Hidden Gems: How Fallen Stocks Can Turn Into Big Wins for Investors?

Synopsis: Markets have a habit of overreacting. Stocks are often punished brutally for short-term setbacks, even when the core business remains sound. History shows that when fear peaks and expectations collapse, patient investors can find powerful comeback stories hiding in plain sight across beaten-down sectors.

Markets often punish stocks harshly, even when the underlying business remains strong. From tech platforms to pharma and auto suppliers, several once-hyped names have seen sharp declines, leaving investors wondering whether the worst is over or if more pain lies ahead. Can these beaten-down stocks actually turn into big wins for those who are willing to look past short-term setbacks?

Historic Examples

Zomato

Zomato’s post-IPO crash was not because the business deteriorated overnight, but because the stock listed at a valuation that assumed years of flawless execution in advance. At the time of listing, Zomato was a loss-making company with negative cash flows, operating in a highly competitive food delivery market with uncertain long-term margins. As investor preference shifted from growth-at-any-cost to profitability and cash flow, loss-making internet companies fell sharply across markets, and Zomato was no exception. The mismatch between lofty expectations and near-term financial reality led to a steep derating.

The fall was further intensified by doubts over food delivery unit economics, lack of a clear second growth engine initially, and selling pressure from early investors after lock-in expiries. As the narrative flipped from “tech disruptor” to “cash-burning platform,” sentiment collapsed and the stock lost over 60 percent from its listing price levels.

Ironically, this correction laid the foundation for recovery, forcing Zomato to focus on cost discipline and profitability, while the Blinkit acquisition added a credible second engine. Once earnings visibility improved, the same stock that was widely written off turned into one of the market’s biggest comeback stories, with the stock giving returns of over 500 percent. 

Larus Labs & Dr Lal Path Labs 

Laurus Labs and Dr Lal Path Labs followed a similar boom-bust cycle during Covid, where extraordinary demand led to extraordinary stock price gains that were never sustainable in a normalised environment. Laurus Labs surged nearly 800 percent as Covid-related APIs and formulations drove earnings to record highs, while Dr Lal Path Labs climbed over 150 percent as diagnostic testing volumes exploded. 

However, as Covid demand faded, earnings normalised sharply, leading to steep corrections of around 60 percent in Laurus Labs and over 50 percent in Dr Lal Path Labs. Investors initially treated this earnings reset as a permanent deterioration, triggering heavy sell-offs well beyond the actual damage to core businesses.

Over time, it became clear that while Covid-era profits were transient, the underlying franchises were intact. Laurus Labs continued to build scale in CDMO and non-Covid APIs with a strong balance sheet, while Dr Lal Path Labs retained its leadership in diagnostics with expanding test portfolios and steady long-term demand. As earnings stabilised and growth visibility returned, sentiment gradually improved, allowing Laurus Labs to deliver over 250 percent returns from its lows, while Dr Lal Path Labs recovered meaningfully despite remaining below its Covid peak.

Paytm

Paytm’s collapse after listing was driven by a combination of valuation excesses and severe regulatory setbacks rather than a sudden breakdown in its core platform. The stock fell nearly 80 percent from its IPO price as investors questioned the sustainability of a payments-led model where UPI transactions generate no direct revenue. These concerns intensified after the Reserve Bank of India imposed restrictions on Paytm Payments Bank over compliance lapses, including curbs on onboarding new customers and limits on wallet and deposit-related activities. 

The recovery began once fears of a complete franchise breakdown eased and Paytm demonstrated better cost discipline and a clearer path toward profitability through higher-margin businesses such as merchant subscriptions, loan distribution and financial services. While regulatory overhangs remained, the core payments ecosystem and merchant network stayed largely intact, allowing operations to stabilise. With expectations reset to extremely pessimistic levels, even gradual improvement in losses and execution triggered a sharp re-rating. From those lows, Paytm delivered nearly 280 percent returns, highlighting how regulatory shocks can temporarily destroy sentiment far more than fundamentals in quality platforms.

Why Does This Happen?

When valuations are very high, even small negative news can hit stock prices hard. In such times, the market is not valuing the company based on what it earns today, but on what it is expected to earn many years into the future. So when growth slows a bit, margins come under pressure, or regulations change, that future picture cracks. Investors panic and rush to sell together. Prices then fall much more than the actual damage to the business, not because the company is broken, but because expectations were too high to begin with.

As the stock keeps falling, valuations start becoming reasonable again. What earlier looked like a permanent problem begins to look like a temporary slowdown. Selling driven by fear slowly dries up, and the market stops assuming the worst. At this point, the company does not need to deliver spectacular results. Even steady performance or small signs of improvement are enough to change how investors feel, because expectations have already been pushed very low.

