Is There Any Further Upside in India's Most Expensive Largecap Stocks?

• All intelligent investing is value investing - acquiring more than you are paying for. You must value the business to value the stock. - Charlie Munger

How can you say for sure that you are acquiring more than that for which you are paying?

One simple metric that investors usually look at is the Price to Book Value (P/BV) ratio.

This is because of two reasons...

• Simple and Effective Metric: The P/BV ratio is straightforward, i.e., easy to calculate and understand.
• Risk Assessment: The P/BV ratio measures financial stability by comparing market price to tangible assets. Low ratios often signal strong asset bases and a margin of safety in downturns.

Understanding the P/BV Ratio

There are two ways in which the price to book value ratio can be calculated.

Or alternatively...

A high P/BV ratio indicates the stock could be overvalued. It suggests that the market price is above the company's actual asset value and vice versa. This could signal a potential risk for value investors seeking stocks with limited upside.

The P/BV ratio is a vital metric especially when evaluating companies with substantial tangible assets like manufacturing, real estate, or banking.

In recent editorials, we looked at low price to book value smallcaps, low price to book value midcaps, and penny stocks with high book values.

In this article, we'll look at the top 5 Indian large-cap stocks that are trading above their book values.

These stocks are filtered using the Equitymaster stock screener.

This activity is conducted to find out whether there's any more upside left in India's most expensive stocks from a price to book value perspective.

Take a look...

#1 Nestle India

First on this list is Nestle India.

Nestle India is a subsidiary of Nestle S A (with a 62% stake) which is a Swiss multinational company (MNC).

It ranks among the top two players in most product categories, including milk products and nutrition, beverages, prepared dishes and cooking aids, chocolates, and confectionery.

The company has over 10,000 distributors and 5.2 million (m) outlets.

Nestle India's latest book value per share stands at Rs 41.4.

At the current price of Rs 2,226, this translates into a P/BV multiple of 54.3x. This suggests that the stock is trading at a heavy premium relative to its actual book value.

From a historical valuation perspective, Nestle India has commanded a median P/BV of 81.5x.

Here's a table showing the company's historical financials...

Financial Snapshot of Nestle India

Rs m, standalone	CY19	CY20	CY21	CY22	CY23
Net Sales	123,690	133,500	147,410	168,970	191,260
Growth (%)	10%	8%	10%	15%	13%
Operating Profit	29,260	32,020	35,620	37,060	44,710
OPM (%)	24%	24%	24%	22%	23%
Net Profit	19,680	20,820	21,180	23,910	29,990
Net Margin (%)	16%	16%	14%	14%	16%
Dividend (Rs/share)	342	200	200	220	182.5

Data Source: Screener.in

Nestle India is currently setting up its 10th manufacturing facility in Odisha. This will result in economies of scale, leading to lower production costs and higher profit margins.

It has also launched its first-ever 'direct to consumer' (D2C) platform - www.mynestle.in, that offers products manufactured by the company in India.

The company has launched 130 new products in the last seven years and new projects are in the pipeline. This will result in the diversification of revenue streams, expanding market reach, and increased brand visibility and awareness.

The Covid-19 lockdown in 2020 changed everything for Nestle as well as other legacy FMCG companies. When distribution came to a halt, Nestle, HUL, ITC, even Dabur, Marico and Emami, quickly put together D2C (direct to consumer) strategies.

It was a period when even retailers had little option but to embrace digitisation for stocking up inventory. That was the game-changer.

Nestle has now made big investments in technology, its own D2C brands and smart data-led strategies. The sector is expected to clock US$ 220 bn in revenue by 2025 and Nestle could be one of the biggest beneficiaries.

To know more, check out the Nestle India financial factsheet.

#2 Trent

Second on this list is Tata group company Trent.

Trent is engaged in the retailing of apparel, footwear, accessories, toys, games, food, grocery & non-food products through various of its retail formats/concepts.

The company is a part of the Tata group, with the group holding 37% (Tata Sons Pvt Ltd holds 32.45%).

The company operates 875+ stores which include:

1. Fashion Retailing (Owned Format)
2. Westside (39% revenue share): It offers apparel, footwear, accessories, cosmetics, gifts, etc.
3. Zudio (55% revenue share): It offers apparel, footwear, beauty, and cosmetics at affordable prices.
4. Utsa: It offers ethnic apparel, beauty products, and accessories.
5. Misbu: Earlier known as Landmark, this brand offers beauty and fashion accessories targeted at Gen Z and millennials.
6. Samoh: The brand offers luxurious occasional and ethnic wear.
7. Fashion Retailing (Alliances) - Zara and Massimo Dutti
8. Grocery Retailing - Star: The brand offers FMCG, staples, and fresh offerings (vegetables, fruits, dairy & non-veg products)
9. Other Concepts: This includes Booker India Ltd acquired in FY20, which operates four cash and carry stores under the Booker Wholesale banner.

Trent's latest book value stands at Rs 132 per share.

At the current price of Rs 6,487, this translates into a P/BV multiple of 49.1x. This suggests that the stock is trading at a heavy premium relative to its actual book value.

