5 Most Undervalued Bluechip Stocks to Add to Your Watchlist

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  • Apr 27, 2022 - 5 Most Undervalued Bluechip Stocks to Add to Your Watchlist

5 Most Undervalued Bluechip Stocks to Add to Your Watchlist

Apr 27, 2022

5 Most Undervalued Bluechip Stocks to Add to Your Watchlist

If you are looking for fast paced growth and potentially high returns in the short term, you'd be better off investing in mid-and-small-cap companies.

But just like any smart investor, you also want to ensure that your portfolio is balanced with an asset allocation that offer stability even during uncertainty.

This is where bluechip companies enter the scene.

Bluechip companies are fundamentally strong with a large market capitalisations and enviable reputations.

From a consumer or investor perspective, you have always known of these companies. You know what their products are because of their long presence in the market.

Most importantly, these stalwarts come with a history of well-managed operations, are financially sound, deliver consistent growth of revenue and are resilient to adverse market conditions and economic downturns.

These trailblazer stocks are some of the most sought after in the country. Whether you are a novice or an experienced investor, you'd want to have some of these stocks in your portfolio.

That said, the general mindset is that acquiring these stocks might be a phenomenally expensive affair.

Some of these bluechip stocks are indeed pricey. But that's not the case with all bluechip companies.

With the help of Equitymaster's Stock Screener, we found a couple of bluechip stocks which are largely undervalued.

Just take a look at their price to earnings (P/E) ratio and price to book value (P/B) ratio, you will see that they are trading well below their intrinsic value.

So, if you are exploring a value investment opportunity, these 5 undervalued bluechip stocks should certainly be on your watchlist in 2022.

#1 Tata Steel

Steel prices have remained firm despite the weak macro environment. Moreover, steel demand across the globe is close to reaching pre-pandemic levels.

The Indian government is also pushing its spending on infrastructure, thus driving domestic demand in this segment. This puts Tata Steel first on our list of undervalued bluechip stocks that should be on your watchlist this year.

A part of the well-known Tata Group, Tata Steel achieved its highest ever consolidated EBITDA of Rs 308.9 bn with 71% year on year (YoY) growth in the third quarter of fiscal year 2022.

From a trailing twelve months perspective the company's shares are -trading at 5.4 times its earnings (P/E) and at 1.4 times its book value (P/B). The historical P/E average of Tata Steel stands at 6.4 and P/B is 1.5.

The two closest competitors of Tata Steel are SAIL and JSW Steel. SAIL trades on a PE multiple of 3.2 and a P/BV multiple of 0.8 whereas JSW Steel has a PE of 9.9 and 2.9 P/B.

Tata Steel is Asia's first integrated private steel company and one of the leading steel manufacturers in the world with an installed operational capacity of over 20 MTPA across its flagship facility Jamshedpur along with Kalinganagar and Dhenkanal steel plants.

With a wide portfolio of product offerings, the company caters to the needs of diverse customer segments in construction, automotive, industrial, and general engineering segments in India and abroad.

Currently, Tata Steel has operations in 26 countries and exports to 50 countries.

With a 101.8% profit growth in the financial year 2021, the company is focusing on optimising returns for all its stakeholders.

With a strong balance sheet, the company is prioritising the development of solutions in sync with changing customer preferences.

Tata Steel has diligently worked towards minimising debt and maintaining an effective average operating margin of 27.1% in the last 5 years.

To know more about the company, check out Tata Steel's financial factsheet and its latest quarterly results.

#2 Oil & Natural Gas Corporation

No analyst in the world could have predicted that crude oil would touch US$ 130 a barrel this year.

This is largely due to the Russia-Ukraine war that disrupted the global supply chain. The was caused a staggering price rise that no one could have anticipated.

In the backdrop of these unprecedented geo-political tension many countries will need to take a hard look at their oil and gas strategy. So, the companies that are pumping oil or gas, the possibility of a boost in value seems probable.

As an investor, if you are sitting on good quality, frontline stocks in this segment, it's best to hold on to them until the dust settles down a bit.

However, if you have liquid capital and exploring some new investment opportunities in this landscape, the oil and gas industry is a sector you should consider.

Being India's largest oil and gas producer, Oil & National Gas Corporation (ONGC) features as a top contender in this segment. With its long presence in the market, ONGC has built a competitive edge over new entrants in this segment.

With revenue of Rs 681.4 bn, the company enjoys a dominant position in the Indian market with its proven reserves, stable performance of its subsidiaries and competitive cost structure globally.

ONGC produces 73% of India's total crude oil and 79% of natural gas in the country. ONGC Videsh, a subsidiary, is running 35 projects in 15 countries. It produced 13 Metric Tonne Oil Equivalent (MMTOE) of oil and gas in the fiscal year 2021.

ONGC's stock price is up 58% in one year. It rose 14% since the beginning of 2022. From a trailing twelve months perspective, the stock's P/E is 5.7 and P/B is around 0.9, much below the industry average P/E of 8.6 and P/B of 5.1.

Its dividend yield is a little over 3%. The stock is currently trading at 2x the estimated EV/EBITDA for financial year 2023.

To know more about the company, check out ONGC's financial factsheet and its latest quarterly results.

#3 Bharat Petroleum Corporation

Looking at the promising growth in the oil and gas industry, Bharat Petroleum Corporation (BPCL) features as the third undervalued bluechip stock on our list.

The company's P/E ratio stands at 4.7, whereas the P/B ratio stands at 1.7, both well below the industry benchmarks.

BPCL currently holds a 24.4% market share in India with operations in both refining and marketing segments.

It boasts a balanced portfolio with strategically located refineries and marketing infrastructure that produced 32.9 MMT and 39.1 MMT in output in the financial year 2021.

