Last Updated – March 2021
In this article, we will cover,
– What is value investing
– A well-researched and well-rounded list of the best value stocks to buy now
– Things to consider while deciding the best value stocks to buy
– A model portfolio to gain optimal exposure to the best value stocks in the Indian market
– Portfolio companies
– A detailed table providing a snapshot of the parameters based on which the value stocks were evaluated, compared and weighed to arrive at the list of best value stocks to buy
What is Value Investing?
Investing in value stocks is a strategy which focuses on buying undervalued stocks of strong companies and holding them over a long period of time. Investment in these stocks focuses on investment in quality companies that you think are undervalued and this decision is backed by strong fundamental analysis.
Benjamin Graham coined the term value investing and is also known as father of value investing, sums up the crux of value investing in his classic book ‘The Intelligent Investor’: An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative. Warren Buffett, protégé of Benjamin Graham embraced and mastered the value investing approach and went on to become the richest investor ever.
Summary Table for best Value Stocks to buy now
|Sr. No.||Company Name||BSE Scrip Code||NSE Symbol||CMP (as on Feb 23, 2021)||Rating||Industry|
|1||Sonata Software Ltd.||532221||SONATSOFTW||466.0||1.0||IT – Software|
|2||Avanti Feeds Ltd.||512573||AVANTI||480.0||3.0||FMCG|
|3||HCL Technologies Ltd.||532281||HCLTECH||920.0||4.0||IT – Software|
|4||KEI Industries Ltd.||517569||KEI||497.0||0.5||Cable|
|5||Aurobindo Pharma Ltd.||524804||AUROPHARMA||856.0||2.0||Pharmaceuticals & Drug|
|6||Castrol India Ltd.||500870||CASTROLIND||126.0||4.5||Lubricants|
|7||Coal India Ltd.||533278||COALINDIA||136.0||2.0||Mining & Minerals|
|8||Cummins India Ltd.||500480||CUMMINSIND||766.0||0.5||Automobile & Ancillaries|
|9||Excel Industries Ltd.||500650||EXCELINDUS||858.0||0.5||Chemicals|
|10||Oracle Financial Services Software Ltd.||532466||OFSS||2972.0||0.5||IT – Software|
|11||Central Depository Services (India) Ltd.||N.A.||CDSL||591.0||0.5||Finance|
|12||Oil & Natural Gas Corporation Ltd.||500312||ONGC||106.0||2.0||Crude Oil|
|13||Gujarat State Petronet Ltd.||532702||GSPL||243.0||3.0||Gas Transmission|
|14||Mphasis Ltd.||526299||MPHASIS||1699.0||3.0||IT – Software|
|16||Persistent Systems Ltd.||533179||PERSISTENT||1653.0||3.0||IT – Software|
|17||Balkrishna Industries Ltd.||502355||BALKRISIND||1539.0||0.5||Automobile & Ancillaries|
|18||Finolex Industries Ltd.||500940||FINOLEXIND||629.0||1.0||Plastic Products|
|19||TTK Prestige Ltd.||517506||TTKPRESTIG||7146.0||4.0||Consumer Durable|
|20||Pidilite Industries Ltd.||500331||PIDILITIND||1742.0||4.0||Chemical|
Value investing is a strategy which consists of cherry picking those stocks that has their current value much lesser than the intrinsic value. But if the company has potential to grow, then the current investment is cheaper as the market price will eventually rise and meet its intrinsic value. This difference can be capitalised to making hefty returns. Picking up value stocks works on a process of finding out stocks that are currently undervalued; buying them at much lower price and staying with them until they gain and provide excellent returns.
In simple terms, value investing is an investment approach that seeks to profit from identifying undervalued stocks. It is based on the idea that each stock has an intrinsic value, i.e. what it is truly worth. Through fundamental analysis of a company, an investor can determine what this intrinsic value is. The sole idea is to purchase stocks that trade at a significant discount to their intrinsic values (i.e. they are cheaper than their true value – which would give an investor a margin of safety). Once an undervalued stock is purchased, the stock price eventually rises towards its intrinsic value, and makes a profit in the long run.
