Five most undervalued stocks that are too cheap to ignore

Momentum stocks are in the spotlight, but what about the real opportunities? They lie in the ignored corners of the market.

Some stocks are simply too cheap to ignore—not just because they’ve fallen, but because their fundamentals remain solid. For those who are interested, here are five stocks that could be hidden gems in this market.

These stocks may have been beaten down, ignored, or simply overlooked, but their business fundamentals tell a different story.

#1 Natco Pharma

Natco Pharma has carved a niche in the pharmaceutical space, excelling in generics, oncology, and complex drugs.

The company’s first-to-file strategy in the US has been a game-changer, helping it secure strong market positions in high-value products.

With a pipeline packed with niche molecules, oligonucleotides, and biosimilars, Natco is gearing up for the next leg of growth.

Yet, the stock is trading cheap—at a current price to earnings (PE) ratio of 12, well below its 5-year median PE of 26.

The market is cautious due to continued losses in the crop science business and weak domestic formulations. But gRevlimid’s cash windfall has given Natco the firepower to invest in high-margin opportunities, including exclusive launches like Ozempic.

The long-term picture remains solid, backed by a strong cash balance, a well-defined R&D pipeline, and the ability to scale in limited competition segments. While near-term concerns persist, this might just be an opportunity hiding in plain sight.

Between 2020 and 2024, the sales and net profit have reported CAGR of 13.4% and 16%, respectively. The company’s 5-year average Return on Equity (RoE) and Return on Capital Employed (RoCE) stand at 16% and 13%, respectively.

#2 IDFC First Bank

IDFC First Bank’s stock is struggling because of persistent earnings misses and continued stress in its microfinance (MFI) book.

The latest results (Q3FY25) disappointed yet again, with PAT at just ₹3.3 billion (bn) and RoA at a weak 0.4%. The stress in the MFI portfolio, led to lower margins and higher provisions. The MFI SMA pool jumped from 2.5% in Q2 to 4.6% in Q3, signalling further near-term pain.

Margins have also been under pressure due to interest reversals on NPAs and a lower loan-to-deposit ratio (LDR). Slower loan growth versus deposit growth is also weighing on investor sentiment.

With these concerns, the stock is hovering near its 52-week low, as investors worry about asset quality risks, slower growth, and uncertain profitability in the near term.

Despite the near-term headwinds, IDFC First Bank’s long-term story remains intact. The bank’s non-MFI retail portfolio is holding up well, showing resilience despite broader concerns. Management expects MFI stress to ease from early FY26, which should improve asset quality and profitability.

More importantly, the bank’s deposit franchise remains strong. This provides a solid foundation for future lending. Additionally, opex growth is set to moderate, as investments in people, products, and technology are largely complete. This should support operating profitability over time.

In the previous five years, during 2020-24, IDFC First Bank increased its advances at a CAGR of 17.1%, while deposits grew at 23.3%.

The company sports a relatively clean balance sheet and is focusing on high-margin business which it is confident that it will maintain high margins in the future.

#3 Indraprastha Gas

Indraprastha Gas (IGL) is a leading city gas distribution company supplying compressed natural gas (CNG) and piped natural gas (PNG) across the National Capital Region.

With a dominant position in the market, long-term gas sourcing tie-ups, and a debt-free balance sheet, the company has been a key beneficiary of the shift towards cleaner energy.

As car and commercial vehicle manufacturers push CNG variants, IGL is expanding its infrastructure, adding more refuelling stations and boosting compression capacity.

Despite this, IGL has been caught in the market’s crosshairs, sliding 24% in six months. It is trading at a price to book (PB) ratio of 3, a discount of 35% to its 5-year median PB of 4.7, as shrinking margins and policy flip-flops have spooked investors.

The October-November APM gas cut forced IGL to rely on expensive LNG, squeezing CNG margins. Price hikes offered some relief, but with elections around the corner, passing on costs in politically sensitive Delhi was easier said than done.

Meanwhile, uncertainty around gas allocation policies and GST inclusion rumours only added to the selling pressure. Even after the partial rollback of APM gas to 51%, recovery won’t be instant.

But the long-term story remains intact. IGL is expanding its CNG and LNG network and betting big on cleaner transportation. A debt-free balance sheet and steady infrastructure growth ensure it remains well-positioned.

