Best Stocks: 23 Stock to Buy for Long Term in India [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 17th-Aug-2019)

  • MCap: Market Capitalisation (Rs.Crore).
  • Valuation: Stock is overvalued or undervalued.
StocksSizePriceM.CapValuation
Tata Elxsi Small623.453,882.62Undervalued
Bajaj Finserv V.Large7,439.401,18,581.66Undervalued
L&T FinanceMid105.0021,005.04Undervalued

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.

8 Comments

  1. 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.

  2. 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.

  3. 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.

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