Discover Undervalued Shares in India: Use On-line Inventory Screener [2025]

[Use Stock Screener] Undervalued shares are shares that commerce beneath their true worth, providing a possible alternative for traders. For instance, if a inventory is priced at Rs.80, however its intrinsic worth is estimated to be Rs.100, it’s thought-about undervalued by 20%. Figuring out these shares can result in worthwhile investments, as shopping for them at a low cost will increase the probability of greater long-term beneficial properties.

The idea of worth investing revolves round buying shares when they’re undervalued, with the expectation that the market will finally acknowledge their true value. Nevertheless, discovering these shares will be difficult, as common firms typically commerce at inflated costs.

On this article, I’ll share with you strategies on learn how to discover undervalued shares. We’ll concentrate on methods that professional traders use to identify alternatives in lesser-known or out-of-favor shares.

Undervalue Inventory Screener

Up to date: December 30, 2024 [Note: The table is scrollable]

Matters:

1. Easy methods to Use the Undervalued Inventory Screener

The Undervalued Inventory Screener offers entry to a curated checklist of about 100 shares from numerous sectors,. It could possibly enable you to simply filter and establish shares which are buying and selling at low worth multiples. This free instrument helps you to apply a number of filters to slender down your inventory search. It’s primarily based on monetary metrics, equivalent to worth, market capitalization, P/E ratio, P/B ratio, and P/FCF ratio.

Instance: Discovering Small, Low P/E Shares Under Rs.100. Let’s say you’re on the lookout for smaller firms with a low P/E ratio, buying and selling beneath Rs.100. Right here’s how one can filter shares utilizing the screener:

1. Value Vary: Set the worth filter to beneath Rs.100 (use <100) to concentrate on shares whose unit worth is smaller.
2. Market Cap Vary: Set the market capitalization filter to pick out smaller firms, for instance, shares with a market cap underneath Rs.5,000 crore (use <5000)
3. P/E Ratio: Set a most P/E ratio, say 22, (use <22) to filter shares which are buying and selling at comparatively low valuations.

By making use of these filters, the screener will present you an inventory of shares that meet these standards. It’s manner so that you can establish undervalued alternatives in smaller firms buying and selling at low-P/E multiples. Furthermore, you might have additionally set the restrict of Rs.100 for the worth in order that whereas investing, you needn’t pay an excessive amount of to buy every share.

After, you might have recognized potential shares right here, you possibly can then additional analyze these shares utilizing our Inventory Engine app.

2. Undervaluation: The Idea

Suppose there are two 2-BHK flats in Mumbai. One is positioned in Kandivali and the opposite is positioned in Bandra. The space between these two areas is about 20 Km.

You might be an investor who’s prepared to purchase a property in both of those two areas, however you might have a situation. You’ll purchase solely a property whose rental yield is 3% or greater. So for you, a property whose yield is 3% or greater is undervalued. The idea sounds easy, proper? Nevertheless it highlights an important ingredient of “worth valuation” of an asset. Let’s learn additional.

How rental yield is calculated? Annual rental revenue dividend by whole value of buy. So if annual rental revenue is Rs.12,000 and value of buy is Rs.10,00,000, then rental yield shall be 1.2% (=12,000 / 10,00,000).

Individuals who know Mumbai will know the distinction between a property in Bandra and in Kandivali. Properties in Bandra are very costly. However for now, we’re referring Bandra as “costly” in worth phrases. In funding phrases, valuation will not be calculated by way of worth, it calculated by evaluating earnings with worth.

To accurately estimate the worth of a property in Bandra and Kandivali, I’ve collected some knowledge. Examine it within the beneath desk.

Evaluating Bandra and Kandivali, Bandra is trying higher valued. Why? As a result of its rental yield is greater. Irrespective of, the customer should pay greater than double the worth to purchase the property in Bandra as in comparison with Kandivali, however by way of ROI – return on funding, Bandra appears to be like comparatively undervalued.

Takeaway: Had we valued the property solely by way of worth, Bandra property would have at all times sounded overvalued. However in incomes phrases, it appears to be like higher valued than Kandivali. Equally, in inventory investing, worth valuation can’t be precisely carried out with out realizing the potential future earnings of the asset.

3. The Problem of Inventory Investing

The difficult a part of inventory investing is the estimation of future incomes potential of the corporate.

