Top Underdog-Undervalue Stocks to Invest

Envision entering a store and finding a secret area tucked away in a corner where you find premium goods at deeply discounted costs. 

You're eager already, right? Undervalued equities are the investment world's equivalent of this undiscovered gold mine. Investors look for cheap stocks that are selling below their fundamental worth, just as shrewd consumers love the chance to score a deal. 

These equities are like undiscovered treasures in the financial markets, frequently passed over by the general public. However, investing in cheap stocks on the NSE might offer a chance for people who understand their actual value to profit handsomely from the market at reduced costs. We will discuss the best inexpensive Indian stocks in this article.

What is Underdogs/Undervalued Stocks?

Underperforming stocks, often known as undervalued stocks, are simply equities that are trading below their true or intrinsic value. Consequently, these might be worthwhile investment possibilities. Stated differently, it's possible that the market is undervaluing certain value stocks. 

There are a number of reasons why this may happen, including transient market conditions, company-specific elements, or investor mood. Finding inexpensive stocks is not always the same as identifying undervalued shares. The secret is to avoid buying worthless stocks at extremely cheap costs and instead search for quality stocks at prices below their fair values.

Methodology for Analysis:    

1. Operating Profit Margin / (Market Cap to Sales) is more than 24 
2. Debt to equity less than 0.25 
3. Operating Profit Margin more than 0 
4. Market Cap to Sales more than 0 
5. Market Capitalization more than 50Cr.

Overview of the Undervalue Stocks to Invest

1- Balmer Lawrie Investment Ltd.

About:

A government enterprise is Balmer Lawrie Investments Ltd. It holds a sizable investment in Balmer Lawrie & Co. Ltd. The corporation and its subsidiaries are in the business of selling leather chemicals, greases and lubricants, and industrial packaging.

Revenue Distribution:

Approximately 91% of revenues in FY21 came from dividend income from non-current assets, with the remaining ~9% coming from interest income from FDs on an independent basis.

Strength:

The company has continued to pay out a strong 80.4% dividend.

Weakness:

Company has a low return on equity of 8.35% over last 3 years.
Earnings include an other income of Rs.102 Cr.

Financial Summary:

2- Ruchira Papers Ltd

About Business:

Industry Softness: The company operates in the paper manufacturing industry, and the recent quarter has seen softness in paper prices, which is an industrywide phenomenon affecting many companies.

Diversification Efforts: To enhance efficiency and introduce new products, the company has invested in upgrading and modifying its Kraft and Writing Printing Paper units, showcasing a commitment to diversification and improvement.

Revenue Distribution:

Revenue Breakdown: Q3 FY20 total revenue amounted to Rs. 117.95 crore, with a detailed breakdown indicating challenges in both Writing and Printing Paper unit and Kraft Paper unit due to a decrease in the average Net Sales Realization (NSR) per metric ton.

Segment EBITDA Percentage: The EBITDA percentage for Writing and Printing Paper was 12.10%, while Kraft Paper faced a negative EBITDA of 4.10%, reflecting the distinct financial performance of each segment.

Strength:

Production Confidence: Despite industry challenges, the company expresses confidence in achieving the production guidance for FY 2020, indicating resilience in managing production levels amid market uncertainties.

Cash Reserves: Holding surplus cash of around 25 Crore for FY20 signifies financial stability and provides flexibility for potential future investments or strategic decisions.

Weakness:

Market Challenges: The market is currently experiencing challenges, with no meaningful recovery in prices. Land issues with a Greenfield project persist, and the company faces difficulties in aggressive market penetration.

Demand Slowdown: The demand slowdown across India is impacting the company's ability to boost EBITDA margins, and efforts to liquidate inventory and explore new markets are ongoing.

Financial Summary

Outlook:

Market Dependency: The outlook acknowledges that the future performance is contingent on market behaviour, indicating a cautious stance as the company navigates ongoing challenges.

