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4 Stocks that Could be a Risky Investment

Apr 15, 2023

4 Stocks that Could be a Risky Investment

Investing in stocks always carries some kind of risks. However, certain stocks are considered riskier than others.

These are stocks of companies that are usually saddled with a mountain of debt, are frequently loss-making and sport weak balance sheets.

However, despite fundamental problematic businesses, they enjoy high valuations owing to different factors.

One of the leading reasons is speculation created by retail investors or social media platforms that can drive up stock prices.

While some investors may be betting on the company's ability to turn things around, others may overlook or underestimate the company's fundamental problems or risks in favour of overly optimistic projections.

Identifying such risky stocks can be challenging, but we highlight four stocks that carry high levels of risk.

#1 Vodafone India

First on our list is Vodafone India.

Vodafone is India's third largest mobile operator (by subscribers) in India, with over 240 m subscribers. It is also the third largest operator by revenue.

The telecom player tickmarks the entire checklist of a typical risky business. These characteristics include high debt levels, poor performance and a loss-making business.

In the last six years, the company has lost half its subscriber base and market share to the intensifying competition.

Despite the poor state of the business, the stock enjoys a lofty valuation, trading at an EV/EBIDTA multiple of 14.4 times. This is likely due to investor optimism about a potential recovery of the business.

But turning around the business seems like an insurmountable task, given the capital-intensive nature and the competitive landscape of the telecom sector in India.

Vodafone Financial Snapshot (2018-2022)

  2017-2018 2018-2019 2019-2020 2020-2021 2021-2022
Revenue Growth (%) -20.0% 31.5% 22.5% -8.6% -8.8%
Operating Profit Margin (%) 23.1% 13.1% 35.8% 41.3% 42.1%
Net Profit Margin (%) -15.9% -39.9% -165.1% -106.0% -73.3%
Return on Equity(%) -17.3% -34.1% -226.7% 0.0% 0.0%
Source: Ace Equity

The company has been operating at a loss for some time now. And the continuous investments in the telecom sector over the 4G/5G spectrum rollouts have made it tough for the business to sustain itself over the long term.

To know more about the company, check out its financial factsheet and latest financial results.

#2 Tata Motors

Next on our list is Tata Motors.

Tata Motors is India's leading automobile player, with a 45% market share in the commercial vehicle (CV) segment. The company is also present in passenger vehicles (PV) in India (with a market share of 18%), where it has turned around its business with a slew of successful launches.

Tata Motors is well-placed to capitalise on the growing consumer preference for electric vehicles, leading the market with a share of more than 80%.

Apart from the Indian market, Tata Motors also caters to the global luxury auto space with its Jaguar Land Rover (JLR) brand.

So what makes this leading automobile player a risky stock?

Not only does the company sport a debt-ridden balance sheet, but it has also been operating at a loss since the financial year 2019.

While Tata Motors boasts a strong franchise in the domestic CVs segment, the JLR portion of the business has been losing its share in the international market.

The tepid demand growth from JLR in tandem with the recent semiconductor shortages and the rising commodity prices have wiped away profits in the past.

Tata Motors Financial Snapshot (2018-2022)

  2017-2018 2018-2019 2019-2020 2020-2021 2021-2022
Revenue Growth (%) 9.9% 2.7% -13.6% -3.5% 10.7%
Operating Profit Margin (%) 12.1% 9.2% 8.0% 14.0% 10.0%
Net Profit Margin (%) 2.3% -9.6% -4.2% -5.2% -4.0%
Return on Equity(%) 8.9% -37.2% -17.9% -22.2% -22.5%
Source: Ace Equity

While this bogged the profits down, it didn't break the investor spirit. The stock is trading at an EV/EBIDTA multiple of 8.6 times.

The high valuations came after the company swung back to profits in the quarter ending December 2022 after seven consecutive quarters of losses.

This change of fortune was led by a strong order book, better semiconductor chip supply, tempered commodity prices, along with an improved product mix. Also, the demand for PVs in general, and JLR products in particular, has remained strong in key markets globally.

Apart from this, its India CV (commercial vehicle) business has continued to see cyclical recovery and has a positive outlook.

While the management seems to be working hard to turn the tide, concerns over the continued strong demand (for JLR) in a weak macroeconomic environment combined with hefty interest payments, pose a big risk to the turnaround in the business.