Improvement in refining and marketing margins, greater gains from marketing inventory, and the sale of Numaligarh Refinery Limited (NRL), has the company record Rs 3,018.7 bn in gross sales from its operations.

The company created history with stellar financial performance in fiscal 2020-21 with a profit before tax (PBT) of Rs 226.2 bn.

The company recorded 609.7% profit growth in the financial year 2021 and average profit growth of 33.7% for the past 3 years. -

The company has a stable growth history and manageable debt making it a worthy competitor in our list of undervalued bluechip stocks to watch out for in 2022.

To know more about the company, check out BPCL's financial factsheet and its latest quarterly results.

#4 Indian Oil Corporation

Given the ongoing political turbulence in Europe, a window of opportunity has opened up for Indian Oil Corporation (IOC), another stock from the energy sector that could potentially see some gains in the foreseeable future.

With a distinguished legacy of more than 100 years, IOC accounts for the largest market share of India's petroleum product consumption.

Even though IOC is a Maharatna energy company, the company's P/E ratio stands at 4.7, which is significantly below the industry average of 13.8 (P/E). The P/B ratio stands at 1 which is well below the industry average of 2.7 (P/B).

The company has a presence in oil, gas, petrochemicals, and alternative energy sources. It manages one of the largest oil pipeline networks for fuel distribution and transportation in the world.

With subsidiaries across 7 countries, IOC boasts of a strong geographical presence. It has a 32.2% share of national refining capacity which is 80.6 MMTPA.

It operates 29,000 retail petrol pumps, and 7,000 bulk consumer pumps. It has a robust network of 12,700 distributors for its LPG cooking gas in India.

The promoter stake is 51.5% stake in the company as of 31 March 2022, while FIIs owned 16.8% and DIIs have a 2.9% stake.

The company recorded its highest ever profits of Rs 58.61 bn in December 2021. This was a 16% year on year (YoY) growth from December 2020.

The major growth drivers include high operating margins, a robust distribution network and capex investments in the pipeline segment.

IOC has a strong connection with the Indian government which is working in favour of the company. In government initiatives like 'Atmanirbhar Bharat' IOC will be a key player that will redefine the country's energy future.

Inventory gains are expected to rise 25% on average in 2022. Marketing margins ar predicted to be hit by election-led retail price freeze in autos and LPG.

To know more about the company, check out IOC's financial factsheet and its latest quarterly results.

#5 NMDC

Lately, the metal and mining sector has become the darling of the market. Be it retail, institutional or HNI investors, everyone is looking to lay their hands on a share of this pie.

Experts predict the global price of iron ore will not go below US$ 100 per metric tonne.

That said, there have been some ups and downs which have led to valuation corrections in this sector. This makes NMDC an attractive investment proposition.

NMDC is India's single largest iron ore producer with a recorded turnover of Rs 153.7 bn in the financial year 2022. There was an increase of 31.4% from the previous fiscal year. The last quarter of fiscal 2022 has been one of its best ever with a 35% jump in its revenue from operations.

The company's shares are currently trading at a P/E of 4.7 which is much below the industry average P/E of 11 over the last 3 years.

Its P/B ratio is 1.3 while the industry average is 1.2.

NMDC is a Navratna Public Sector Enterprise (PSE) under the government of India, Ministry of Steel. It's also one of the world's low-cost producers of iron ore.

The company currently has ownership of highly merchandised iron ore mines located in Chhattisgarh and Karnataka that produces around 35 million tonnes (MT) per annum of iron ore.

NMDC has broadened its horizons with diamond mining. It operates India's only merchandised diamond mine in Panna, Madhya Pradesh.

Recently, it has also forayed into producing steel and has taken on many high value projects that helped the company to hold on to its leadership position in the domestic market.

Owning to its lost cost of production NMDC has maintained robust operating profitability. The company recorded profit growth of 18% and Return on Capital Employed (ROCE) of 26.9% over the last three years.

The company has a diversified customer base. Hence, a high probability exists the company will be able to improve its working capital and cash flows in the next few months.

It's strategically important to the government of India. The Ministry of Steel has 61% ownership of the company. NMDC gets preferential treatment under the amended MMRD Act, 2021. Under this act, the government has special powers to allocate mines and renew mining licences of PSEs.

Most importantly, the company has very little debt on its books. Add to that - where the global iron ore market is positioned currently, NMDC is expected to fair well over the next few years.

To know more about the company, check out NMDC's financial factsheet and its latest quarterly results.

Snapshot of Undervalued Bluechip Stocks from Equitymaster's Stock Screener

Here's a quick look at the above companies on crucial parameters.

Equitymaster Stock Screener

These parameters can be changed according to your selection criteria. This will help you identify and eliminate stocks not meeting your criteria. It will also emphasise the stocks meeting these metrics.

Is Investing in Undervalued Bluechip Stocks Worth the Risk?

Bluechip stocks are in a league of their own. But should you risk investing if they are significantly undervalued?

When selecting stocks, valuation does play a vital role. However, it should not be the only parameter that determines where you invest.

So, before you make up your mind, it's important for you to find the reason why some of these bluechip stocks are undervalued.

One reason could be that these companies are dominant leaders in their sectors. The possibility for high growth in the future is limited.

Having said that, these bluechip stocks have proven their worth under some of the most difficult market conditions. Therefore they are definitely worth your consideration.

And remember...you want depth and balance in your portfolio that bluechip stocks offer in abundance. Most importantly, these companies are backed by strong fundamentals and stable growth prospects.

So, why worry if they are available at a low price point?

Getting these bluechip stocks for a steal means that the possibility of your losing money on them is largely minimised.

So, you gain a considerable margin of safety with these undervalued bluechip stocks.

At the end of the day, when it comes to investing, that's what matters the most.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

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