Generally, value investors use margin of safety to demand risk associated with any purchases. It means purchasing a share when its prices are lower than a particular limit. Thus, even if an investment turns sour about a specific company, losses, if any, would not be catastrophic. Therefore, greater the difference between the intrinsic value and the current stock price, the greater the margin of safety is for value investors looking for investment opportunities.
Things to consider while deciding the best value stocks to buy
Investors are advised to analyze and understand the company to be invested in before buying any stock. A few characteristics which should be kept under one’s radar while investing in these value companies: company’s run-way i.e. its long-term plans, its business principles, financial stability with healthy capital structure along with identification of management efficacy running the organization.
Value investors should also place a great deal of importance on companies that pay consistent dividends.
Some useful valuation techniques are used to compare stocks from the same industry and analyse if it’s over or under valued. Relative valuation multiples such as P/E, P/B, EV/EBITDA, P/S are famously used. Another well known valuation method is Discounted Cashflows. This valuation style uses a number of parameters right from free cash flows of the company to cost of capital to reach the final true value which is then compared to the current market price of the stock to judge if the company is fairly valued. Certain investors also look at the PEG ratio instead of PE which compares the PE to the growth of the company. But not all multiples will give you the same value hence certain investors use the blended valuation technique.
It is the weighted average of various intrinsic values by different methodologies. It is important for an investor to see which valuation technique best applies depending on the company’s business model. For instance for capital intensive companies it is best to use the EV/EBITDA multiple.
Investors investing in this basket of stocks should look for immediate, market-beating returns and consistency of performance while taking on moderate risk. Since these stocks are meant to be held for a longer time period, the growth averages out over time and returns are consistent.
Looking at a few stocks from our model portfolio:
Sonata Software Ltd.
Sonata Software Ltd. provides varied IT services namely IT consulting, product engineering services, application development, application management, managed testing, business intelligence, infrastructure management, packaged applications, and travel solutions. During FY2020, the company derived most of its revenue from overseas, with the US and Europe accounting for nearly 88% of business. Sonata Software has an established position in the IT services sector and is one of the leading players catering to the travel, tourism, and logistics verticals. It operates a software distribution business for companies such as Microsoft, Oracle, and IBM and has longstanding relationships with clients and has been actively adding customers. Its financial risk profile is marked by a healthy capital structure and debt protection metrics with low debt to equity ratio of 0.18 times, supported by a healthy net worth of Rs. 806 Crs.
Its financial risk profile is also supported by a comfortable liquidity position of Rs. 642 Crs as on September 30, 2020. As stated, it derives most of its revenue from overseas this exposes the company to the risk of economic slowdown in these regions, as well as regulatory changes such as restriction on H1B visas. Additionally, Sonata also operates with a high concentration risk of clients. Moreover, the travel and tourism sector, which contributed to almost one-fifth of revenue may be adversely impacted in the near term due to the Covid-19 pandemic. Company has over the years steadily improved its business risk profile, with material increase in revenue share of high-margin IT services business.
It has achieved substantial and sustained growth in revenue and profit – CAGR of over 157% in the 5 years. In addition to this, Sonata has a payout ratio of nearly more than 50% in the past 7 years maintaining a robust financial risk profile.
Avanti Feeds Ltd.
Avanti Feeds manufactures and sells shrimp feed and exports processed shrimp. It has a total shrimp feed capacity of 600,000 million tonnes per annum (mtpa), of which 60,000 mtpa is in Gujarat and remaining 540,000mtpa in Andhra Pradesh. Company commands a market share of about 48% in the domestic feed business. Its shrimp processing subsidiary, Avanti Frozen Foods which has an installed capacity of 22,000mtpa, is one of the leading shrimp exporters in the country. Thai Union holds around 24.21% stake in the company and 40% stake in Avanti Frozen Foods which is among the largest shrimp, fish and pet food manufacturers and processed seafood producers, with a strong marketing and sales network worldwide across the globe.
