to Equity
7. Effect of news
8. Change in fundamentals
9. High dividend yield
10. The disruptiveness of the business model

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He is pursuing BBA, a Passionate trader and his hobby is to write content on business and finance.


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