Best Stocks: 25 Stock to Buy for Long Term in India [2019]

[Updated: Oct-2019] Here is a list of best stocks which one can buy with an objective of LONG TERM holding.

In fact: I use this list for myself to unearth few good stocks from a heap of average ones.

What is the strategy? How to identify best stocks trading in Indian stock market?

How to start?

Buying stocks of companies which has high sales, high net profit, or high dividend payout is not going to work.

Best Stock to Buy in India for Long Term 2019 - High Net Profit Stocks

Not that these stocks are bad, but it also essential to do further checks.

In this blog post, we will discuss what a long term investor must check in stocks before buying it.

1. Which are best stocks?

Best Stock to Buy in India for Long Term 2019 - Which are best stocks

Best stocks are ones, which represent a “good business”, and are also available at “undervalued price” levels for investing.

  • Good business: Which is good business? There can be several contributing factors, but what works best is ‘free cash flow’. Read about blue chip stocks.
  • Undervalued Price: What is undervalued price? For this one must know the ‘intrinsic value’ of a stock. When market price less than its intrinsic value, stock is undervalued. Read about low PE stocks.

A good business will always generate high free cash flows. High free cash flow will eventually lead to high intrinsic value. Check free cash flow based calculator.

When intrinsic value is high, there are more chances to find it at undervalued price levels.

So what is the takeaway from here? Look for stock with high free cash (FCF).

See how good business builds its intrinsic value (use MS Excel to estimate intrinsic value)

2. Which are undervalued stocks?

Suppose a stock is trading at a market price of Rs.100/share. Upon estimation, its intrinsic value comes out to be Rs.120/share.

As market Price is less than intrinsic value, stock is said to be undervalued.

Best Stock to Buy in India for Long Term 2019 - Undervalued Stock

To identify best stocks, the essential ingredients are the following:

  • Free cash Flow (FCF), and
  • Intrinsic Value (IV). Read more on IV formula.

How to identify best stock? FCF will help you to estimate IV.

Then one can compare the current market price with its estimated intrinsic value to check undervaluation. Read more on undervalued stocks.

3. Complication to identify best stocks

It is not possible to accurately identify best stocks without knowing their free cash flow and intrinsic value.

Does this understanding make best stock picking simpler? Yes and No. 

  • Yes, because we now know what stock parameter must be looked at to pick best stocks. Otherwise we simply waste our time looking at less important stock metrics like financial ratios etc. 
  • No, because estimation of both ‘free cash flow’ and ‘intrinsic value’ is a special skill. Only gifted people can do it accurately

So how a common man, who knows nothing about stocks can identify best stock? It is a tough task, but I have a solution for it.

4. The Ultimate Solution

Best Stock to Buy in India for Long Term 2019 - Solution DIY

Why I’m calling it ultimate? Because the solution lies within us. How?

Learn to estimate intrinsic value of stocks by self.

From my experience, I can say three things about intrinsic value estimation:

  • First: Estimating an approximate intrinsic value of stocks can be done by anyone. No special skill is necessary.
  • Second: The more one practices estimating intrinsic value, the accuracy improves.
  • Third: It is better to believe in the intrinsic value estimated by self, rather than buying stocks on others advice.

I am sure these points are making sense, right?

But some might say that estimating intrinsic value estimation is tough – how to learn it?

This is where my stock analysis worksheet can be helpful. How? You can actually see for yourself the financial reports data being converted into intrinsic value.

Reading this article, and using my excel worksheet can give huge clarity about intrinsic value estimation even to a novice.

A few days of practice can clear a lot of cloud about intrinsic value.

So lets process and try to learn how to estimate free cash flow and intrinsic value of stocks…

5. What builds intrinsic value?

Best Stocks to Buy in India - what builds intrinsic value

Before we get into the math part of intrinsic value, let’s understand what are the steps involved in estimation of intrinsic value.

There are several methods of estimating intrinsic value of stocks. One of the most reliable method is discounted cash flow model (DCF). You can read this post to know more about it.

But here what I will show you is a hybrid method of “dividend discount model’ and DCF.

In this hybrid model, there are three steps which ultimates helps us to build the intrinsic value:

  • Step #1 (FCFE): Calculate the present Free Cash Flow to Equity (FCFE).
  • Step #2 (FCFE Growth): Forecast FCFE growth rate for next one year.
  • Step #3 (Expected Return). Quantify your ‘expected return’ (say 5%, 8%, 12% etc).
  • Step #4. Calculate intrinsic value. 

