Best stocks to buy in India for long term investors for next 10 years 2019

Best Stocks To Buy -Image

You are a long term investor, who is hear to read an article with an intention to get a ready made list of best stocks to buy for long term. You will get a concise list at the bottom of this post.

I also provide my stocks watch list which I feel will be very useful for long term investors. Why? Because here is a list of ‘great stocks’ which has strong near-term growth prospects (in next 1-2 years).

But more importantly, what we will discuss in this article is about “how to identify” the best stocks to buy for long term investors.

I am sure majority of you have landed on this page searching for information on google about ‘list of best stocks’.

But my humble submission to you is that do not “believe such lists” blindly. I have taken care before publishing my list. But not very list available on internet are genuine.

Such lists could be as bogus as a scam. This is particularly true when they are provided like free on internet.

Bloggers and websites make money by providing such lists. Try to comprehend it like this.

If one is so good in identifying best stocks to buy, why the person is publishing them on internet for free?

Instead, the person should have been more busy in buying/selling such stocks, right?

And if at all one get the time from investing, the person must be knee-deep in work, busy identifying more such stocks.

 This is a very logical rational, right? People who know about best stocks will not publish them on internet.

If at all it is done, probably by the time you are reading it, the stock has already become overvalued.

#1. Who is the best stock picker of the world?

Warren Buffett. Does he go around the world telling people which stocks he is researching? No. Why? Because he doesn’t want to do it. Why?

Because his declaration will attract attention towards such stocks.

More positive attention, means more demand, which will eventually make the stock overvalued. So what Warren Buffett does?

He does his research quietly, and then simply buy his analysed stocks first.

After the stock has been purchased (contract is sealed), the news is gently leaked to the media.

So what we can learn from Warren Buffett?

  • Learn to self-identify best stocks.
  • Keep it a secret till you grab them.

#2. How to identify best stocks to buy in India?

To answer this question one must first answer, what it means by a best stock?

Stocks representing a “good business”, available at “undervalued price” levels.

What is a good business? Business whose future free cash flow is more certain. What it means by undervalued price? Stock available at a market price less than its intrinsic value.

Suppose a stock is trading at a market price of Rs.100 per share. Upon calculation, its intrinsic value comes out to be Rs.120 per share. Such a stock is said to be undervalued.

Market Price < Intrinsic Value

So, to identify best stocks, the essential keywords are:

  • Free cash Flow.
  • Intrinsic Value. 

The complication starts here…

It is almost impossible to identify best stocks to buy 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 ratios etc. 

No, because estimation of both ‘free cash flow’ and ‘intrinsic value’ is a special skill. Only gifted people can do it accurately

This is the reason why, at the beginning of this post I said, “never believe such lists which are published for free on internet“. 

People who are publishing such lists are not Warren Buffett’s and Peter Lynch’s. Only handful people in this world can accurately deal with free cash flows and intrinsic value of stocks.

So why to believe lists published by any tom dick and harry? But ‘am I not getting too pessimistic here? If only Buffett can prepare a list of best stocks, then the story ends here. I must stop writing this post here itself, right? 

But I will not. Why? Because I have a solution to the limitation of best stock picking. 

What is the solution?

The solution lies within us. 

Like we need to learn to ride a bicycle, we must also learn to estimate intrinsic value of stocks

But am I not contradicting myself? I have already said that, estimating free cash flow and intrinsic value is a special skill?

So how we common men can learn it? Perhaps this contradiction makes stock investing so unique. 

Best stock picking is simple, but we make it complicated by “not learning this skill and not practicing it ourselves”. 

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

First, estimating an approximate intrinsic value of a stock can be done by even common men (even by non-finance people).

Second, the more one practices it, more accurate will be the estimation. 

Thirdly, it is better to believe in the intrinsic value estimated by self, rather than having a blind-belief on free lists published on internet.

I am sure this simple logic is making sense, right?

So now the bigger question is, how to estimate free cash flow and intrinsic value of stocks? 

What is the purpose? To shortlist best stocks by oneself. Lets read more…

What constitutes intrinsic value?

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

Step #1: Calculate the present Free Cash Flow to Equity (FCFE).

Step #2: Forecast FCFE growth rate for next one year. 

Step #3. Quantify your expected return (say 5%, 8%, 12% etc).

Step #4. Calculate intrinsic value

The above listed 3 things builds the intrinsic value of any stock.

#2.1. Present Free Cash Flow to Equity (FCFE)

This is the most important step in the process of identifying best stocks to buy. 

In this step itself, it becomes evident that if the stock in consideration is worth even an analysis or not. How?

A stock must show a positive free cash flow (FCFE). If the FCFE is positive, the stock may be a good buy.

A negative free cash flow means, the stocks intrinsic value is negative. Not a good buy. 

To estimate free cash flow of a company, it is essential to dig into its financial reports.

But the problem is, even the financial reports does not declare the companies free cash flow.

We must dig into the financial reports and earth the relevant number ourselves, and do the calculation of FCFE.