Environmental Investment: The company's commitment to environmental sustainability is evident through stable raw material prices, environmental improvements, and investments in water treatment plants to reuse more water.

3- Varanium Cloud Ltd

About:

Founded in December 2017, Varanium Cloud Limited is a technology business that specializes in offering services related to digital music, video, and blockchain-based financial streaming (for PayFac).

Business Segments:

Diversified Service Portfolio: The company operates across multiple key verticals, including digital audio and video content streaming, online payment facilitation (PayFac), digital education content platforms (EdTech), and information technology services. This diversification enhances its market presence and resilience.

Technology-Focused Offerings: The focus on SaaS models, particularly in Voice & Video over Internet Protocol (VoIP) solutions and Infrastructure as a Service (IaaS), positions the company at the intersection of emerging technologies, showcasing adaptability and innovation.

Revenue Distribution:

B2B and B2C Revenue Streams: The revenue streams include B2B services for content owners, telecom operators, startups, and SMEs, as well as B2C services for end consumers utilizing digital education platforms and VoIP services.

Diverse Customer Base: Revenue is generated from a range of customers, including business owners, telecom providers, educational institutions, and end consumers. The B2B nature of services caters to small to large businesses across industries.

Strength:

Founder-Led Visionary Management: The strength of having a founder-led visionary management team provides strategic direction and continuity, ensuring alignment with the company's long-term goals and vision.

Technology Competence: The inclusion of "Transport Technology" and "Low Cost of Delivery" as competitive strengths signifies the company's proficiency in leveraging technology for efficient service delivery while maintaining cost-effectiveness.

Weakness:

Market Dependency: The company's reliance on market conditions, especially in digital audio and video streaming, could pose a vulnerability if there are shifts in consumer preferences or disruptions in the technology landscape.

Geographical Risks: Given the focus on growing subscriber base across existing and new geographies, geopolitical and regulatory risks in different regions could impact the company's operations.

Financial Summary:

Outlook:

Expansion Strategies: The company's business strategy, emphasizing the growth of subscriber base, product offerings, and infrastructure efficiency, aligns with the dynamic nature of the digital services market, reflecting a positive outlook.

Market Resilience: The diversity in service offerings, from EdTech to PayFac, positions the company to adapt to market changes. The outlook remains positive with a focus on growth and margin enhancement, indicating a strategic approach to navigate industry challenges.

Advantages of Undervalued Shares 

Investing in undervalued shares presents several strategic advantages that can be particularly appealing for value investors looking to maximize returns while minimizing risk. Here’s an in-depth look at why choosing undervalued stocks could be beneficial:

● Significant Upside Potential: Undervalued stocks are those that trade below their intrinsic value, often due to market overreactions, temporary setbacks, or overlooked prospects by investors. Once the market corrects these mispricings or the company's fortunes improve, these stocks can see substantial price appreciation. 

● Reduced Risk: Investing in undervalued stocks inherently carries a margin of safety. Because these stocks are priced lower than their actual worth, the downside risk is minimized. 

● Dividend Benefits: Often, undervalued stocks are found in mature companies that have consistent dividend payouts. The lower purchase price of these stocks results in a higher dividend yield, providing investors with a steady income stream.

● Less Competition: Stocks that are undervalued are often overlooked or ignored by mainstream investors and analysts. This lack of attention can be an advantage because it allows savvy investors to purchase these stocks without the price inflation that typically accompanies widely recommended stocks.

● Better Overall Returns: Historical data suggests that, over long periods, undervalued stocks tend to outperform the market. Value investing, the strategy of selecting stocks that trade for less than their intrinsic values, has been popularized by investors like Warren Buffett and Benjamin Graham for this very reason.

● Portfolio Diversification: Adding undervalued stocks to a portfolio can enhance diversification, particularly if these stocks span various industries or sectors. This diversification can help reduce overall portfolio risk and smooth out returns over time.

In conclusion, while investing in undervalued stocks requires patience, diligence, and a thorough understanding of both the market and the specific companies, the potential rewards include not only significant capital gains but also increased income through dividends, reduced investment risks, and better long-term returns.