Within the above instance, it was straightforward to forecast the longer term rental yield of the properties. Therefore, it’s simpler to worth an actual property property.

However in inventory investing, firms are concerned. An organization is a sophisticated asset the place variables like man-power, equipment, land, constructing, raw-material, clients, market demand, native and international financial system, and so on components can impact the incomes potential of an organization.

The simple with which we are able to estimate the longer term rental yield of a property in Bandra, we can’t estimate the longer term earnings (internet revenue) of an organization.

An investor like Warren Buffett has the data and useful resource to estimate future earnings extra precisely than us. That is the rationale why he’s such a profitable investor.

Let’s perceive it utilizing an instance

Suppose there’s a new age firm referred to as “ABC Ltd.” (an IPO like Zomato, Swiggy, Zaggle, and so on).

• Previous Information: Within the final 5 years of its operation, the corporate’s EPS was Rs.10 per share. Presently, the share worth of the corporate is say Rs.500 per share. So, at this EPS of ABC Ltd., the Value-To-Earnings (P/E) ratio is 50. It appears to be like very costly, proper?

Now, suppose the ABC Ltd. has been investing to broaden and modernize its operations. It has been estimated that, within the coming 5 years, its EPS will develop from Rs.10 to Rs.40 per share.

• Future Information: Within the subsequent 5 years of its operation, the corporate’s EPS will turn out to be Rs.40 per share. On the present share worth of Rs.500 per share. the longer term P/E ratio is 12.5. Even by the definition of Benjamin Graham, the P/E of 12.5 makes this inventory undervalued, proper?

I’ve used this instance to spotlight that how our potential to estimate future earnings of an organization makes the duty of worth valuation of shares look so correct. However there may be fallacy and that is what makes inventory investing so difficult for everyone (even Warren Buffett). What’s the fallacy?

How on the planet can me and you’ll know for certain that within the subsequent 5 years, ABC Ltd’s EPS will develop to Rs.40 ranges? We’ll by no means realize it, proper? So that is the place we begin to make assumptions about future earnings and the inaccuracy begins to creeps in.

4. What’s the Goal of Discovering Undervalued Shares?

The first goal of discovering undervalued shares is to obtain superior long-term funding returns.

Undervalued shares provide the potential for important worth appreciation because the market finally acknowledges their true intrinsic worth.

By figuring out and investing in these alternatives, traders can profit from each capital beneficial properties and dividends. undervalued inventory can create a twin supply of revenue that enhances general portfolio efficiency.

The goal is to purchase high quality shares at a reduction, lowering funding threat and growing potential returns over time.

Margin of Security

One other key objective is to construct a margin of security in investments.

The margin of security is the hole between the inventory’s present worth and its intrinsic worth. It serves as a cushion towards potential minor errors that may at all times creep-in whereas estimating the intrinsic worth. Margin of security also can work as one other security internet towards market volatility.

We’ve already mentioned that worth valuation’s accuracy depends on how near actuality are our future incomes estimates. There’s a excessive likelihood that within the strategy of inventory evaluation, we overestimate the longer term earnings of an organization. In such a case, our assumed future efficiency won’t be met. Therefore, a decrease entry worth helps mitigate losses.

This conservative method is very useful in inventory investing.

Nowadays, I see younger women and men with solely restricted expertise of inventory market cycles discuss so optimistically in regards to the inventory market. In a manner it’s good as a result of it brings lot of individuals to the market. However coming into the market with “extreme optimism” is harmful.

For such folks, it’s important to be taught to conservative. Actually, over-enthusiasm in inventory market may cause extra losses.

Discovering undervalued shares permits traders to remain targeted on long-term wealth creation. It’s a solution to keep away from impulsive choices pushed by short-term worth actions.

With this as our premise, permit me to share with you a way to seek out undervalued shares.

5. How To Discover Undervalued Shares

On the lookout for undervalued shares when the market is at its peak might turn out to be a futile train. I’ve personally wasted hours doing it. It’s true that there are at all times worth shares hidden in any kind of market. However discovering them is less complicated when the market will not be at its peak. With this premise, permit me to point out you two steps of learn how to discover undervalued shares:

Step A. Analyze the Index

Earlier than we go forward and begin analyzing particular person shares for worth valuation, let’s analyze the index first. This shall be carried out within the following three sub-steps:

Step #A1 – Index Watch

On this step, we should watch the actions of the 2 massive indices, the Nifty50, and Sensex. Whereas we’re observing the index, we are literally ready for the index to right or crash. How that is helpful?

