The 5 Most Overvalued Stocks in India. Will these Stocks Crash in 2024?

When it comes to investing, a commonly question asked is, 'Is this the right price to enter the market?'

While that depends on many factors, you can determine whether you are overpaying for a stock with two simple ratios.

The first is price to earnings (P/E) ratio and the other one is price to book value (P/BV).

Both these valuation ratios help determining whether a share is overvalued or undervalued.

A high ratio implies the company is overvalued.

Let's look at the most overvalued stocks in India in the current market.

We have shortlisted these companies using Equitymaster's Stock Screener.

#1 Trent

First on the list is Trent, a subsidiary of Tata Group.

The company operates retail stores under the brand names Westside, Zudio, Star, and Landmark.

It shouldn't be a surprise that a Tata Group company is on the list. Tata is one such group that has always managed to capture investor's attention consistently as the group's shares continue to rally.

In case of Trent, shares of the company have zoomed over 50% since January 2023.

Trent shares are currently trading at a price-to-earnings ratio (P/E) of 197.2x, as against 115.3x as of 31 March 2023.

The price to book value (P/BV) has also gone up to 26.9x from 17.5x in March 2023.

The primary reason for such high valuations could be attributed to a strong set of numbers reported by the company in recent quarters.

In June 2023 quarter, the revenue, net profit and even the store count improved significantly compared to the previous financial year.

Trent also laid out plans to further increase its store count in the current financial year.

While the valuations have gone up, the earnings yield of the company took a hit. Earnings yield is a stock's expected return.

For Trent, the current earnings yield is 0.5%. This means that for every Rs 100 worth of shares owned, the shareholders can expect to earn Rs 0.5 from their investment in the company.

This is much lower than what a bank fixed deposit (FD) pays.

The company's financials have been improving in the last five years, with revenue and net profit growth CAGR coming in at 26.3% and 32.9%, respectively.

However, the long-term debt has almost doubled during the same period. The debt-to-equity ratio is at 0.2x.

Although the company's financial performance is improving, it is important to keep an eye on the debt, given Trent's rapid expansion plans.

To know more, check out Trent's financial factsheet and latest quarterly results.

#2 Adani Green Energy

Second on the list is Adani Green.

Despite falling over 50% since 2023 due to the Adani - Hindenburg crisis and poor quarterly results, the company still remains one of the most overvalued stocks in the market.

Adani Green shares are currently trading at a P/E and P/BV of 153.5x and 24.2x, respectively. Compared to the industry average P/E of 24.1x and P/BV of 2.3x, the shares of Adani Green are highly overvalued.

High valuations imply low earnings yield, and the current earnings yield of the company is 0.6%.

Being one of the largest renewable energy companies, Adani Green was always under investor's radar, which explains the high valuations.

Nevertheless, the company's revenue and net profit have grown at a CAGR of 34.6% and 74.9%, respectively, in the last five years.

Its return on equity (RoE) and return on capital employed (RoCE) currently stand at 16.5% and 8.7%, respectively.

Although the company's debt to equity fell from 37.1x to 8.5x in the financial year 2023, the total debt on its books rose.

At the end of financial year 2023, the company's long-term debt was Rs 500 billion (bn) as against Rs 441 bn the year before.

The company plans to invest US$ 20 bn (Rs 1.63 trillion) over the next decade to increase its renewable energy target.

If Adani Green plans to fund this expansion through debt, then the debt on its books will further increase.

A high debt always deteriorates the quality of a business, which ultimately affects the performance of the stock on the bourses.

Hence, it is always best to proceed with caution when dealing with such stocks.

To know more, check out Adani Green's financial factsheet and latest quarterly results.

#3 Apollo Hospitals Enterprise

Third on the list is Apollo Hospitals.

It is Asia's foremost integrated healthcare service provider and is present across the healthcare ecosystem, including hospitals, pharmacies, primary care, and diagnostic clinics.

No wonder shares of the company are on an upswing even in the post-pandemic period.

Shares of Apollo Hospitals have grown 13.7% since January 2023.

