Top 10 Value Stocks in India with Long Term Potential

The Indian stock market has experienced volatility recently, impacted by global economic uncertainties, rising interest rates, and geopolitical tensions.

While sectors like technology and finance have seen significant ups and downs, core industries such as energy, pharmaceuticals, and infrastructure are showing resilience.

This current environment makes value investing especially attractive, as several strong companies are now trading below their intrinsic value due to short-term market reactions rather than fundamental weaknesses.

Investing in value stocks in India today offers a strategic opportunity to capitalize on undervalued yet fundamentally sound companies.

These stocks provide a cushion against market fluctuations, thanks to their stable earnings, established market positions, and potential for consistent dividends.

Here, we'll take a look at the top 10 value stocks that stand out for their long-term potential.

For investors looking to grow their portfolio steadily and mitigate risk, these could be a good option in today's dynamic market.

#1 Power Finance Corporation

First on our list is Power Finance Corporation.

The company is a government of India enterprise that is registered as a non-deposit-taking NBFC (Non-Banking Finance Company) with the Reserve Bank of India (RBI).

It is engaged in extending financial assistance to infrastructure projects of the Indian power sector.

As on 30 June 2024, the share of loans to discoms continue to make majority share in the overall loan book with 40%, followed by loans to generation companies (gencos) with 36%, loans to renewable energy (RE) companies with 13%, loans to transmission companies (transcos) with 7%, and loans to infrastructure companies and others with 2% each.

The stock is trading at price to earnings (P/E) multiple of 7.24x. This is lower than the industry multiple of 10.22x. Its price to book value ratio also stands at 1.48x lower than the industry value of 2.16x.

As far as financials go, PFC has done well. The company's revenue has grown at a compounded annual growth rate (CAGR) of 11% in the last five years while net profit has grown at a CAGR of about 15%.

Its return on equity (RoE) also stands at a comfortable 21.3%.

PFC's asset quality also has been improving trend over many previous years. Owing to resolution through National Company Law Tribunal and write offs, the company reported reduction in gross NPA (GNPA) ratio to 3.34% as on 31 March 2024, from 3.91% as on 31 March 2023.

As on 30 June 2024, although there have been no new slippages, the GNPA ratio has increased slightly to 3.38%, as the loan book remained at similar level to as on 31 March 2024.

The company is also a good dividend paymaster. Except for FY19, PFC has been consistently paying dividends since 2007. The dividend payout ratio stands at 22.5%.

The share price of PFC has risen over 80% in the last year and over 400% in the last 5 years.

The reason for the run up in the stock was the company's push towards giving loans to the renewable energy sector. This has ensured the growth in net interest income and thus, the net profit, has remained solid and consistent.

The market has priced in the multiple positive changes to the company's long-term prospects, in just about 15 months or so. Instead of a steady rise upward, the stock went up almost parabolically.

Going forward, the company is optimistic about scaling up clean energy investments and driving the energy transition in India. It is also collaborating with industry and academia to work on innovative solutions for challenges.

It is focussing on making technologies commercially viable for sustainable growth.

For more details, see the Power Finance Corporation fact sheet and quarterly results.

#2 Bank of Baroda

Second, on our list is Bank of Baroda.

The bank is the third largest Indian PSU bank by market capitalisation.

It offers a wide range of banking services, including personal, corporate, international, rural, small and medium enterprises (SME), non-resident Indian (NRI) services, and treasury services.

The stock is also undervalued on both the valuation metrics - PE and PBV.

Bank of Baroda's PE ratio stands at 6.49x while the industry PE stands at 9.62x. The price to book value ratio also stands lower at 1.08x, compared to the industry value of 1.43x.

While the stock has taken a hit temporarily, its fundamentals still stand strong.

The bank's net profit has grown at a 5-year CAGR of 77% driven by controlling operating costs and maintaining net interest margin. The company's RoE has also grown to 18.95%.

Its asset quality is also healthy. For the June 2024 quarter, the bank's net NPAs was low at 0.69% of the total advances while gross NPAs came in at 2.88% against 2.92% in the June 2024 quarter.

Going forward, the management remains optimistic about future growth, focusing on asset quality and profitability while navigating market challenges.