What type of calculation is required to estimate free cash flow?

Free cash flow formula is like this:

Best Stock to Buy in India - FCFE Formula
FCFE Formula

{PAT = Net Profit, YOY = year on year, Capex = Purchase of capital assets – sale of capital assets}.

[Note: Capex means, net of capital assets added by the company]

How to calculate present FCFE?

The first step will be to visit the companies official website and download the annual report

Example: For Britannia Industries, the annual report can be downloaded from here:

Best Stocks to Buy in India -AnnualReport_Compressed

Once the report is downloaded, see its table of contents to locate on which pages are the financial reports of the company (Balance sheet, P&L A/c & Cash Flow report).

Once you see the financial reports, these are the places in the report where you will get the relevant values:

  • Statement of Profit and Loss
    • Net Profit (PAT).
    • Depreciation & Amortisation.
  • Statement of Cash Flow.
    • Capital Expenditure.
      • Cash flows from investing activities > Purchase and Sale of Capital Assets.
    • Net Debt, Debt Repaid.
      • Cash Flows from financing activities > Proceeds from borrowing, Repayment of Borrowing.
  • Balance Sheet.
    • Increase in Working Capital (YOY)
      • Increase in CA = CA (2018) – CA (2017)
      • Increase in CL = CL (2018) – CL (2017)
      • Increase in WC = Increase in (CA – CL).

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

More accurate will be the free cash flow (FCFE) estimation, nearer will be the calculated intrinsic value to its true value. 

This is the reason why, numbers should be taken directly from the companies audited financial reports. 

Though we can also get the numbers from websites like moneycontrol, economictimes etc. But often their reporting format is not as detailed as required.

Important points to note about best stocks with respect to free cash flow:

  • Its FCFE must always be positive. 
  • If a company is in expansion mode, its Capital Expenditure (CAPEX) will be high.
  • High Capex often leads to lower FCFE.
  • But such companies generally show positive FCFE in future. 
  • Sudden increase in CA w.r.t CL will also lead to lower FCFE. 
  • 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. 
  • Eventually, major cash must come from PAT & provisions of D&A. 

#2.2 Assume Growth Rates.

In step #2.1 above we have estimated the Free Cash Flow (FCFE) of a stock. 

To convert FCFE into intrinsic value, we need to assume two growth rates:

  • FCFE growth for next 1 year (g).
  • Expected rate of returns for next 1 year (k).

What should be FCFE growth rate for next one year (g)?

Easy way:

Thumb rule: g = 5% per annum. 

Logic? In India, 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 I have settled for FCFE growth rate of g=5%. 

My suggestion will be repeat the calculation with the following “g” values:

g1g2g3g4g5
3%5%7%9%12%

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 do it the difficult way. 

Downloading annual reports, searching data in the reports, preparing the excel sheet will take time.

People do lose interest this way. 

Better approach for a beginner is to use the easy way first. Assume 5% FCFE growth (1Y) and move head.

If after the calculation, the stock looks attractive, repeat the process using the difficult route.

What should be the expected rate of return (k)?

This must be easy. 

[Important Note: K must always be more than g.]

Thumb rule: k= 8% per annum. 

Logic? Over a period of last 15-20 years, Sensex/Nifty has grown at a rate of 12% per annum (CAGR).

So a stock investor, who is interested to invest in stocks should have an expectation in and around 12% mark. 

What means by this assumption?

Over a period of next 15-20 years, our stock in consideration might give returns @12% per annum or more. 

But now, we do not have to make an assumption for next 15-20 years time horizon. 

Our time horizon is limited to only 1 year in future. Hence a smaller rate of return (w.r.t. 12%) shall be assumed.

Hence I have settled for rate of return of g=5%.

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%

#2.3 Calculate Intrinsic Value

What we have in hand till now?

  • Free Cash Flow (FCFE) of a stock. 
  • 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 formula. 

Intrinsic Value = FCFE / (k – g)

Though this formula has been developed to calculate intrinsic value of stocks which pays consistent dividends.

What does it mean?

Matured companies (big companies), who has less scope of future growth, generally distributes their free cash flow as “dividend” to its share holders.

Hence intrinsic value of such companies are calculated using a Gordon Growth Model formula.

Intrinsic value = Dividend / (k – g)

But in our case we have replaced Dividend with FCFE. This made Gordon’s formula more versatile. 

This way we can use this formula for any stocks (whether it distributes dividend or not). 

Examples of intrinsic value calculation:

Best stocks must be undervalued!

How to check if the above stocks are undervalued or not?

Just Four steps:

  • Convert Intrinsic Value (IV) to “IV per share”. 
  • Note Current Market Price of stock. 
  • Compare IV per share with Market Price. 
  • If IV/share > Market price, stock is undervalued. 

How to convert IV to IV/share?

IV per share = IV / Nos of shares outstanding

The “number of shares outstanding” is available in companies annual report. 

Or else, this value is also published by moneycontrol. 