They are currently trading at a P/E of 101.9x, as against a P/E of 67x in March 2023. The price to book value (P/BV) has also gone up to 11.6x from 9.7x in March 2023.

The industry average P/E and P/Bv stand lower at 45.8x and 7.4x, respectively.

Apollo Hospitals is the first and only hospital company to be included as a member of the Nifty 50 stocks list since March 2022.

To add to this, strong and consistent growth in financial performance in the last few years has kept the valuations high.

The revenue has grown at a CAGR of 11.6% in the last five years. The net profit also grew at a CAGR of 34.8% during the same period.

Its debt-to-equity ratio also came down from 0.9x to 0.3x during the last five years.

However, the company plans to incur a capex of Rs 5-6 bn annually for the next 2-3 years. If it plans to fund this expansion through debt, then the financial obligations of the company in the form of interest payments will increase, affecting its profitability.

To know more, check out Apollo Hospital's financial factsheet and latest quarterly results.

#4 Pidilite Industries

Next on the list is Pidilite Industries.

India is the sixth largest producer of chemicals in the world, and at the pace at which it is growing, it could be the next chemicals manufacturing hub.

With the chemical industry expected to grow at 11% CAGR during 2021-27 on the back of rising domestic consumption and changing consumer preferences, Pidilite Industries is a primary beneficiary.

The company is a leading manufacturer of adhesives and sealants, construction chemicals, craftsmen products, and polymer emulsions in India. It is home to several leading brands, including M-Seal, Fevikwik, Fevistik, and Dr. Fixit.

The company trades at a P/E multiple of 88.8x and a P/BV multiple of 16.3x at the current price.

The industry average P/E and P/Bv are 27x and 3.1x, respectively.

The primary reason behind such high valuations is the company's dominant position (market share of 65%) in the consumer adhesive and sealant market and good growth in the new categories, such as waterproofing and tile jointers.

In the last five years, the company's revenue and net profit have grown at a CAGR of 10.4% and 6.8%, respectively.

However, the net profit margins fell from 13.1% to 10.1% during the same period.

Pidilite Industries is investing to get ready for its next phase of growth. It is undertaking 29 capacity-building projects, of which ten will already completed by the end of July 2023.

It plans to remain debt-free and fund its capex through internal accruals.

Going forward, although its expansion plans will drive growth, a fall in net margin can affect the company's profitability.

To know more, check out Pidilite Industries' financial factsheet and latest quarterly results.

#5 Havells

Last on the list is Havells.

The company is a leading fast-moving electrical goods (FMEG) company with market dominance across a wide spectrum of products, including home appliances, industrial and domestic circuit protection devices, and commercial and industrial appliances.

Its shares have zoomed by over 20% since January 2023.

The shares of the company are currently trading at a P/E of 78.5x, as against 72x in March 2023.

Its price-to-book value (P/BV) has also gone up to 12.6x from 11.7x in March 2023.

The industry average P/E and P/Bv stand at 59.8x and 10.1x, respectively.

Presence in diversified industries, established market position, growing scale of operations and improving financial performance are the primary reasons behind such high valuations.

In the last five years, the revenue of the company has grown at a CAGR of 10.9%, driven by volume growth. The net profit also grew at a CAGR of 6.3%.

It is also a debt-free company, giving it some room to raise additional funds through debt for its expansion plan.

Currently, it is funding all its capex (around Rs 6 bn) for the construction of a cable manufacturing unit through internal accruals.

Going forward, despite the growth prospects looking strong, the company is highly susceptible to volatility in the prices of raw materials, which nearly account for 80% of total operating costs. This can affect its net profit margin in the short term.

To know more, check out Havells' financial factsheet and latest quarterly results.

Conclusion

Warren Buffett said 'It's far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.'

It basically means not every undervalued company is good and not every overvalued company is bad.

A fundamentally strong company can be overvalued in the short term. However, in the long term the business will catch up to the stock price.

Hence before checking the valuations of the company, check the fundamentals and then do your analysis on the valuations.

A fundamentally strong company will fetch you higher returns in the long term than an undervalued company with weak fundamentals.

Happy investing!

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...