If the company gets its gas mix right and pushes through pending price hikes, margins could bounce back by FY26.

At a 35% discount to its five-year median PB, IGL is trading as if its best days are behind it. But with steady volume growth, a dominant position in the NCR, and structural demand tailwinds, the market may be writing off the recovery story too soon.

The business has done well. During 2020-2024, its revenue and net profit have grown at CAGR 19.3% and 18.6%, respectively. The RoCE and the RoE have averaged of 28.1% and 22.9%, respectively.

#4 Berger Paints

Berger Paints is one of India’s leading paint manufacturers, with 80% of its revenue coming from decorative paints and 20% from industrial paints.

A strong player in the coatings industry, the company has steadily expanded its retail network and strengthened its market presence with over 25,000 dealer partnerships.

Despite inflation and an extended monsoon, it held its ground, particularly in the decorative segment, where strong volume growth in economy paints helped offset pricing challenges.

Yet, it has faced its share of setbacks, as earnings declined and demand remained uncertain.

The entry of Grasim Industries and other heavyweight players has disrupted what was once an oligopolistic market, adding pressure on pricing and margins.

But Berger isn’t new to competition. Its robust distribution network, brand equity, and operational expertise have helped it navigate competitive challenges in the past.

Trading at a PE of 48, the stock is at a 31% discount to its 5-year median of 71, as the market factors in near-term challenges.

However, the long-term story remains intact. As the industry consolidates, established players with a strong infrastructure will be best positioned to capitalise on growth opportunities.

With rising disposable incomes and increasing urbanization driving steady demand for paints, companies that can adapt to shifting consumer preferences, digitalization, and sustainability trends will emerge stronger.

For long-term investors, it’s not about whether Berger will bounce back—it’s just a matter of when.

From 2020 to 2024, Berger Paint’s sales and profits have grown resiliently, at a CAGR of 12.9% and 18.8%, respectively. Average RoCE and RoE stand at 28.7% and 23.3%, over the same period.

#5 Sona BLW Precision Forgings

Sona BLW Precision Forgings (Sona Comstar) is a leading supplier of automotive systems, specializing in differential assemblies, gears, and EV traction motors.

While serving all vehicle categories, it has sharpened its focus on electric and hybrid vehicles, designing high-power-density EV systems and fuel-saving hybrid motors.

Sona Comstar’s EV revenue has jumped from 14% in FY21 to 29% in FY24, with a target of 50% in two years. This looks achievable, as EV programs accounted for 79% of its ₹226 bn order book back in March 2024.

To bolster its technology, it acquired Serbian firm Novelic for ADAS development, funding it via internal accruals. The company has also set aside ₹10 bn in capex over the next two to three years, reinforcing its growth ambitions.

Yet, the stock has faced near-term pressures, with weak demand in key markets such as the EU, US off-highway segment, and India’s commercial vehicle sector weighing on growth.

A slowdown in the EV transition, coupled with a model change at a key OEM, has further dampened revenue momentum. Additionally, an unfavourable product mix and lower production levels have squeezed margins.

Despite these headwinds, the long-term story remains intact. With 76% of its order book linked to EVs, Sona Comstar is well-placed to ride the ongoing shift toward electric mobility.

New program wins, such as a differential assembly for electric passenger vehicles in India, highlight its growing footprint in the EV space.

Moreover, its recent US$ 4 m investment in ClearMotion Inc. adds another layer of diversification to its portfolio. As EV adoption accelerates and the company leverages its global reach and strong customer relationships, Sona Comstar is poised for solid long-term growth.

The business has grown at a robust pace. During 2020-2024, the company’s revenue and net profit have grown at a CAGR of 36% and 38.7%, respectively. The 5-year average RoE and RoCE stand at 26.7% and 27.9%, respectively.

Conclusion

Markets can be impatient, but smart investors know that cheap stocks don’t stay cheap forever.

Whether it’s margin pressure, policy uncertainty, or short-term demand hiccups, these stocks are facing headwinds that won’t last forever.

When sentiment turns, businesses with strong fundamentals, market leadership, and long-term tailwinds tend to bounce back the hardest.

The real question: Will you be watching from the sidelines, or will you have already placed your bets?

All being said, make sure to conduct corporate governance checks… investors must do their own due diligence before taking any action.

Happy Investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. 

This article is syndicated from Equitymaster.com