The bank is strategically managing deposits and advances to maintain margins and is prepared to capitalise on growth opportunities in retail and corporate segments.

It plans to introduce new retail products to enhance its deposit growth, optimise costs through digital transformation, and utilise technology to grow its advances and loan book.

It is aiming for 10-12% deposit growth and 12-14% advance growth in the upcoming quarters. It also has a strong pipeline for corporate loans, with an expected growth of 10-12% in that segment.

For more details, see the Bank of Baroda fact sheet and quarterly results.

#3 ONGC

Third on our list is ONGC.

ONGC is the largest crude oil and natural gas company in India, contributing around 71% to the Indian domestic production and 84% to the natural gas production.

ONGC's PE ratio stands at 7.59x, slightly lower than the industry PE of 7.85x. The company's PBV is also lower at 0.96x, compared to the industry PBV of 1.11x.

This is because the company's share price is down more than 10% in the last month.

Crude oil prices have been on a steady decline, recently hitting their lowest point since December, effectively wiping out the year's gains.

This decline has been partly attributed to easing supply concerns in Libya, where a resolution to crude production disputes has been in sight.

The ongoing decline in crude oil prices is directly affects ONGC's profitability. When crude prices fall, the prices of refined products, such as petrol and diesel, tend to drop as well, often at a quicker rate.

Despite current challenges for ONGC's share price, the future looks promising for ONGC via its international ONGC Videsh.

ONGC Videsh is focusing on acquiring stakes in producing oil and gas assets rather than engaging in long-term exploration projects.

This strategy comes in response to the expected decline in demand for conventional fuels due to the global energy transition.

With stakes in 32 oil and gas projects across 15 countries, ONGC Videsh is positioning itself strategically in the global market.

The company's financials also show promise.

Sales have grown at a compounded annual growth rate (CAGR) of 25% over the last three years while its profit has grown at a CAGR of 47%.

Its RoE and ROCE are strong at 16.3% and 18.4% respectively.

The company also pays consistent dividends. Its dividend yield stands at a whopping 4.6% while the dividend payout has averaged about 37% in the last five years.

Going forward, the company is adapting its financial strategies to manage higher statutory levies and exploration costs. The goal is to mitigate their impact on profitability and improve financial performance in upcoming quarters.

ONGC is investing in technological advancements and operational efficiencies to enhance its overall production capabilities and cost management.

ONGC is also looking to list its green energy arm. In February 2024, the largest crude oil and natural gas company in India incorporated a wholly owned subsidiary ONGC Green.

ONGC Green engages in the value-chains of energy business viz. renewable energy, biofuels/ bio-gas business, green hydrogen and its derivatives like green ammonia, green methanol, storage, carbon capture utilisation and storage and LNG business.

For more details, see the ONGC fact sheet and quarterly results.

#4 Punjab National Bank

Fourth on our list is Punjab National Bank (PNB).

PNB is the third largest PSU after SBI (State bank of India) and Bank of Baroda (BoB).

The bank's current PE ratio stands at 7.77x, lower than the industry PE of 9.62x. The PBV ratio also stands at 0.95x, lower than the industry PBV of 1.43x.

Despite its low valuation, the bank is strategically positioned for significant future growth. With legacy issues resolved, the management believes that the bank is set to outperform its competitors in profitability for the current and upcoming financial years.

Its financials also hold it in good standing. The bank's net profit has grown at a CAGR of 24% in the last five years.

The bank's gross non-performing assets (NPA) fell to 5.73% from 6.24% in the last quarter. Gross NPAs stood at 8.74% during the same period last year.

Net NPAs for the quarter was at 0.73%, against 0.96% in Q1.

The management has implemented several initiatives to enhance underwriting, collections, and digital and HR transformation, which are expected to yield results in the near term.

The bank plans to focus on expanding its retail, agriculture, and MSME portfolios while extending quality corporate loans. Controlling slippages and improving recovery rates are also key priorities.

Additionally, PNB aims to increase forex income and boost fee income from third-party product sales to augment non-interest income.

For the current financial year, the bank intends to maintain credit costs below 1%. The management projects that the return on assets (ROA) will rise to 0.8% this year and reach 1% by March 2025, leading to a substantial profit increase.