To know more about the company, check out its financial factsheet and latest financial results.

#3 Interglobe Aviation (Indigo)

Third on our list is Interglobe Aviation (Indigo).

InterGlobe Aviation is the operating company for IndiGo, India's largest passenger airline in terms of domestic market share (55%). It is the flagship company of InterGlobe Group, which enjoys diverse business interests across aviation, hospitality, real estate, travel commerce, IT/BPO, etc.

It operates on an LCC (low-cost carrier) business model, offering no-frills air-commute to passengers in the domestic and international sectors.

Indigo possesses all the traits typically associated with a risky stock such as significant debt, weak financial performance, unprofitable operations, and an overvalued market position.

The airline was profitable right up until the pandemic hit. And now, even though the business is booming, the airline has generated a profit in just two out of eight quarters.

Indigo Financial Snapshot (2018-2022)

  2017-2018 2018-2019 2019-2020 2020-2021 2021-2022
Revenue Growth (%) 23.6% 24.4% 25.0% -56.6% 64.5%
Operating Profit Margin (%) 17.3% 4.1% 15.7% 7.2% 5.0%
Net Profit Margin (%) 9.7% 0.6% -0.7% -39.7% -23.8%
Return on Equity(%) 41.7% 2.3% -3.7% -195.4% 0.0%
Source: Ace Equity

Despite these issues, the investors haven't written off the Indigo stock. The stock is trading at an EV/EBITDA multiple of 20.6 times.

The company faces serious challenges moving forward, most of which centre around the size of its debt on the balance sheet and the competitive intensity.

Apart from this, the capital-intensive nature of the business and the surging fuel prices raise doubts about the company's ability to turn the business around.

To know more about the company, check out its financial factsheet and latest financial results.

#4 Mahanagar Telephone Nagar Limited

Last on our list is Mahanagar Telephone Nagar Limited (MTNL).

MTNL is a state-owned telecommunications service provider in India. It primarily operates in the metropolitan cities of Mumbai and New Delhi, catering to both residential and commercial customers.

The stock is at high-risk considering that MTNL faces competition from private telecom service providers offering affordable 4G mobile, fixed-line, and fibre-to-the-home services.

Moreover, the company's operations are limited to Mumbai and Delhi, which restricts its ability to expand into other cities and compete with pan-India telecom service providers.

Apart from this, the telecom tariffs in India have declined due to cut-throat competition, affecting the industry's revenue.

MTNL Financial Snapshot (2018-2022)

  2017-2018 2018-2019 2019-2020 2020-2021 2021-2022
Revenue Growth (%) -12.0% -15.4% -14.9% -19.2% -5.1%
Operating Profit Margin (%) -16.7% -32.7% -46.6% 39.4% 27.7%
Net Profit Margin (%) -120.2% -162.5% -227.5% -177.4% -226.5%
Return on Equity(%) 0.0% 0.0% 0.0% 0.0% 0.0%
Source: Ace Equity

This has led to a loss-making business burdened with high levels of debt and a weak balance sheet. But the stock continues to trade at a high valuation. At present, the stock is available at an EV/EBIDTA multiple of 129.7 times.

The endless issues testify to growing concerns about the telecom player's ability to turn around the business, making the stock a risky bet.

To know more about the company, check out its financial factsheet and latest financial results.

In conclusion

Investors must exercise caution when investing in the stock market as it always involves a certain degree of risk.

A great way to avoid that is by doing your due diligence before making any investment decisions.

Conducting thorough research and analysis can help you avoid risky stocks with high valuations, which can result in significant losses for investors.

Investment in securities market are subject to market risks. Read all the related documents carefully before investing

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Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...


What is Risky Stocks?

Risky stocks are companies that are expensively valued, have weak balance sheets, high debt, and are frequently loss making.

How do you know if a stock is expensive?

One of the quickest ways to gauge whether a stock is expensive is to compare its valuation ratios to the rest of its industry or its historical average. If it is trading above these numbers, it is expensive.

Which are the Risky stocks in India right now?

As per Equitymaster's Stock Screener, here is a list of risky stocks in India right now

These companies have been ranked as per their reported losses of latest financial year.

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