• Bull Market: In such a market, primary indices like Sensex and Nifty are solely going up. When indices are rising, basically robust shares are inclined to turn out to be extra overvalued.
• Bear Market: In such a market, the primary indices fall (referred to as correction and even crash). When indices are falling, even basically robust shares are inclined to shed their worth, therefore they get undervalued. Learn extra on the bear market.

Within the pursuit to seek out undervalued shares, the duty turns into comparatively simpler during times of corrections or a crash. However it isn’t enough to observe index actions alone. We now have to do extra. Learn step #A2.

Step #A2 – Look Deeper Into The Index

Look barely deeper into the index’s PE & PB ratios. Sensex’s PE & PB ratio will be discovered by visiting BSE & NSE’s web site. Let’s see how Sensex’s P/E & P/B have modified within the final 12 months:

It’s fascinating to watch the index by way of its PE, and PB ratios. I preserve a historic PE and PB database of Sensex. This offers me a extra correct perspective on the current valuation of the general inventory market.

Following remark from the above desk

• Factors Motion: Sensex jumped from 55,583 to 59,670 (up by 7.66%) between Aug’21 and Aug’22. In the identical interval, Nifty50 jumped from 16,563 to 17,825 factors (up by 7.62%). Taking a look at this motion, we are able to assume that the market is following an overvaluation pattern.
• P/E Motion: Sensex PE fell from 30.27 to 23.26 (fall by -23.16%) ranges between Aug’21 and Aug’22. In the identical interval, Nifty50 PE fell from 25.62 to 21.34 ranges (fall by -16.71%). Although the indices have moved up, their PE is falling. It factors towards the market changing into undervalued.
• P/B Motion: Sensex PB fell from 3.55 to three.43 (fall by -3.38%) ranges between Aug’21 and Aug’22. In the identical interval, Nifty50 PB fell from 4.31 to 4.18 ranges (fall by -3.02%). Falling PB is once more hinting in the direction of a pattern resulting in undervaluation.
• The dividend Yield (DY): Sensex’s DY jumped from 0.97% to 1.19% (up by 22.68%) between Aug’21 and Aug’22. In the identical interval, Nifty50’s DY jumped from 1.1% to 1.34% (up by 21.82%). Rising dividend yield can be pointing in the direction of undervaluation.

Between Aug’21 and Aug’22, the indices have moved up by about 7.5%. However the P/E, P/B, and Dividend Yield (DY) numbers are hinting towards undervaluation.

Step #A3 – PE Pattern Evaluation of The Index

PE pattern of the index can provide an excellent clearer perspective in regards to the market valuation.

Within the years 2000-01 & 2008-09, 2020, and so on inventory market worldwide noticed their worst disaster. Throughout these moments of turmoil, the common PE ratio of the inventory market peaked after which bottomed.

The Sensex ranges and its P/E ratios within the final 25 years are proven within the above chart.

Finding out this chart provides an concept in regards to the Index’s habits. We are attempting to determine a most degree of PE at which the index corrects or crashes. Why does it right? As a result of it has turn out to be overvalued. Listed below are three fast examples that can additional make clear the purpose:

Three Examples

• 2000-01 Dot Com Crash: Sensex peaked by Dec’2000 earlier than crashing. Throughout these moments, Sensex was buying and selling at 5,200 ranges and its P/E ratio was 29.39. At these ranges of P/E, the index crashed because the traders began reserving earnings. Past this level (PE29), the pattern of undervaluation begins.
• 2008-09 Mortgage Disaster: Sensex peaked by Dec’2007 earlier than crashing. At the moment it was at 20,000 ranges. The P/E ratio of the Sensex was 26.94. So this time, the market crashed even earlier than it reached 2000-01 ranges of PE29. Nonetheless, we are able to view even PE27 as a degree indicating overvaluation.
• 2020 Covid Disaster: Sensex peaked by Mar’2020 earlier than crashing. At the moment it was at 41,000 ranges. The P/E ratio of the Sensex was 28.37. So this time, the market crashed getting very near the 2000-01 ranges. That is one other takeaway {that a} PE29 for Sensex is a degree to notice. As soon as the index will attain this degree, it should both crash or at the very least right itself.
• 2022 Present Ranges: The P/E ratio of Sensex is at 22.83 as of at this time (August 2022). It’s far beneath the hazard mark of PE27 or PE29. Therefore we are able to say that at this time at PE23 ranges, there are extra possibilities of discovering undervalued shares than at PE27 to PE29 ranges.