5.1 How to estimate free cash flow (FCFE)

A stock must show a positive free cash flow (FCFE). If not, then its intrinsic value will also go in negative.

Only if the FCFE is positive, the stock may stand a chance to become undervalued.

How to estimate free cash flow? Free cash flow formula is like this:

Best Stock to Buy in India - FCFE Formula

To estimate free cash flow, get the following values from the company’s financial reports:

  • PAT: Open the ‘profit and loss account’. Note the numbers mentioned against ‘net profit after tax’.
  • CAPEX: Open the ‘cash flow statement’. Go to ‘Cash flows from investing activities’. Note the numbers for ‘purchase and sale of capital assets’.
  • D&A: Open the ‘profit and loss account’. Go to the section where all ‘expenses’ are listed. Note the numbers mentioned against ‘depreciation and amortisation’.
  • Increase in Working Capital (WC): Open the ‘balance sheet’. Note current assets (CA) and current liabilities (CL). The formula for change in WC will be like this:
    • Increase in CA = CA (Y2018) – CA Y(2017)
    • Increase in CL = CL (Y2018) – CL (Y2017)
    • Increase in WC = Increase in (CA – CL).
  • New Debt: Open the ‘cash flow statement’. Go to ‘Cash flows from financing activities’. Note the numbers for ‘purchase and sale of capital assets’. Note the numbers mentioned against ‘Proceeds from borrowing’.
  • Debt Repaid: Open the ‘cash flow statement’. Go to ‘Cash flows from financing activities’. Note the numbers for ‘purchase and sale of capital assets’. Note the numbers mentioned against ‘Repayment of borrowing’.

Gather these values in your excel sheet and calculate the free cash flow (FCFE) as indicated below.

Note the ‘Formula‘ column. This way, one can arrive at ‘free cash flow‘ numbers for a stock.

Important points to note about free cash flow calculation:

  1. FCFE must always be positive.
  2. If a company is in expansion mode, its Capital Expenditure (CAPEX) will be high. High CAPEX often leads to lower FCFE. But such companies will eventually yield higher FCFE in times to come. The waiting time for FCFE to become positive can be 3+ years.
  3. Sudden increase in Current Assets (CA) compared to Current Liability (CL), will also lead to lower FCFE.
  4. A company relying too much on “long term debt” (year after year for longer duration of time) for enhancing its FCFE is not a good sign. 
  5. Good companies rely less on debt. Their major cash comes from PAT & provisions of D&A.

5.2. How to estimate FCFE growth (g)?

In the above step we have estimated the Free Cash Flow (FCFE) of a stock.

Now we must estimate the expected rate at which the above FCFE will grow in next 1 year time (g).

There are two ways to do it, easy way and the difficult way.

  • Easy way: Assume it to be 5% (g = 5% p.a). Logic, in India the average inflation over a period of last 10 years is close to 7.5% per annum. Over a period of time, a good company will make sure that its Free Cash Flow (FCFE) must beat the inflation rate. But this will happen only in long term. In shorter time horizon (like next 1 year), assuming a smaller growth rate (less than inflation) is better. Hence we can settle g=5%. If you want, you can repeat the calculation for other g values like 3%, 6% etc.
  • Difficult way: Calculate the FCFE for last 5 years. See the trend and then make a safe assumption. But I will suggest that, initially do not go the difficult way. Downloading annual reports, searching data in the reports, preparing the excel sheet will take time. If you afraid of losing the interest, begin with the easy way. If after the calculation, the stock looks attractive, repeat the process using the difficult route. Another option can be, use my stock analysis worksheet.

5.3 What should be the expected returns (k)?

This step will be easy.

But important Note: K must always be more than g. Here as well, I will suggest you to use a rule of thumb (k= 8% per annum).

Logic, in a long time horizon (5+ years), Sensex/Nifty can grown at a rate of 12% p.a. But at present we are making an assumption for next 1 year only.

Hence a smaller rate of return (w.r.t. 12%) shall be assumed. Hence I have settled for rate of return of g=8%.

My suggestion will be to repeat the calculation with the following combination of “g & k” values:

12345
g3%5%7%9%12%
k6%8%10%12%15%

5.4 Calculation of Intrinsic Value

What we have in hand till now?

  • FCFE.
  • FCFE Growth Rate – for next 1 year (g)
  • Expected Return – for next 1 year (k)

With these values we can estimate the intrinsic value of any stock using a formula.

What is the formula? It is called Gordon Growth Model. 