This strategic partnership provides Avanti with the technical know-how in feed formulation and shrimp processing, and access to its global marketing network. Avanti Feeds has a healthy cash balance of Rs. 72 Crs with minimal term debt repayment requirement. Cash flow from operations continued to be robust at Rs. 125 Crs owing to increased scale and robust working capital management which is sufficient to fund dividend payments and modest capex requirements. The Income Tax Department conducted a search on the premises of Avanti Feeds and its subsidiaries recently but the search did not impact the operations and the authorities have not initiated any coercive actions or proceedings such as freezing of bank accounts, seizure of stocks, etc.
However, any adverse finding in this regard in the future would have a negative impact on its stock price. Moreover, the Company is also exposed to raw material risk but has exhibited an ability to manage raw material price volatility effectively. Risk of any disease outbreak on shrimps could also impact the feeds and processing division of Avanti feeds.
Oracle Financial Services Software Ltd.
Oracle Financial Services Software Limited (Oracle) is a world leader in providing IT solutions to the financial services industry and is a majority owned subsidiary of Oracle Corporation. Oracle provides a wide range of technology solutions covering Retail Banking Corporate Banking and Payments. The products business which comprises product licensing consulting and support is the company’s principal business segment. The two other smaller business segments comprise consultancy services business and the business process outsourcing services business. Oracle has established an extensive global presence across leading markets through its sales and marketing network. It’s topline has grown at a CAGR of 4.48% and bottom line has grown at a CAGR of 4% over 5 years.
The Company has clogged an operating margin of 50% from product business, 18% from service business and 33% from BPO services in FY2020. Oracle’s dividend yield is amongst the highest in its industry at 5.75%. This IT solutions provider has a history of financing majority of working capital requirement, capital expenditure and other requirements through its operating cash flow. Key risk which the company has identified is increased competition from vendors with digital solutions and new players, negative pricing pressure as customers seek to streamline their IT budgets on back of uncertainties caused by COVID-19 pandemic, etc. Company operates with the best financial risk profile of zero-debt and has stated the cash generated from operations will be sufficient to satisfy the foreseeable capital expenditure and working capital requirements in future.
Gujarat State Petronet Ltd.
Gujarat State Petronet Ltd. (GSPL) derives strength from its established position as one of the largest players in the gas transmission business in India together with its leadership position in Gujarat, strategic location with connection to all major natural gas supply sources; along-with its synergies with Gujarat State Petroleum Corporation group which has presence across the energy (natural gas) value chain. GSPL operates with an open-access model which supplements healthy profitability for the company. The Company also has a majority stake in Gujarat Gas Ltd. which is India’s largest city gas distribution company in its kitty.
GSPL has a 2,620 km long pipeline network which is the second largest gas transmission pipeline network operator in the country, after GAIL. Total operating income increased by around 26% YoY in FY20 which was primarily driven by increase in transportation tariff along with improved transmission volumes and increased compression charges. Further, its capital structure was comfortable with an overall debt to equity ratio of 0.37 times as on September 30, 2020. GSPL has adequate liquidity which is characterized by sufficient cushion in its accruals vis-à-vis debt repayment and the cash and bank balance as on September 30, 2020 stands at Rs. 1,107 Crs. In the event of any significant change in Government policy and the tariff, the revenues generated from the pipeline may be impacted.
Accordingly, GSPL remains exposed to regulatory risk obligations. In addition to this, there exist risks associated with its large-size capex and investment plans being implemented through its two JVs of around Rs. 13,000 Crs to be funded with a debt to equity ratio of 70:30.
Mphasis is a mid-sized IT company primarily engaged in providing IT / ITeS / BPO services catering to clients in the banking and capital markets, emerging industries, information technology, communication and entertainment and insurance. Company derives its revenues primarily from software services & projects, licensing arrangements & application services, infrastructure outsourcing services. It’s financial profile remains healthy marked by stable earnings, sizable net worth, and strong liquidity with large cash reserves, healthy capital structure and coverage metrics. The revenues grew by 14.39% YoY during FY2020 which was supported by higher order executions and new deal wins.