From a historical perspective, Trent has commanded a median P/BV of 18.2x over the past 5 years.

Here's a table showing Trent's historical financials...

Financial Snapshot of Trent

Rs m, consolidated	FY20	FY21	FY22	FY23	FY24
Net Sales	34,860	25,930	44,980	82,420	123,750
Growth (%)	33%	-26%	73%	83%	50%
Operating Profit	5,290	1,140	5,950	11,140	19,710
OPM (%)	15%	4%	13%	14%	16%
Net Profit	1,060	-1,810	350	3,940	14,770
Net Margin (%)	3%	-7%	1%	5%	12%
Dividend (Rs/share)	1.0	0.6	1.7	2.2	3.2

Data Source: Screener.in

In FY24, the company saw a 50% year-on-year (YoY) revenue growth with a 16% operating profit margin, driven by Zudio store expansion.

However, its non-apparel formats (Landmark, Booker India) and joint ventures like Star Bazaar still incurred losses, though losses at Star Bazaar and Booker decreased compared to FY23.

Trent's share price is under pressure these days and is down more than 20% from its 52-week highs.

In other words, the stock has officially entered a bear market as a drop of more than 20% from the top is defined as a bear market. One reason for this could be expensive valuations.

The company recently reported a 47% YoY growth in its profits for the quarter ended September 2024 on the back of a 39% growth YoY growth in its topline.

Trent's management noted that the retail business faced challenges due to subdued consumer sentiment and seasonality effects, which limited sales growth.

The company has had negligible debt for many years. The company has grown almost entirely through internal accruals i.e. through internal cash generation.

It also has a solid competitive advantage as the bulk of its revenue comes from its own private labels. These private label brands not only ensure high profit margins, but they also provide better control over the supply chain. This leads to massive savings on working capital.

Looking ahead, Trent is not resting on the fact that it's the top company in India that's riding the retail megatrend at the moment.

The company's strategy includes a strong push for an integrated approach, blending its physical store expansion with a growing online presence. Apart from its strategy of continuing its steady investments in tier 2 and 3 cities, the company is also focused on e-commerce.

Trent's future strategy is focused on sustained growth and expanding its market reach. The company plans to consistently add 30 to 40 new stores annually, each carefully chosen based on market potential and location.

Despite facing weak consumer sentiment and struggling market conditions, Trent has shown impressive annual improvements in revenue and margins. It's strong performance in tier 2 and tier 3 cities shows that its appeal is growing beyond just major urban areas.

The future looks promising, with expansion plans and a balanced retail strategy, but it will be crucial for the company to continue executing its vision to support its growth trajectory.

To know more, check out the Trent Ltd financial factsheet.

#3 Interglobe Aviation (Indigo)

Next on this list is IndiGo.

Interglobe Aviation (IndiGo) is India's largest passenger airline operating as a low-cost carrier. It serves eighty-eight domestic and thirty-three international destinations.

The company commenced operations in August 2006 with a single aircraft and has grown its fleet to 262 aircrafts.

The company has a market share of 62% and 18% in the Indian aviation segment and international passenger segment, respectively. It has become the seventh-largest airline in the world by daily departures and the first Indian airline with a large fleet of 300+ aircraft.

In FY24, the company's earnings before interest, tax, depreciation, and amortization (EBITDA) margin improved to 25% compared to 13% in FY23 due to moderation in fuel costs, high passenger load factors, and firm yields.

IndiGo's latest book value stands at Rs 98 per share.

At the current price of Rs 3,902, this translates into a P/BV multiple of 40.4x. This suggests that the stock is trading at a heavy premium relative to its actual book value.

Here's a table showing IndiGo's historical financials.

Financial Snapshot of Interglobe Aviation

Rs m, consolidated	FY20	FY21	FY22	FY23	FY24
Net Sales	357,560	146,410	259,310	544,460	689,040
Growth (%)	25%	-59%	77%	110%	27%
Operating Profit	40,900	140	5,750	65,310	163,560
OPM (%)	11%	0%	2%	12%	24%
Net Profit	-2,340	-58,060	-61,620	-3,060	81,720
Net Margin (%)	-1%	-40%	-24%	-1%	12%
Dividend (Rs/share)	0.0	0.0	0.0	0.0	0.0

Data Source: Screener.in

In October 2024, IndiGo launched its first premium business product, IndiGoStretch, on India's busiest business routes, making high-quality service more accessible to a wider audience. It plans to roll out tailored business class flights on 12 metro routes by the end of 2025.

Shares of the company faced turbulence not long ago after IndiGo reported a loss of Rs 9.9 bn for Q2FY25. This loss is a major downturn from its Rs 1.9 bn profit in the same quarter last year, and an even steeper decline from Rs 27.3 bn profit in the preceding June quarter.

Additionally, it has received approval from the market regulator for IndiGo Ventures, a venture capital arm aimed at investing Rs 3 bn in aviation-related startups, which is expected to bring innovative solutions to the business.

IndiGo will also be launching a tailor-made business product on the busiest routes and business routes of the country before the end of this year.

There is an ever-growing need for premium travel in India and launching this new product will create a desired option for many who are aiming to travel business.