Intrinsic value = Dividend / (k – g)

But in our hybrid formula, we have replaced Dividend with FCFE. This way our new formula looks like this:

Intrinsic Value = FCFE / (k – g)

What is the logic for this alternation?

In the Gordon Growth Model, dividend is taken in consideration as its ‘real earnings’ reaching the hands of investors. In other words, it is the dividends which is creating real value for the shareholders.

The real value generator (dividend) in turn is determining the intrinsic value of the stock.

Similarly, free cash flow has powers to create real value for the shareholders. How? In two ways:

  • One: A part of FCF can be used to pay dividends to the shareholders.
  • Two: Another part can be reinvested back into the business to fund future growth (resulting in capital appreciation).

The real value generator (FCF) in turn is determining the intrinsic value of the stock (using the hybrid formula)

Examples of intrinsic value calculation:

Best Stocks to Buy in India - IV Formula Table

6. Best stocks are undervalued

How to check if the above stocks are undervalued or not? Just follow the below 2 steps:

  1. Calculate IV/share (N): What is IV per share? Intrinsic value converted to per share value. How to do it? Get the ‘number of shares outstanding’ of the company from its financial reports. IV/share = Intrinsic value / N.
  2. Compare: Compare the calculated IV/share with the current market price of the stock. If IV/share is more than current price, the stock is undervalued.

Now matter how strong is the underlying business, a stock cannot become a good buy till its market price is ‘undervalued’.

7. Necessity of stock analysis

Best Stocks To Buy - Screener

There are 5,000+ stocks currently trading in Indian stock market (BSE). Out of these, which are the best stocks?

The answer is not easy. In fact, the answer is so unique that people who can find this answer have become millionaires.

We common men can find this answer? Yes it is possible.

But we have to follow a procedure. We can use two basic screening criteria’s. This will help to identify best stocks among ordinary ones.

What is this screening criteria?

When people undertake the process of intrinsic value estimation of a stock, they are actually following these 2 screening criteria:

  • Screen #1: Remove fundamentally weak stocks. How it is done? Only those stocks whose free cash flow is positive  are fundamentally strong. 
  • Screen #2: Remove overvalued stocks. How this is done? Only those stocks whose market price is less than its intrinsic value per share are undervalued. 

List of best stocks to buy in India in 2019

(Updated on 13th-Oct-2019)

  • MCap: Market Capitalisation (Rs.Crore).
  • Valuation: Stock is overvalued or undervalued.
StocksSizePriceM.CapValuation
National Peroxide Mid1855.71,066.47Undervalued
Jamna Auto Inds. Mid34.61,380.68Undervalued
ICICI Securities Mid266.458,580.24Undervalued
BLS InternationalMid78.9813.45Undervalued
Indiabulls HousingMid209.98,976.92Undervalued

Bottom Line

I hope this post showed you a shortcut of how to estimate intrinsic value and find best stocks to buy.

But you must be wondering, “how to put this theory into practice?”

Well I’ve something special for you (My stock analysis worksheet).

This worksheet can convert all this theory into actionable steps.

Check the screenshot of the report generated by my worksheet:

I’d love to know what your thoughts about this article. Please consider leaving you comments below.

Handpicked Articles:

  1. Hindustan Zinc – Share Price Analysis (a Blue Chip Stock).
  2. Venky Ltd – Share Price Analysis (a small cap stock).
  3. Zee Media – a penny stock to look out for.
  4. Which stock to buy when Aluminium price is falling?
  5. Focused Mutual Fund and Sun Pharma Stock.
  6. EIL – a potential long term small cap stock.

59 Comments

  1. Hi Mani,
    I have been following your articles for more than a year. Recently I purchased STOCK ANALYSIS WORKSHEET V2.1.4 (PLUS). First congratulations on good work.
    I have couple of questions for you though as listed below:
    1. This article list L&T Finance as undervalued at 80.6 however when I entered data as advised in the video, I am getting intrinsic value as 53 and showing it as overvalued. Can you please advise?
    2. I have been holding Lupin shares for last 20 years. Purchased price is quite low. When I used the spreadsheet to get intrinsic value of Lupin it is showing approx. 919. Can you please confirm this price is correct and do you advise to keep it?

    • Hi, the numbers shown in this article are based on a screener. These numbers are not as reliable. But they at least screen out the non-important stocks. I generally use my “Stock Analysis Worksheet” to do a more deeper analysis of my shortlisted stocks.