Takeaway: When the index is undervalued, there are extra possibilities of discovering undervalued shares out there. Trying to find worth shares when index is at its peak (overvalued) could also be a futile technique. Easy methods to decide if the market is undervalued or not? We are able to research the PE of the index (Sensex or Nifty) as proven within the above three steps. As a rule of thumb, when the index’s PE is round 29, the market is undervalued.

Step B. Analyze Particular person Shares

There are about 5000 quantity shares out there. Which shares to investigate for undervaluation when the index is falling? Principally, we should goal solely the inventory of basically robust firms. Nevertheless it requires loads of digging into their monetary statements. It’s a ability that have to be realized and can be time-consuming.

If one doesn’t wish to go into a lot element work, one can goal to purchase blue chip shares when the index is falling. Alternatively, they’ll additionally follow index investing throughout corrections and a crash. However additionally it is true that, as this method is straightforward, everybody practices it. Therefore, its potential returns are smaller.

That is the place a instrument like ours, Inventory Evaluation Engine (SAEngine) turns into helpful. It has a pre-coded theme that screens undervalued shares. The screener’s algorithm works by churning the next numbers from the monetary studies of firms:

4-Parameters

• Intrinsic Worth: Our ‘SAEngine’ is coded to calculate the intrinsic worth of the highest 850 quantity shares within the Indian inventory market. Any of those shares whose present worth is beneath their intrinsic worth is tagged as undervalued. Urged Studying: Internet Current Worth Calculation.
• Low PE: Our algorithm loves low PE shares. As a common rule of thumb, shares whose PE is 20 or decrease is most popular. However there are some progress shares whose PE is greater. For such shares, one other metric is used for the analysis (PEG). Urged Studying: Value to Incomes Ratio – Fundamentals.
• Low PEG: It’s principally a complicated model of the PE ratio. Right here the corporate’s EPS progress issue can be used to guage if the corporate is overvalued. Right here, our algorithm considers EPS progress charges of intervals, 3-12 months, 5-12 months, and 10-12 months. Urged Studying: PEG Ratio – Fundamentals.
• Low EV/EBITDA: It’s a ratio that intently resembles the PE ratio. Nevertheless it renders a barely extra correct valuation than PE. Why? As a result of it additionally considers the corporate’s debt and money place to guage the corporate’s market valuation. Urged Studying: EV to EBITDA a number of – Fundamentals.

Conclusion

Investing in undervalued shares has two advantages. First, it tremendously reduces the danger of loss when the market turns into unstable. Second, in a long run, the probabilities to earn above-average returns get amplified (associated studying).

So, on this article, we now have seen learn how to discover undervalued shares. However I might additionally like to the touch base on one other essential issue that impacts the worth valuation of shares. It’s inflation.

Impact of Inflation on Value Valuation

In nations like India, we can’t keep away from trying into inflation numbers. PE ratio, and therefore worth valuation, is affected by inflation charges. How?

The above knowledge set, exhibits a average unfavourable relationship between inflation and the P/E ratio of the Nifty 50.

Because of this when inflation rises, the P/E ratio tends to fall, and when inflation drops, the P/E ratio typically will increase.

• A potential cause for that is that greater inflation will increase prices for companies, lowering their revenue margins. This could make traders much less prepared to pay the next worth for a similar earnings, reducing the P/E ratio.
• Conversely, decrease inflation helps companies management prices, which may increase earnings and make traders extra prepared to pay greater costs, resulting in a greater P/E ratio.

Nevertheless, this relationship will not be excellent.

Different components, like financial progress, firm efficiency, and investor sentiment, additionally affect the P/E ratio. For instance, throughout instances of financial optimism, traders could also be prepared to pay greater P/E ratios even when inflation is excessive. Equally, throughout financial uncertainty, the P/E ratio would possibly stay low even with decrease inflation.

This highlights that whereas inflation can affect the P/E ratio, it’s simply one in every of many components affecting inventory market valuations.