The bank anticipates a credit growth of 11-12% and deposit growth of 9-10% in the current financial year. To support this growth, the bank has secured approval to raise Rs 175 bn through Tier I and Tier II bonds and share sales via private placement.

To enhance its reach, PNB plans to add 150 new branches in the domestic market and open a representative office in Dubai.

For more details, see the PNB fact sheet and quarterly results.

#5 REC

Fifth on our list is REC.

REC is a central public sector undertaking under the Ministry of Power. It is involved in financing projects in the power sector value chain from power generation to power distribution.

The company offers services such as loan for generation projects, loan for transmission projects, loan for distribution projects and term loans for working capital requirements of the power sector companies.

REC is majorly held by Power Finance Corporation Limited post completing the acquisition transaction from the Government of India on 28 March 2019, with 52.63% stake as on 30 June 2024.

PFC is majorly owned by the GoI and post the transaction, REC has become a subsidiary of PFC.

REC's valuation metrics are also lower than the industry average. The company's PE ratio stands at 9.25x while that of the industry stands at 10.12. The PBV ratio also stands lower at 1.89x while that of the industry is 2.14x.

The company has strong fundamentals and growth prospects which make it a stock with long term potential.

The company's net profit has grown at a CAGR of 20% in the last five years on the back of loan disbursements. The company's return on equity also stands at a comfortable 22.2%.

REC's loan book has been consistently growing, with dip in growth rate in FY22 due to subdued demand in the power sector owing to slowed start of projects post Covid-19.

With the inception of LPS and Revolving Bill Payment Facility in FY22, picking up momentum in FY23, the company's loan book has grown by 17% YoY in FY24 reaching a loan book of Rs 5.1 tn as on 31 March 2024.

Recently, REC has diversified its portfolio with a mandate of up to 33% loans to the infrastructure and logistics sectors.

The management has expressed confidence in sustainable growth and the role of REC in supporting India's energy transition and infrastructure development.

For more details, see the REC fact sheet and quarterly results.

#6 SBI

Sixth on our list is SBI, India's largest PSU bank by assets and by market capitalisation.

The bank is the third PSU bank on our list. It is currently trading at a PE ratio of 10.79x. While this is higher than the industry PE, it is slightly below its 5-year historical PE of 10.85x.

Despite the bank's troubled background, the bank's financial situation has improved over the years.

Its net profit has doubled over the last five years. This has propelled the lender's RoE to 20.3% in the financial year 2024. The bank's asset quality has also kept up with that of the other PSU banks.

For the June 2024 quarter, the bank's net NPA's stood at 0.57% of total advances. Its gross non-performing assets (NPA) ratio also improved to 2.21% as against 2.24% led by lower slippages.

Going forward, the management remains optimistic about maintaining NIMs and overall profitability despite macroeconomic pressures.

It is confident of growth going forward led by the government's capital outlay plans and an uptick in the credit demand across the country.

Moreover, it is confident in generating sufficient capital organically to fund the growing business.

The bank is also focussing on enhancing liability franchise and deposit mobilisation through various initiatives.

It is opening approximately 60,000 savings bank accounts daily, with significant contributions from digital channels and enhancing deposit interest rates selectively to maintain franchise value and attract deposits.

For more details, see the SBI fact sheet and quarterly results.

#7 BPCL

Seventh on our list is BPCL.

BPCL is India's second-largest oil marketing company (OMC). It is also the third-largest company in terms of refining capacity and the sixth largest in terms of turnover.

BPCL's shares are currently trading at a PE of 10.28x while the industry PE stands at 20.48x, making it undervalued with respect to its peers. On PBV basis also, the shares are undervalued at 1.75. compared to the industry PBV of 1.96x.

OMC shares are down due to the fall in crude oil prices. The decline in crude prices directly impacts oil marketing companies (OMCs) like BPCL by squeezing their profit margins.

However, the company's fundamentals and long term prospects hold it in good stead.

Between FY20 and FY24, BPCL's revenue and net profit have surged with an impressive CAGR of 8% and 28%, respectively. This robust growth has led to a strong RoCE and RoE averaging 21% and 20.8% over the last 5 years.

BPCL's future growth plans include expanding its refining capacity to 45 MMTPA with upgrades in Mumbai and Kochi refineries, and the expansion of the Bina refinery.