  2. Basis the above my FCFE for Graphite India is coming out to be 1308 CR (using Annual report of FY18-19). However, in your post on best stocks (https://getmoneyrich.com/stocks-list/best-stocks/), you show Graphite India’s FCF as 2194.71. Not sure if it is because my inputs to different variables is incorrect. Would be super helpful if you can take a company’s example (for a specific FY) and show this.
    Also in new debt formula you mention “Note the numbers for ‘purchase and sale of capital assets’. Note the numbers mentioned against ‘Proceeds from borrowing’.”. Shouldn’t it just be proceeds from borrowing as purchase and sale of capital assets would be under investment activities

  3. I am novice on this, can you please explain how is expected return arrived at & also the data table in that section. Thanks

  4. Hi Mani,
    Really nice article. it’s great that you are sharing your watch list for others.
    I would also like to suggest one website ( you might be already knowing about it ) to pick up stocks for analysis. Website: screener. in/screens/ .
    On these screens one can write down query and get list of stocks based on our preferred criteria. Then they can use your stock analysis tool to get intrinsic value.
    Let me know your views on it. Thanks

  5. Hi to All, iam new to this feild .. if anyone can suggest few names to study and select shares to invest.. it will be helpfull ..

    • there is nothing like help but more like pay and payee, if you have something to share then they will might share something to you. but it rarely the correct path.

      Look before you go and do it!
      —————————–
      nothing is free just like this blog!
      ————————————

  6. Could you elaborate on “Cash flow from financing Activity” esp. what all to consider under Proceeds from borrowings ‘E’ and repayment of borrowing ‘F’?
    I was calculating FCFE for Ashok Leyland and their “STATEMENT OF CASH FLOWS” has below

    Cash flow from financing activities
    Proceeds from issue of equity shares (including securities premium) 455.35
    Proceeds from non-current borrowings –
    Repayments of non-current borrowings (105,502.74)
    Payments relating to swap contracts on non-current borowings (11,633.48)
    Proceeds from current borrowings 924,000.00
    Repayments of current borrowings (933,863.78)

    Should i calculate like below:
    E Proceeds from borrowing (New Debt) From Report 924000
    F Repayment of borrowing (Debt Repaid) From Report -933863

    Thanks in advance! This article made me start looking into the sheets.

    • Good work Ankit. Your assumptions are right related to “cash flow from financing activity”. Thanks for asking and putting your thoughts here.

  7. Hello sir,
    I was looking for some information on Best stocks to buy in India, this morning and came across your website.

    Great content! I especially liked how your website describes the topic in an easily understandable language which inspired me to write more up to date content on How to pick the best stocks for consistent returns and Top 10 best stocks to buy in India for the long term.

    Actually, I have published on the said topic with more insights and infographic which is quite beneficial for your audience.

    Let me know if you want to check it out.

    Either way, keep up the good work.

    Thanks,

    Jharna Majee.

  8. Sir, i checked the financial data for britania, but could not find the figures you mentioned above. have you used random numbers? when i did the calculation, the IV/share is less than Re 1. can you take a real example and explain the calculations. for our benefit, can you use financial figures from ndtv or economic times.
    thank you.

    • I will suggest you to use moneycontrol. Generally numbers in financial reports will be similar whether we follow NDTV, economic times, etc. Thanks.

  9. This is a very good article, which gives a brilliant explanation on how to identify and select the best stock for investing. It also tells us how to identify the best stocks for beginners, as stock picking must be done with extreme care because picking up any random share without proper research will be a bad investment decision. This article also tells us that business whose future free cash flow is certain is a good business and market value of the stock must be less than its intrinsic value. Here the information provided is precise, resourceful and has its unique way of analyzing data and presenting it in a simple manner.

  10. With ref. to your post dt. 19th Sep. 2018 on Free Cash Flow Analysis of Indian Stock, AdanI ports is Undervalued. But your post dt. 24th Sep. 2018 on Best stocks to buy in India for Long term 2018, you have mentioned to avoid Adani Ports. Please clarify.

    • –Good observation…
      The list provided in this blog post is result of a general “screener”. It is less detailed. But it helps me to quickly highlight few potential stocks from all.

      The analysis provided in “Free Cash Flow Analysis of Indian Stock…” is more detailed. It is based on 2 years data. Hence the reliability of that analysis is more.

      The point is, estimation of intrinsic value will differ from person to person. The variation will come based on:
      – Knowledge, skill of the analyst.
      – Data used for analysis.
      – Procedures used for analysis.

  11. Out of NIFTY 50 only 8 shares qualify your test. Now looking tersely, it can be said that though the intrinsic value is high these shares do not command good price.My be due to the bad methods in manufacturing, marketing, political reasons, lack of financial manipulation, risk taking etc.That means one should not buy those shares before the companies improve. When and how will that happen? They may not even reach the IV in long time like Karnatak Bank. There appears contradiction. Do you see the light?