Best Stocks to Buy in India - nosofsharesoutstanding

Compare IV per share vs Market Price

What does the above values in table suggest?

As market price of all three stocks A, B, C is higher than its intrinsic value, these stocks are overvalued. 

Hence, neither Stock A, B nor C will qualify as the best stock to buy. 

Conclusion.

Indian stock market has thousands of stocks available for trading. These stocks are bought and sold each day by hundreds of people. But important is to realise that, picking any random stock is not a good investment.

We cannot buy any other stock. Out of all stocks that we have in the market, only few can qualify as a good-buy. Hence stock picking must be done with extreme care.

The focus should be to buy, “only” the best stocks offered to us by the market. To a beginner, it can be overwhelming to identify best stocks to buy.

So how to pick the best stocks?

Best stocks are not available off the shelf. Best stocks are often hidden in the heap of other stocks.

One must learn to screen their best stocks from this heap. This is what is called as stock screening.

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, 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?

See the below pictorial representation.

Best Stocks To Buy - Screener

When a person undertakes the process of intrinsic value estimation of a stock, he/she actually is following the above 2 screening criteria. How?

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. 

Final Words…

Success in life cannot be borrowed.

The same theory is applicable in stock investing.

We cannot borrow others stock-advice and become successful.

Why borrowed advice does not help in stocks?

People who really can identify best stocks, do not care about publishing it for public.

People who publish are either not reliable or their news reach us too late.

So how a common man can buy best stocks?

Do not wait for TV, Print media or internet to suggest you best stocks.

Start calculating intrinsic value of stocks by yourself as explained here. 

Best Stocks to Track and Buy in Current Market Scenario?

What is the current market scenario? Falling Nifty and Sensex.

Best Stocks to Buy in India 2018 -Nov

Since last one month Nifty index has fallen by 7.34%. In the same period, Sensex fell by 7.21% (from 36,526 to 33,891).

Note: On 28-Aug’18, Sensex was at 38,800 levels. 

So, if we will take performance of Sensex in last 60 days, it has fallen by almost 13.5%.

In last 59 days, Nifty has fallen by 13.5%.

In terms of performance of country’s main indices (Sensex and Nifty), fall of 8% and 13% odd percentage points is huge. 

Why I say huge, because of its impact on individual stocks. 

Here is a list of my Top 10 stocks which looks interesting. Why? Because of the following characteristics:

  • High Return in Last 3 Years.
  • Negative Returns in Last 1 Years.
  • Current Price more than 20% below 52 week high price.
  • Low Valuation Ratios (P/E and P/S)

(Updated on: 14-March’2019)

SLCompanyPricePossible Discount *Last 1 Year Return (%)Last 3 Year Return (%)P/EPrice / Sales
1HEG 2,209.1-55.42%-23.16148.872.791.35
2Phillips Carbon Black 179.4-37.50%-17.14113.557.970.92
3Tata Metaliks 665.1-24.81%-10.9990.519.730.8
4Graphite India 459.8-59.20%-35.187.63.171.37
5Sudarshan Chemical Inds. 345.4-45.58%-16.7957.4314.761.65
6Gujarat Narmada Valley Fert309.6-38.91%-25.7357.134.910.77
7Rain Industries 112.7-72.20%-71.3556.296.530.27
8Jindal Stainless (Hisar) 92.2-53.76%-49.2447.457.430.25
9Gujarat Alkalies & Chemicals 522.0-34.15%-26.4446.685.181.26
10NOCIL 142.3-38.80%-27.146.5711.82.18
11Meghmani Organics 64.1-43.94%-29.2542.26.930.81
12L&T Finance Holdings 145.1-23.43%-11.8538.4313.912.36
13KNR Constructions 256.9-24.37%-13.0635.3514.41.77
14JSW Steel 286.3-33.05%-5.7534.127.590.83
15Future Consumer 46.1-26.83%-23.0930.6102.42
* Possible Discount = Current Price is how much below the 52W High Price?

These are all great stocks, and that is why they are included in the watch list.

May be due to temporary problems, these stocks are seeing major price correction. 

This is the moment of time, when price of great companies, may fall below their intrinsic values.

Hence, I prefer to do a deeper analysis of my shortlisted stocks using my stocks analysis worksheet

Handpicked Articles:

  1. Top 20 Stock Market Investment Tips for Beginners.
  2. Fundamentally Strong Stocks in India 2018.
  3. How to Invest in Stocks.
  4. Value investors avoid stocks like these
  5. Best Large Cap Stocks in India.
Hi. I’m Mani, I’m an Engineering graduate who in pursuit of financial independence, has converted into a full time blogger. After working in the corporate world for almost 16+ years, I bid it adieu....read more

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Disclaimer: None of the articles, products etc should not be treated as investment advice. All types of content provided here are for casual reference and for informational purposes only. It should not be considered financial advice. You should consult with your professional expert before application of any information provided here.

2 Comments

  1. 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: https://www.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

  2. 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 ..

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