Mphasis’ operating margins have expanded to 19% in FY2020 aided by enhanced scale and operating efficiencies. Given the Blackstone Group’s parentage, Mphasis has access to its investment portfolio and has leveraged the same since its acquisition. With Blackstone expanding its AUM across verticals and geographies, new opportunities for client wins would continue. As of March 2020, the company’s cash and cash equivalents were robust at Rs. 1,126 Crs. Mphasis is also vulnerable to pricing pressure from peers, moderate scale of operations, foreign currency fluctuations, higher revenue share of time and material contracts, wage inflation, challenges of training and geo-political risks, with approx. 80% of revenues derived from North America.
Pidilite Industries Ltd.
Pidilite operates with two main divisions: pigment emulsions and adhesives. Over the years, the company diversified into branded consumer and bazaar products, and industrial specialty chemicals, which accounted for 77.6% and 22.4%, respectively of sales in FY2020. Besides the mother brand, Fevicol, Its prominent brands include Steelgrip, Dr. Fixit, M-seal, Fevicryl, Fevikwik, Fevistik, Fevilite, Fevibond, and Acron. The Company witnessed overall volume growth of 1.70% in FY2020 with volumes of consumer and bazaar segment growing by 1.9% and industrial products segment by 3.9%. Financial risk profile is marked by a healthy net worth of Rs. 4,456 Crs as on March 31, 2020 and debt to equity ratio of 0.06 times. Debt protection metrics remained strong with interest coverage of about 32.64 times. Networth is expected to improve further, led by healthy accretion to reserves over the medium term. Key risks include substantial capital expenditure, acquisition or unrelated diversification which may lead to deterioration of capital profile and substantial erosion of liquidity along with significant weakening of operating performance or profitability in future.
Coronavirus has destroyed economies and wiped out years of savings. In times like these, for companies, cash in hand allows them to continue operations and incur costs without having to borrow money. During such a challenging environment, markets are likely to reward companies that are generating high free cash flows and thus can service their debt (deleveraging) and other fixed obligations through cash accruals and reinvestments. Hence, investors should focus on such stocks for their portfolio.
For the most part, investment in value stocks is associated with long-established companies that have steady (but not rapid) growth rates, comparatively stable revenue, and consistent profitability. The idea behind investing in value stocks is generally not to make you rich overnight and that is not the goal. If you’ve heard the expression: slow and steady wins the race, it is one of the best ways to summarize the strategy behind value investing.
Watch our video on how to analyse and pick value stocks for investments
In order to get an exposure to Best Value Stocks, you would need a total of Rs. 22,981.7 for the below curated portfolio as of December 11, 2020.
|Company Name||Weightage||CMP (as on December 06, 2020)||Quantity||Total (Rs.)|
|Sonata Software Ltd.||11%||354.7||7||2,482.9|
|Avanti Feeds Ltd.||12%||544.6||5||2,723.0|
|Oracle Financial Services Software Ltd.||27%||3,133.4||2||6,266.7|
|Gujarat State Petronet Ltd.||10%||232.0||10||2,320.0|
|Pidilite Industries Ltd.||29%||1,638.4||4||6,553.4|
The below table covers some of the most important factors while evaluating value stocks such as return ratios including RoE and RoCE, operating margins, sales and earning growth and market cap among others.