    • Market pice can be higher than IV. Its fair.

      But why IV is less than price? It is not always “due to the bad methods in manufacturing, marketing, political reasons, lack of financial manipulation, risk taking etc“….

      Stocks of great companies trade at overvalued price levels. But there will be moments in time when there will be price correction. The strategy should be, first know the true value of a good company. When this is established, wait for the market price to become favourable (it will be, one day soon).

  12. Your method seemed to be working in good old days before the IPO of Reliance Power and also when the shares of multinational were issued at nominal premium and when STT was not there.
    Who approves the shares prices of IPO and on what basis? Could that be rigged up? Why people invest without knowing anything.
    One of my Sr. broker who is no more, used to say that share bazar is a gambling den. That is an over statement but if everything is predictable, then you can never earn in share bazar because here they do not produce any goods or services and also they can not tax like Govt.
    Having said that, your method is quite interesting because it enables to find the element of speculation quantum in present share prices.
    Is there a software program sold by you which I can buy and on the top of that I apply my intuition?
    Congrets fr nice style and kind regards

    • Share Market looks like a casino, but its not. At least for me, “shares” are not very different from the “business” it represents. This way of looking at stock market, helps in making more meaning out of stock investing.
      Thanks for a lovely comment.

  13. while calculating IV per share, i noticed that the nifty 50 stocks you gave also divide no . of shares by face value. Without this every stock seems overvalued… Mani please comment

  14. I tried to follow your steps to calculate FCFE. However, I am getting minor difference in the FCFE of nifty-50 stocks that you have mentioned. For ex, following are the values I took from Bajaj auto’s annual report 2017-18 (everything is in Rs. Cr). PAT = 4068.1, Depreciation & Amortization = 314.8, Purchase of capital assets = 182.63, Sale of capital assets = 13.13.
    Current asset, 2018 = 9,235.63 and current asset 2017 = 9,391.37 hence change in current asset = -155.74. Similarly, current liability 2018 = 4,111.29, current liability 2017 = 3,212.58 hence change in current liabiliity = 898.71.
    Proceeds from borrowing (new debt, I am assuming this is long term debt only that we should take) = 0
    Repayment of borrowing (again repayment of long term debt) = 0
    FCFE I calculated = 5267.85. FCFE you have mentioned in the table above = 5154.26
    I believe either I am going wrong in taking the captial asset sale/purchase or new debt vs repayment. Would be super helpful if you could help me with the same.

    • The value mentioned in the blog are results out of a general “stock screener”. It has been used to bring forward potential stocks. A detailed analysis will surely give a different values than generated by the screener. Thanks for posting your comment. Good work.

  15. Hi, Thank you for such a detailed post on this topic which I was really looking for. I will use the steps for some of the stocks and I will share my views as well. BTW, normally, people will say that there will be exception when we do such analysis – for example, banks will be having more money which needs to be seen from right perspective (not as a free cash). Is there any such consideration while we use your above steps to analyze the stocks. Please clarify. Looking forward for your other posts to learn more. Thank you.

  16. Hi Mani Sir,

    I am a big fan of your stocks analysis sheet and thanks to you for that.

    I want to know that while putting the Balance sheet values in the sheet from moneycontrol, should I be picking the consolidated or standalone values (from moneycontrol). Please advise.

    Thanks

    • Its better to use standalone data. It gives better idea about the core strength of the “parent business”.
      Thanks for your comment.

  17. The article was simple and lucid.I need one clarification.
    You have stated ‘A company relying too much on debt for its cash flow management will have lower FCFE”.But if a company borrows new debt its FCFE will rise.
    Seems contradictory…
    Kindly elaborate.

  18. Very good article about how to choose a stock before purchasing the same. I have not come across such a detailed article before except an article on site of StockAxis.

    Very helpful.

  19. I have purchased Karnataka bank shares 100 at Rs 155, as its Market price is lower than true value which is Rs 197. But from past three years Karnataka bank shares have not reached its true value Rs 197. Now what should I do?.

  20. This is the first time that I have read something very useful about stock investing. I am holding Man industries, Visesh infoteck, Havisha hosp & infra in my portfolio. Please give me some advice on this stock.
    Thanking you
    T.C.Raveendran

  21. This is a very good article to analysis market, & how to make own list . It’s really good to work. I m very impressed because to cover all fundamental reasons to choose our best stock.

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