The company is also focused on renewable energy, targeting an additional 176 megawatts of wind and solar energy capacity, with its current capacity at 77 megawatts.

Apart from that, BPCL aims to increase ethanol blending to 20% by 2025 from the current 14.1%.

For more details, see the BPCL fact sheet and quarterly results.

#8 IOC

Eighth on our list is IOC.

The company, a prominent Government of India undertaking, was formed in 1964 through the merger of Indian Oil Company Limited and Indian Refineries Limited.

Today, it operates through five key divisions, including its refineries division, boasting the largest share of India's refining capacity at 70.25 million metric tonnes per annum (MMTPA), with plans to increase capacity to 87.9 MMTPA by 2024-25.

IOC is trading at a PE ratio of 11.49x which is also lower than the industry PE of 20.48x. The company's PBV ratio also stands below the industry average at 1.96x.

Coming to financials, the company's sales and net profit have grown at a 5-year CAGR of 8% and 19%, respectively. The returns have been strong, with the RoE and RoCE averaging over 12.5% and 15%, respectively.

With India's oil demand forecasted to rise from 5.4 m barrels per day in 2023 to 8.3 m bpd by 2050, IOC is targeting significant growth.

To meet this demand, the corporation aims to expand its refining capacity while scaling conventional and non-conventional energy solutions.

In fact, IOC is set on meeting one-eighth of India's energy needs by 2050, positioning itself as a pillar of India's future energy landscape.

Alongside refining, IOC is strategically pivoting toward clean and renewable energy. It has launched a new subsidiary focused on low-carbon initiatives to achieve net-zero emissions by 2046.

By 2050, IOC plans to generate 200 GW of renewable energy and produce 7 million tonnes of biofuels and 9 million tonnes of biogas.

A notable objective includes converting 50% of its hydrogen production to green hydrogen by 2030. With this, IOC continues to pioneer the green energy transition.

IOC is also expanding its petrochemical capacity, which is expected to more than triple by 2030, with new plants being developed at Gujarat and Panipat refineries and enhanced lube oil base stock (LOBS) capacity at its Haldia complex.

The company has outlined a transformative growth strategy combining traditional oil refining with clean energy investments in green hydrogen and EV charging, aiming to become a US$ 1 trillion entity by 2047.

For more details, see the IOC fact sheet and quarterly results.

#9 GAIL

Ninth on our list is GAIL.

GAIL (Gas Authority of India Limited) is a prominent Indian government-owned company specialising in the natural gas sector. The company is a leader in this segment with around 75% of its revenues coming from natural gas marketing.

GAIL's PE stands at 11.46x, which is lower than the industry PE of 18.17x. The company is also undervalued on the PBV metric. Its PBV ratio stands at 1.65x, lower than the industry PBV of 2.45x.

The company's sales have grown at a CAGR of 32% over the last three years while its profit has grown at a CAGR of 17%.

Its return ratios are also comfortable with RoE at 14% and RoCE at 14.7%.

GAIL has been instrumental in the establishment and expansion of CGD networks across India. Through its subsidiary, GAIL Gas Limited, and its joint ventures with various state governments and other companies, GAIL has developed a robust infrastructure for the distribution of CNG.

This includes the establishment of numerous CNG stations that cater to vehicles across various regions, particularly in urban areas. The company's extensive pipeline network facilitates the transportation of natural gas to these CNG stations, ensuring a steady and reliable supply.

To enhance its presence in the CNG space, GAIL has formed strategic partnerships and joint ventures with other leading companies.

Notably, it has collaborated with companies like Mahanagar Gas Limited (MGL) in Mumbai, Indraprastha Gas Limited (IGL) in Delhi, and Gujarat Gas Limited (GGL) in Gujarat.

The company is working on increasing the number of CNG stations, particularly in new areas where the adoption of natural gas as a vehicular fuel is still in its nascent stages.

Additionally, GAIL is looking at expanding its CNG infrastructure to cover tier 2 and tier 3 cities, thereby making CNG a more widely available and a viable option for a larger segment of the population.

Although GAIL has not yet made any formal commitment regarding CNG for two-wheelers, the company may consider catering to this segment in the near future.