|Sr. No.||Company Name||BSE Scrip Code||NSE Symbol||CMP (as on December 11, 2020)||Rating||Industry||Market Cap (in Crs)||Promoter Holding Q2FY21||Compounded Sales Growth (5 years)||Compounded Profit Growth (5 years)||Operating Profit Margin (%) Q2FY21||Price to Earnings (times)||Price to Book (times)||EV/EBITDA||Debt to equity (times)||Dividend Yield (%) Q2FY21||Return on Equity (%) Q2FY21||Return on Capital Employed (%) Q2FY21|
|1||Sonata Software Ltd.||532221||SONATSOFTW||354.7||1.0||IT – Software||3733.0||28.51%||17.00%||16.00%||9.13%||15.20||4.63||8.42||0.18||5.71%||37.98%||50.57%|
|2||Avanti Feeds Ltd.||512573||AVANTI||544.6||3.0||FMCG||7419.0||43.69%||19.00%||27.00%||11.60%||18.60||4.59||13.40||0.01||0.94%||29.10%||36.60%|
|3||HCL Technologies Ltd.||532281||HCLTECH||861.5||4.0||IT – Software||233986.0||60.33%||17.00%||11.00%||26.50%||19.20||4.13||11.60||0.1||0.81%||23.70%||27.40%|
|4||KEI Industries Ltd.||517569||KEI||420.8||0.5||Cable||3782.0||40.30%||19.00%||51.00%||10.40%||15.80||2.32||8.31||0.17||0.36%||22.40%||28.10%|
|5||Aurobindo Pharma Ltd.||524804||AUROPHARMA||897.4||2.0||Pharmaceuticals & Drug||52579.0||52.01%||14.00%||12.00%||21.10%||16.70||2.87||10.10||0.28||33.00%||18.60%||18.70%|
|6||Castrol India Ltd.||500870||CASTROLIND||130.3||5.0||Lubricants||12883.0||51.00%||2.71%||11.74%||29.20%||19.30||10.20||12.30||0.00||4.22%||65.37%||90.72%|
|7||Coal India Ltd.||533278||COALINDIA||138.3||2.0||Mining & Minerals||85200.0||66.13%||5.00%||4.00%||20.70%||6.28||2.30||3.03||0.13||8.68%||57.00%||73.10%|
|8||Cummins India Ltd.||500480||CUMMINSIND||583.5||2.0||Automobile & Ancillaries||16151.0||51.00%||1.10%||0.26%||10.80%||26.40||3.64||19.00||0.12||2.40%||16.10%||17.27%|
|9||Excel Industries Ltd.||500650||EXCELINDUS||887.8||0.5||Chemicals||1119.0||52.80%||8.00%||19.00%||14.00%||20.90||1.37||11.20||0.01||1.12%||13.70%||16.60%|
|10||Oracle Financial Services Software Ltd.||532466||OFSS||3133.4||3.0||IT – Software||26935.0||73.35%||4.00%||4.00%||47.60%||16.90||4.54||9.12||0.02||5.75%||25.42%||39.58%|
|11||Central Depository Services (India) Ltd.||N.A.||CDSL||521.9||0.5||Finance||5465.0||20.00%||16.00%||25.00%||50.00%||37.60||7.08||27.40||0||0.86%||15.30%||19.60%|
|12||Oil & Natural Gas Corporation Ltd.||500312||ONGC||96.8||2.0||Crude Oil||121777.0||60.41%||20.00%||-2.00%||11.50%||7.79||0.58||4.34||0.5||5.17%||7.55%||10.60%|
|13||Gujarat State Petronet Ltd.||532702||GSPL||232.0||3.0||Gas Transmission||13112.0||37.63%||63.00%||36.00%||29.80%||7.01||2.39||4.28||0.37||0.86%||55.70%||34.20%|
|14||Mphasis Ltd.||526299||MPHASIS||1317.9||3.0||IT – Software||24570.0||56.18%||9.00%||13.00%||18.60%||20.10||4.21||12.70||0.1||2.66%||21.40%||26.16%|
|16||Persistent Systems Ltd.||533179||PERSISTENT||1316.3||3.0||IT – Software||10043.0||32.47%||14.00%||3.00%||14.60%||27.60||3.91||14.00||0.03||0.91%||13.92%||18.57%|
|17||Balkrishna Industries Ltd.||502355||BALKRISIND||1665.5||3.0||Automobile & Ancillaries||32201.0||58.30%||5.00%||12.00%||29.90%||33.5||5.95||19.80||0.16||1.20%||17.07%||16.89%|
|18||Finolex Industries Ltd.||500940||FINOLEXIND||640.9||1.0||Plastic Products||7955.0||52.65%||4.00%||42.00%||18.20%||24.60||3.48||14.90||0.11||1.56%||14.30%||16.40%|
|19||TTK Prestige Ltd.||517506||TTKPRESTIG||5766.9||4.0||Consumer Durable||7980.0||70.41%||8.00%||17.00%||12.30%||38.63||5.89||26.50||0.01||0.36%||16.18%||20.58%|
|20||Pidilite Industries Ltd.||500331||PIDILITIND||1638.4||4.5||Chemical||83265.0||70.19%||9.00%||18.00%||21.61%||93.00||17.20||57.80||0.05||0.43%||27.00%||34.60%|
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