This is where smart investors usually step in. Instead of focusing on recent bad news, they look at the quality of the business. Strong management, a healthy balance sheet and long-term demand give confidence that the company can survive a rough phase. When the core business remains solid and demand is delayed rather than destroyed, time works in the investor’s favour. As confidence returns and valuations improve, these beaten-down but strong companies often deliver the best returns.

Future Opportunities

ER&D Sector

KPIT Technologies’ nearly 35 percent stock correction reflects a mix of slowing growth, macro disruptions, and structural shifts in the automotive software sector. Revenue growth, which exceeded 40 percent in FY24, slowed to under 20 percent in FY25, while US-China tariff tensions and a weak European auto market forced OEMs to delay EV programs and reduce discretionary spending. Rising competition from Chinese EV makers and KPIT’s transition to solution-led, platform-based services further delayed revenue conversion, creating near-term earnings softness despite continued deal wins.

Tata Technologies’ decline since listing has been driven by a mix of high initial valuations, slowing growth and sector-wide headwinds. The stock listed amid strong ER&D and EV optimism, but post-listing growth fell sharply, leading to a valuation re-rating. Delays in converting large deals into revenue, margin pressure from investments and one-off costs, and a slowdown in global automotive ER&D spending weighed on sentiment. High dependence on the auto sector and a few key clients further amplified concerns.

JP Morgan has maintained its target for KPIT Technologies at Rs. 1,400 while raising the target for Tata Technologies to Rs. 710 from Rs. 570, reflecting an improving demand environment in the auto ER&D sector over the past three months. The upgrade is largely driven by the resolution of trade deals and easing of tariff-related concerns, which have helped restore investor confidence. Additionally, OEMs are gradually restarting R&D programs that were previously on hold, supporting near-term growth prospects for both companies.

The ongoing investments are focused on hybrid vehicles, autonomous driving systems, and connected car technologies, although the electric vehicle segment remains sluggish. Recovery in auto R&D is geographically uneven, with Europe leading, followed by Asia-Pacific, while the United States continues to lag and is unlikely to see meaningful improvement for at least two more quarters. As a result, companies with strong European exposure, such as KPIT Technologies and Tata Technologies, are best positioned to benefit from this gradual resurgence.

Auto Ancillary 

Sona Comstar’s stock has been under pressure for a prolonged period, falling nearly 40 percent from its recent highs, as the company faced a mix of operational, market, and financial challenges. Revenue recognition was delayed after a major European EV customer changed supply terms, while weaker demand from global EV clients weighed on sales. Material shortages, including China’s rare earth magnet ban, and broader supply chain disruptions affected production timelines and costs. Margins were also impacted by railway business integration and early-stage hybrid motor development. Despite these headwinds, Q2 showed signs of recovery, with improving sales and PAT growth hinting at a gradual turnaround.

Trade Brains has initiated a “Buy” rating on Sona BLW with a target of Rs. 550 per share, highlighting strong FY25 performance and robust long-term prospects. The company reported revenue of around Rs. 3,546 crore, up 12 percent year-on-year, with EBITDA of Rs. 1,102 crore at a 27.4 percent margin and net profit of Rs. 600 crore, up 16 percent. 

Its BEV segment now contributes 36 percent of revenue, growing 38 percent YoY, while global market share in differential gears and starter motors continues to rise. With a record Rs. 24,200 crore order book, 77 percent EV-linked, and strategic investments in the railway division, active suspension technology, and new plants, Sona BLW is well-positioned to benefit from the electrification and global mobility trend.

Tobacco 

Shares of tobacco companies fell sharply in trade on January 1 following the government’s announcement of a new excise duty on cigarettes. ITC dropped over 10 percent to Rs. 369.20. The Central Excise (Amendment) Bill, 2025, approved by Parliament in December, replaces the temporary levy on cigarettes and other tobacco products, paving the way for additional excise duties alongside the existing 40 percent GST. 

The finance ministry notified that the duty, ranging from Rs. 2,050 to Rs. 8,500 per 1,000 sticks depending on cigarette length, will take effect from February 1. Currently, taxes account for about 53 percent of retail prices, below the WHO benchmark of 75 percent aimed at curbing consumption. Analysts at ICICI Securities estimate the levy will increase overall costs by 22-28 percent for 75-85 mm cigarettes, which include roughly 16 percent of ITC’s volumes, translating into a 2-3 rupee per stick price increase.

Due to the uncertainty from the new excise duty, several brokerages have lowered their target price for ITC, citing a likely direct impact on sales volumes. Analysts suggest that ITC’s stock may recover only once the market is confident that the volume decline has stabilised. JPMorgan noted that ITC is expected to pass on the higher tax to consumers, meaning cigarette buyers will face increased prices. The brokerage also indicated that any stock upside may remain limited over the next six to nine months as investors await a bottoming of volume declines.

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