Best Value Stocks in India

India’s stock markets have been going through a bullish phase ever since the March 2020 crash that wiped out more than a third of investor wealth within a matter of days after the emergence of the Covid-19 pandemic.

During a bull market, it’s easy to follow the herd and make investments in growth-oriented stocks. But as investor concerns about market values increase, they begin to consider alternative strategies like value investing.

Indeed, when the markets are awash with liquidity, such as the case now, it is important also to find stocks that offer enough value. In other words, investors should look for value stocks.

What are Value Stocks?

Value stocks refer to shares of companies that seem to be trading at a price below what their fundamental metrics suggests. These fundamentals include as earnings, revenue, debt, cash flow and dividends. Value investing, therefore, means finding and betting on such stocks.

One way to find such companies is through the lens of the Piotroski F-score. The score is named after Joseph Piotroski, a professor at Stanford University’s Graduate School of Business and who previously taught at the University of Chicago Booth School of Business.

Piotroski is best known for a paper he wrote in 2000. The paper, titled Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers, describes a way to buy stocks using nine parameters that cover three broad aspects: profitability; leverage, liquidity, source of funds; and operating efficiency.

Each parameter gets one point; and a higher score makes a stock more attractive for value investing. So, stocks with scores of 8-9 are considered the best from a value investing perspective.

To gauge profitability, four sub-parameters are checked. These are positive net income, positive return on assets, positive operating cash flow, and cash flow from operations being greater than net income.

Under the second category, the sub-parameters capture lower amount of long-term debt in the current period, compared with the previous year; a higher current ratio; and whether any new shares were issued in the last year.

To gauge operating efficiency, companies are checked on the basis of a higher gross margin and higher asset turnover ratio compared to the previous year.

List of Top 10 Value Stocks in India 2023

Based on the parameters specified above, we get a list of around a dozen value stocks in the BSE500 that score 9 on the Piotroski scale. These include three large-cap stocks: Nestle India, Bharat Electronics and PI Industries.

Other BSE500 stocks with a perfect Piotroski score include Apollo Tyres, Oberoi hotel operator EIH Ltd, Jyothy Labs, drugmaker Natco Pharma, battery maker Amara Raja, Great Eastern Shipping and JK Paper.

Overview of Value Stocks in India

Nestle India: The Indian unit of Swiss giant Nestle is one of India's FMCG companies and competes with the likes of Hindustan Unilever and ITC. It sells food products, beverages, chocolate, and confectioneries under some of the most well-recognized brands such as Maggi noodles, Nescafe coffee, Kitkat chocolate and Everyday milk powder.

Bharat Electronics: BEL is a state-owned aerospace and defence electronics company. The Navratna PSU makes advanced electronic products for ground and aerospace applications across factories in nine Indian cities. Its products include navigation systems, radars, communication systems and electronic warfare systems.

PI Industries: Founded in 1946, PI Industries is one of India’s top agri-science companies. The company manufacturers a range of insecticides, herbicides, fungicides and speciality chemicals. It also provides R&D services and custom synthesis and manufacturing services to multinational corporations.

Apollo Tyres: One of India’s best-known tyre makers, Apollo Tyres was started almost 50 years ago. It makes tyres for cars and SUVs, scooters and bikes, commercial vehicles, tractors and earthmoving equipment. The Gurgaon-based company has factories in Andhra Pradesh, Tamil Nadu, Kerala and Gujarat. It has sales and marketing offices across India as well as in many countries in Europe, Southeast Asia, Americas and Africa.

EIH: It is the flagship company of the Oberoi Group. The company operates 20 luxury hotels in India and six other countries under the Oberoi Hotels and Resorts, as well as two luxury cruises. It also runs 10 Trident five-star hotels in nine Indian cities and the Maidens heritage hotel in Delhi that was established in 1903.

Jyothy Labs: The four-decade-old company made its name from a single product, the Ujala fabric whitener, but now has a wide range of home and personal care products. These include Maxo mosquito repellent, dish washing products Pril and Exo, and Margo soap.

Natco Pharma: The pharmaceutical company develops, manufactures and markets finished dosage formulations and active pharmaceutical ingredients, or bulk drugs. It focuses on niche areas such as oncology and cardiology, and exports its products to more than 50 countries, including the US and several countries in Europe.

Amara Raja: The company is one of India’s biggest makers of automotive batteries. Until recently known as Amara Raja Batteries, the company changed its name to Amara Raja Energy & Mobility Ltd in line with its strategy to diversify beyond batteries and become a significant player in the new energy and mobility segments.

Great Eastern Shipping: The company transports crude oil, liquified natural gas and solid bulk products, and claims it is the largest private-sector shipping company in India. It operates a total of 42 vessels, including 29 tankers and 13 dry bulk carriers.

JK Paper: The New Delhi-based company traces its history before India gained independence in 1947. Today, the company is a leading player in segments such as office papers, coated papers, writing and printing papers and high-end packaging boards. It has three integrated pulp and paper mills; one each in Odisha, Gujarat and Telangana.

Factors to Consider Before Investing in Value Stocks

Investors looking to bet on value stocks must do their due diligence before putting their money to work, just what they should do while making any other investments. In particular, they should consider the following factors.

Company performance: This is first step one must keep in mind while investing in value stocks. A look at the company’s financial and operating performance is essential. This would include checking the company’s revenue and profit growth, debt levels, and cash flow, among other things, over the last few years.

Key ratios: Investors should check a stock’s price-to-earnings ratio, price-to-book value, earnings per share and other important metrics before investing.

Opportunities and risks: Investors should study several other aspects that can affect a value stock. These could include macroeconomic factors, business and sectoral challenges, among others.

How to Invest in Value Stocks in India

Before investing in value stocks, or any other stocks for that matter, investors should first finalise their asset allocation. Basically, they should decide what percentage of their portfolio they should invest in value stocks and how much they might to allocate towards other strategies such as growth investing and even fixed income.

Once that is done, investors should look at various methods to prepare a short list of value stocks, analyse those companies and then start investing using platforms such as 5paisa.com.

Conclusion

Value stocks can potentially offer high returns to investors, if they are able to identify undervalued companies. On the flip side, returns from the value investing strategy can also often lag behind the growth investing strategy, which is what happened when the stock markets first rebounded from the 2020 crash.

However, the strategy paid off when the markets traded sideways last year and earlier this year. This shows that investors looking to bet on value stocks must be patient and not make buy or sell decisions in a hurry.