On 28 June 2024, GAIL's board approved advancing its net zero target for Scope-I and II emissions from 2040 to 2035. This decision came after an extensive study by GAIL to enhance sustainability goals and align with India's net zero commitments.

GAIL plans to achieve this through electrification of NG-based equipment, renewable energy, battery energy storage systems, compressed biogas, green hydrogen, CO2 valorisation initiatives, and afforestation.

The company is in the business of marketing and transmitting natural gas, a cleaner fuel that reduces emissions for various industries and end-consumers. It is also implementing measures to reduce emissions within its operations, contributing to a cleaner environment.

By moving up its emission reduction target to 2035, it strengthened its position as a leader in India's energy sector, driving sustainable development and contributing significantly to India's Net Zero target.

Natural gas remains a crucial part of India's energy mix, accounting for about 6.5% currently and expected to grow up to 15%. India's energy demand is growing rapidly and is expected to more than double by 2050 the company is gearing up to make the most of it.

The company is also focusing on biogas, having issued 403 Letters of Intent and leading the market through its innovative CBD-CGD Synchronization scheme. It aims to set up 26 biogas plants and has formed a JV to support this effort.

In the hydrogen sector, it has tested hydrogen blending and is setting up a 10 megawatt electrolyser for hydrogen production in Vijaipur.

Its strategy includes preparing for future energy needs by developing capabilities in renewable gas, including green hydrogen and green ammonia, ensuring readiness to switch to these fuels when needed.

Natural gas consumption in India is growing, with India being the 4th largest LNG market globally.

Recent long-term sales purchase agreements have narrowed the gap between supply and demand, indicating a strong future demand for LNG which is a good sign for GAIL.

For more details, see the GAIL fact sheet and quarterly results.

#10 Hindalco

Last on our list is Hindalco.

Hindalco Industries is an Indian aluminium and copper manufacturing company. The company is a subsidiary of the Aditya Birla Group.

The company also manufactures chemicals such as calcined alumina and aluminium hydrates used in the water treatment industry.

It has a wide product portfolio that caters to the needs of FMCG, aerospace, automotive, construction, and industrial and household appliances across the world.

Hindalco's shares are undervalued on both PE and PBV basis. The company's PE ratio stands at 14.3x while that of the industry is 21x. The PBV ratio is also lower at 1.4x compared to the industry PBV of 3.7x.

Hindalco Industries net sales have increased at a CAGR of 18% in the last three years. Net profit has also increased at a CAGR of 40%.

Through its subsidiary, Novelis, which is also the world's largest recycler of aluminium, Hindalco manufactures automotive, and beverage can sheets in North America, South America, Europe, and Asia.

The company is reportedly gearing up to enter the solar module manufacturing space, with plans to establish a plant in Gujarat's coastal town of Mundra, according to media reports.

The company is currently in the process of evaluating a comprehensive five-year plan to navigate the competitive solar sector.

While board approval and finalisation of capital expenditure are still pending, the move signals a strategic diversification into green energy.

Given Hindalco's stronghold in aluminium manufacturing, this venture into solar module production is a natural fit.

For more details, see the Hindalco fact sheet and quarterly results.

Snapshot Of the Top Value Stocks from Equitymaster's Stock Screener

Here's a quick view at the above-mentioned companies based on some crucial financial parameters.

Please note that these parameters can be changed according to your selection criteria.

Conclusion

The above 10 each bring unique strengths, ranging from resilient earnings to strong market position.

While they might not provide the rapid returns that some growth stocks offer, value stocks are often more stable and provide regular dividends.

They're potentially a smart choice for those who seek both growth and stability in their portfolio.

However, investors should proceed with caution. Not every undervalued stock will recover or perform as expected; some may remain underpriced due to genuine weaknesses.

Thorough research is essential to distinguish truly undervalued companies from those with poor fundamentals.

Additionally, value stocks may take time to appreciate, requiring patience and a long-term perspective, especially in volatile market conditions.

The Indian market's current volatility could pose risks for even the most promising stocks. Economic factors, such as inflation or changing interest rates, may impact the performance of these companies.

Diversifying a portfolio and keeping a balanced approach can help mitigate these risks.

For long-term investors willing to ride out market fluctuations, however, well-chosen value stocks still present a compelling opportunity for gradual, reliable growth.

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...