Disadvantages of Undervalued Shares 

While investing in undervalued shares can offer significant advantages, it also comes with its set of challenges and risks. Here are some key disadvantages associated with investing in undervalued stocks:

● Market Recognition Time: One of the primary risks of investing in undervalued stocks is the uncertainty of when or if the market will recognize the stock's true value. This can lead to prolonged periods where the stock remains undervalued, tying up investment capital that could potentially be used more effectively elsewhere.

● Misjudging Value: Identifying truly undervalued stocks requires accurate analysis of the company's financials and potential. There's always a risk that an investor might misjudge a stock as undervalued when, in fact, it is correctly priced due to underlying issues within the company or industry. Such errors can lead to significant losses.

● Company or Industry Issues: Stocks are often undervalued for reasons such as poor management decisions, declining industry sectors, or fundamental business challenges. Investing in these companies can be risky if the underlying problems are not resolved, potentially leading to further declines in stock value.

● Low Liquidity: Undervalued stocks, especially those of smaller or lesser-known companies, may suffer from low liquidity, making them difficult to sell at the desired time and price. This can be particularly disadvantageous in volatile market conditions when quick exits might be necessary.

● Opportunity Costs: Investing in undervalued stocks often requires a long-term commitment before any significant price correction occurs. During this period, investors might miss out on other opportunities that provide quicker or higher returns.

● Limited Growth: Some undervalued stocks may be from companies in mature or declining industries with limited growth prospects. Even if these stocks are undervalued, their long-term potential and thus the potential for significant capital gains might be limited.

● Increased Volatility: Undervalued stocks can be more susceptible to market volatility and panic selling, exacerbating price drops under market stress.

Understanding these risks is crucial for investors considering undervalued stocks. Effective risk management strategies, thorough research, and patience are essential to navigate the potential pitfalls associated with these investments.

How to Invest in Undervalued Stocks in India? 

Investing in undervalued stocks in India involves a few strategic steps:

● Conduct Thorough Research: Analyze financial statements and ratios like P/E, P/B, and dividend yields to identify stocks trading below their intrinsic values.

● Understand Market Trends: Stay informed about overall market conditions and sector-specific trends that might affect stock prices.

● Use Fundamental Analysis: Focus on companies with strong fundamentals, low debt, good earnings potential, and robust business models.

● Consider External Opinions: Look at analyst recommendations and reports to gather additional insights but make decisions based on personal research.

● Diversify Investments: Spread out your investments across different sectors and companies to minimize risks.

● Patience is Key: Be prepared to hold your investments for a longer period, as undervalued stocks may take time to reflect their true market value.

Who should invest in undervalued stocks? 

Investing in undervalued stocks is best suited for investors who possess specific characteristics and goals:

● Patient Investors: Undervalued stocks often require a long-term investment horizon. Investors need to be patient, as it can take time for the market to realize the stock’s true value and for its price to adjust accordingly.

● Value Investors: Those who follow the value investing philosophy, popularized by Warren Buffett and Benjamin Graham, are ideal candidates. Value investors look for stocks trading for less than their intrinsic values, focusing on long-term gains rather than short-term fluctuations.

● Risk-Tolerant Investors: While buying undervalued stocks provides a margin of safety, it still involves risks, especially if the market has mispriced these stocks due to underlying issues within the company or industry. Investors need to be comfortable with this level of risk.

● Research-Oriented Investors: Effective investing in undervalued stocks requires thorough research and analysis. Investors should be prepared to delve into financial statements, understand industry trends, and assess company fundamentals.

● Strategic Planners: Investors who are strategic about their entry and exit points will do well with undervalued stocks. Understanding when to buy during the low and sell when the stock corrects to its fair value is crucial.

For investors with these traits, investing in undervalued stocks can be a rewarding strategy that aligns well with a disciplined, informed, and patient investment approach.