Stocks to buy

The Indian markets have been in focus with the recent Hindenburg Research report on the Adani Group. The report alleges that the group has pulled off the “largest con in corporate history.” The battle continues with a detailed response from the Adani Group. However, the resulting correction in Indian stocks seems to have presented an excellent opportunity to grab some undervalued stocks in India.

Leaving aside the Adani controversy, there is little doubt that India is among the most attractive emerging markets. Factors such as favorable demographics and a swelling middle class are long-term GDP growth drivers. Government policies have also been conducive to business growth, focusing on infrastructure, manufacturing, and green energy.

I also believe that over the next five to ten years, the Indian markets will outperform developed market equities. Of course, it does not imply that investors go overweight India. However, even a 10% to 15% allocation can serve as a portfolio catalyst.

Let’s talk about three undervalued stocks in India to buy at current levels.

MMYT MakeMyTrip $29.23
RDY Dr. Reddy’s Laboratories $53.64
HDB HDFC Bank $67.26

MakeMyTrip (MMYT)

Source: OPOLJA / Shutterstock.com

India has one of the highest household savings rates in the world. Even after declining slightly, the overall financial savings rate of households in India was 10.8% in 2022. With rising income and a swelling middle-class, it’s likely that consumption expenditures will accelerate. By 2030, it’s expected that there will be 142 million additional middle-income households in India. One industry that’s certainly positioned to benefit is travel and tourism.

MakeMyTrip (NASDAQ:MMYT) is a top pick from this sector. The online travel company has witnessed a healthy recovery after the pandemic, which is likely to be sustained. Currently, the company has a wide array of products and services. These include air ticketing, holiday packages, bus and train bookings, etc.

It’s worth noting that between the years 2018 and 2021, MakeMyTrip reported operating losses. However, the company is currently profitable and margin expansion is likely, as the company’s share of holiday packages increases in proportion to its overall revenue. Overall, MMYT stock is positioned to deliver multibagger returns over the next five years.

Dr. Reddy’s Laboratories (RDY)

Source: Hernan E. Schmidt / Shutterstock.com

Dr. Reddy’s Laboratories (NYSE:RDY) is another name to consider among undervalued stocks in India. After trading sideways for the last 12 months, the stock seems poised for a breakout. The first reason is its valuation, with RDY stock trading at an attractive forward price-earnings ratio of 20.6-times. This stock also has a 0.7% dividend yield.

Another reason to be bullish on this pharmaceutical company is its sustained growth in revenue and EBITDA. Via a combination of organic growth and acquisitions, Dr. Reddy has guided for double-digit revenue growth.

The company already has a robust presence in the generics market, and has been increasingly investing in research and development. For the first half of 2022, the company’s R&D investment was 8% of sales. Once the company’s proprietary product pipeline is commercialized, growth can accelerate along with margin expansion.

Dr. Reddy’s also has a wide geographical presence. Besides India, the company has a presence in the United States, Europe, Russia, China, and Brazil. With a broad addressable market and a swelling portfolio of affordable products, the outlook for Dr. Reddy’s is positive.

HDFC Bank (HDB)

Source: Shutterstock

The banking sector is often considered the backbone of economic growth. For investors bullish on the Indian growth story, holding one of the few leading banking stocks is essential. HDFC Bank (NYSE:HDB) is possibly the best pick from the sector.

At a forward price-earnings ratio of 22.5-times, HDB stock looks attractive. In the last 12 months, the stock has traded relatively sideways. However, I believe that once the bank completes its merger with HDFC (the biggest mortgage lender in India), the stock will trend higher.

Currently, HDFC Bank is the largest private sector bank in India, boasting more than 70 million customers. Notably, the bank has some of the best net non-performing assets numbers in the Indian banking system.

With significant potential for expansion in semi-urban and rural India, the company’s customer base will continue to swell. At the same time, its core banking business will likely remain attractive with a healthy net interest income margin.

On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.

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