The company's current pending orderbook of a little short of 1,000 aircrafts to be delivered up until 2035 provides long-term visibility.

To know more, check out the Interglobe Aviation's financial factsheet.

#4 Britannia Industries

Fourth is Britannia.

The company is one of India's leading food companies with a 100-year legacy. It belongs to the renowned Wadia Group.

Its offerings include biscuits, bread, cakes, rusk, and dairy products including cheese, beverages, milk, and yogurt.

The company is a leading player in the biscuit segment, contributing 80% of its revenue, and is also one of the largest in the organized bread market.

The company exports its products to eighty countries and is the number two biscuit player in the UAE.

Britannia's latest book value stands at Rs 133 per share.

At the current price of Rs 4,909, this translates into a P/BV multiple of 36.9x. This suggests that the stock is traded at a heavy markup relative to its actual book value.

Britannia has traded at an average P/BV multiple of 35 times over last 5 years and 23 times over last 10 years.

Here's a table showing the company's historical financials...

Financial Snapshot of Britannia Industries

Rs m, consolidated	FY20	FY21	FY22	FY23	FY24
Net Sales	116,000	131,360	141,360	163,010	167,690
Growth (%)	5%	13%	8%	15%	3%
Operating Profit	18,430	25,090	22,010	28,310	31,670
OPM (%)	16%	19%	16%	17%	19%
Net Profit	13,940	18,510	15,160	23,160	21,340
Net Margin (%)	12%	14%	11%	14%	13%
Dividend (Rs/share)	35.0	157.5	56.5	72.0	73.5

Data Source: Screener.in

Britannia has remained resilient in a highly competitive sector. The company has consistently gained market share due to its strong distribution network.

In 2020, the company cashed in on the sudden surge in demand, especially home snacking amid the lockdown. It launched new products and expanded its rural reach.

Apart from this, Britannia's international operations in the Middle-East and Africa, which were struggling pre-covid, also witnessed healthy growth.

Going ahead, Britannia's digital supply chain initiatives, focus on health products, success in international markets and ability to keep margins stable despite rise in commodity prices will be the key determinants of the company's growth.

The company has planned a capital expenditure of Rs 4-5 bn in FY25, to be funded through internal accruals, reserves, and long-term debt.

To know more, check out Britannia Industries financial factsheet.

#5 CG Power & Industrial Solutions

Next on this list is CG Power.

The company is a global provider of end-to-end solutions for efficient and sustainable electrical energy management for utilities, industries, and consumers.

It offers products, services, and solutions in two primary business segments namely, Power Systems (used in transformers, switchgears, and other allied products) and industrial systems (catering to motors and drives, railways).

It is an 85-year-old company which has been acquired by the Murugappa group company, Tube Investments in FY20.

CG Power's latest book value stands at Rs 23 per share.

At the current price of Rs 694, this translates into a P/BV multiple of 30.2x. This suggests that the stock is trading at a heavy premium relative to its actual book value.

Here's a snapshot of CG Power's financials...

Financial Snapshot of CG Power

Rs m, consolidated	FY20	FY21	FY22	FY23	FY24
Net Sales	51,100	29,640	54,840	69,730	80,460
Growth (%)	-36%	-42%	85%	27%	15%
Operating Profit	310	1,160	6,470	10,050	11,420
OPM (%)	1%	4%	12%	14%	14%
Net Profit	-13,310	12,800	9,130	9,630	14,280
Net Margin (%)	-26%	43%	17%	14%	18%
Dividend (Rs/share)	0.0	0.0	0.0	1.5	1.3

Data Source: Screener.in

CG Power remains debt-free. Its order book reflects a strong future, with the unexecuted order book reaching over Rs 70.5 bn as of June 2024.

The power systems segment's order book surged by 60% YoY, with major contributions from ongoing expansion plans.

Additionally, CG Power recently approved the acquisition of a 55% stake in G.G. Tronics India Private Limited, a key supplier to the railway industry specialising in embedded systems.

The management expects 40% growth in its railway business, driven by newly awarded tenders and improving demand. The company's capacity utilisation stands at 85-90%, and expansion plans in the power and switchgear segments are set to be completed by Q3FY25.

The company's management is aiming for a 20% market share in KAVACH systems, with potential for growth in locomotive and propulsion system orders.

CG Power has also planned to expand its capacity across its four plants. The capital expenditure would be Rs 4 bn to be spent in FY24-25.

To know more, check out CG Power's financial factsheet.

Snapshot of High Book Value Stocks on Equitymaster Stock Screener

Here's a table showing the above stocks on various important parameters.

Conclusion

Investing in stocks trading above their book values can be risky, especially for value investors.

In such cases, an investor may think about looking out for superior quality growth-oriented stocks. However, for such stocks to give excellent returns, an investor needs to stay invested in the markets for a long tenure.

That is why it is always wise to look at multiple valuation metrics along with the price to book value ratio, to create an investing strategy.

As far as these above 5 stocks are concerned, expensive stocks with mediocre growth are the first ones to drop when the market falls.

If you hold any of these and think the growth doesn't justify the current valuation, it's time to say goodbye.

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.