Value investing has the longest documented history of any factor. Benjamin Graham was writing about it in the 1930s. Warren Buffett has practised it for 70 years. Fama and French formalised it academically in 1992. And yet, value spent the entire decade of 2010 to 2020 underperforming growth stocks in the US by a historic margin, leading many to declare it dead.
It wasn't dead. It came roaring back in 2022 when interest rates rose and growth stock multiples collapsed. The same pattern has played out in Indian markets. Value is the most patience-testing factor in existence | and one of the most rewarding for those who stick with it.
This module covers what value really is, how to measure it properly in Indian markets, why cheap isn't always cheap, and how to use value intelligently as part of a systematic strategy.
What value investing actually means
At its core, value investing is simple: you're paying a low price relative to the underlying fundamental worth of the business. The more you pay above intrinsic value, the more expected return you're giving up. The less you pay, the more return you're setting yourself up for | as the price mean-reverts to fair value over time.
The academic foundation: Fama and French
In 1992, Fama and French showed that book-to-market ratio (B/M | the inverse of P/B) was one of the most powerful predictors of stock returns. High B/M stocks (cheap relative to book) earned significantly higher returns than low B/M stocks (expensive relative to book) over the following period.
Fama-French Data Library — HML (Value) Factor ReturnsTheir explanation: value stocks are riskier | they tend to be financially distressed companies, and their higher returns compensate investors for bearing distress risk. The behavioural explanation: investors overpay for growth and underpay for boring, cheap stocks due to extrapolation bias. Both explanations are likely partially true.
How to measure value in Indian markets
Value has many faces. No single metric captures it perfectly. Here are the primary measures used in systematic value strategies, with India-specific context:
| Metric | Formula | Strengths | Limitations in India |
|---|---|---|---|
| P/B (Price-to-Book) | Market Price ÷ Book Value/Share | Original Fama-French signal. Stable, comparable across sectors | Misleading for asset-light businesses (IT, pharma). Goodwill inflation in acquirers. |
| P/E (Price-to-Earnings) | Market Price ÷ EPS | Most widely used, intuitive | Cyclical stocks distort P/E at earnings peaks/troughs. Use normalised earnings. |
| EV/EBITDA | Enterprise Value ÷ EBITDA | Capital-structure neutral. Best for capital-intensive sectors | Requires computing EV (adds debt, subtracts cash). Less available in screeners. |
| Dividend Yield | Annual Dividend ÷ Share Price | Simple, requires actual cash payment | Indian companies vary widely in payout policy. Many high-quality firms retain capital. |
| P/FCF | Market Cap ÷ Free Cash Flow | Most honest valuation | real cash, not accounting earnings | FCF is volatile year-to-year. Requires multi-year average for stability. |
The most robust value signals use a composite of multiple metrics | P/E, P/B, and EV/EBITDA weighted together. No single metric is reliable alone. A company can look cheap on P/B but expensive on EV/EBITDA (a bank, for example). Using a composite reduces the noise in any single signal.
The value trap: cheap doesn't always mean opportunity
The most dangerous pitfall in value investing is the value trap | a stock that appears cheap on traditional metrics but is cheap for good reason. The business is permanently impaired, not temporarily out of favour.
Indian examples of value traps:
- Yes Bank | traded at 0.3x book in 2019 after years of cheap-looking P/B. But the book value itself was inflated with bad loans. The true book was much lower | or negative.
- DHFL | appeared cheap on P/E for years before the fraud was exposed. Low valuation reflected risk that most investors didn't price correctly.
- Telecom sector 2018 to 2019 | multiple operators looked cheap by any metric. But the underlying economics had fundamentally changed post-Jio. Only Bharti Airtel survived intact.
How systematic value strategies avoid traps: by combining value signals with quality filters. Stocks that are cheap AND financially healthy (low debt, profitable, stable earnings) are genuine value opportunities. Stocks that are cheap AND financially stressed are potential traps.
SEBI — Regulatory filings and disclosures (source for financial health checks) NSE — Corporate financial results (value analysis source data)The decade of underperformance | and what it tells us
From 2010 to 2020 in the US, value underperformed growth by an extraordinary margin. Technology companies compounded at 25%+ annually while traditional value sectors stagnated. This was the longest and deepest drawdown of the value premium in recorded history.
Three reasons this happened:
- Ultra-low interest rates | low rates disproportionately benefit long-duration assets (growth stocks). When discount rates fall, the present value of far-future cash flows rises more than near-term cash flows, favouring growth over value.
- The rise of intangibles | traditional book value captures physical assets but misses brands, software, and intellectual property. Many "expensive" growth stocks were actually cheap when measured against their true economic assets.
- Genuine disruption | some traditional value sectors (retail, media, banking) faced genuine structural threats from technology, not just cyclical underperformance.
Value in India behaves differently than in the US. Indian markets have a larger proportion of capital-intensive sectors (banking, infrastructure, commodities) where traditional value metrics are more meaningful. The technology sector is smaller relative to the overall market. And Indian corporate governance is more variable, making quality filters especially critical when screening for value.
Value in Indian markets | the data
RupeeCase's Multi-Asset and Quality strategies use value metrics as one input in a composite factor score. Pure value (buying only cheap stocks) is risky in Indian markets due to governance issues and value traps. Combining value with quality | buying cheap stocks that are also financially healthy | significantly improves the signal. The factor screener lets you rank Nifty 500 stocks by any combination of these signals.
Glossary
Sources & further reading
- → Fama-French Data Library — HML (Value) Factor
- → NSE Indices — Nifty Value 20 Official Page
- → NSE — Corporate Financial Filings
- → Fama, E. & French, K. (1992). The Cross-Section of Expected Stock Returns. Journal of Finance.
- → Graham, B. & Dodd, D. (1934). Security Analysis. McGraw-Hill. (The original value investing text)
- → Asness, C. et al. (2000). Value and Growth Investing: Review and Update. Financial Analysts Journal.
Quick check, Module 3.2
Gordon Growth Justified P/E
Compare a stock's traded P/E to the value the dividend discount model would assign. The gap is your over- or under-valuation signal.