One of the biggest worries for stock market investors is figuring out if they’re paying too much for a stock.
They are often confused to figure out whether a stock is overvalued. After all, their buying decision will depend on it.
For example, Warren Buffett likes to invest in a good business and not based on price. He looks for stocks that are cheaper than their intrinsic value.
The price-to-earnings (PE) ratio, also known as the earnings multiple, provides a quick way to determine a stock’s value. Then comes the book value (BV).
These two metrics help investors determine if a stock is overvalued or undervalued.
With the help of Equitymaster’s powerful stock screener, we’ve curated a list of the top overvalued stocks from the large-cap space.
Let’s take a look at each…
#1 Godrej Attribute
After the recent property boom, most stocks from the exchange have been overvalued. From the lot, the current highest valued is Godrej Properties.
At the current price of Rs 2,100, the company is trading at a multiple of Rs 2,590, after looking at year-end consolidated twelve-month net profit (TTM).
The company had a loss for fiscal year 2021, so the annual PE ratio is not comparable.
Current price to book value is 7.1.
Home loan rates at record lows are helping real estate companies lately. The big players were able to increase their stakes as some developers got rid of their plots and sold them to their larger partners.
This year, Godrej Properties became India’s largest developer by value and volume of sales achieved.
What has helped Godrej Properties is that it has the lowest bank funding cost of 7.3%/year in the industry due to its financial position and goodwill.
In the past year, the company’s stock has increased by more than 60%.
#2 Adani Green Energy
Shares of Adani group companies have increased tremendously since the March 2020 crash. Among the stocks in the group, Adani Green Energy’s market value has increased the most.
The dramatic increase has put a question mark on the company’s valuation. At the current price, the company is trading with a PE ratio of 480.
The PE ratio is not the only factor of concern here. The company is also appreciated for its book value. Its price to book value is now over 100.
Investors are hating on this green energy company despite its poor fundamentals.
The company has lost four of the past five years. Its balance sheet is filled with debt. It has not paid a dividend for the past five years.
However, the stock trades at a median PE.
Given its weak balance sheet and profit and loss statement, Adani Green’s valuation clearly appears to be in a bubble.
So why do investors love this company? Well, they see this as one of the main beneficiaries of the disruptive change in the energy landscape.
A change in which traditional hydrocarbon-based energy will be replaced by Green energy like sun and wind.
Since being listed in June 2018 for Rs 30, the company’s shares have skyrocketed to Rs 1,400 today.
#3 Adani Total Gas
No surprise here that another Adani group company topped the list of overvalued stocks.
Adani Total Gas trades at a multiple PE of 350 at current prices. Its price to book value of 106 is clearly well above the industry average.
Its peers Indraprastha Gas and Gujarat Gas trade at much lower valuations.
Due to this high valuation, market experts have raised concerns.
Things took a turn for the worse when National Securities Depositories Limited (NSDL) froze the accounts of three FPIs, holding shares worth Rs 435 billion in four companies under the Adani group.
If you look at the valuation, shares of the Adani corporation have been trading expensively for a while.
Like Adani Green, shares of Adani Total Gas have sold out this year.
Adani Total Gas, founded in 2005 and listed separately from Adani Enterprises in 2018, is the largest private municipal gas distributor in India.
No. 4 Supermarket Avenue
Avenue Supermarts is primarily engaged in the organized retail business and operates supermarkets under the DMart brand.
Avenue Supermarts are not cheap by any means.
Based on a TTM EPS of Rs 21, the stock is trading at a multiple PE of 227.
While the stock looks expensive relative to its peers, market experts feel the valuation is justified given the company is among the fastest-growing institutional retailers.
The company’s business model has led it to grow exponentially and is now India’s most profitable supermarket chain.
Even if the company launches on the stock exchange with an IPO (issue price Rs 299), the valuation is not cheap.
# 5 IRCTC
The Indian Railways Travel and Services Corporation (IRCTC), which enjoys a monopoly in the segments it operates, came under pressure a month ago because of its overvalued condition.
In October 2021, the company’s shares were up more than 45% from its all-time high with its market capitalization falling to Rs 69,900.
IRCTC is the only entity authorized by Indian Railways to provide rail food service, online rail ticket booking and packaged drinking water at stations and trains in India.
IRCTC’s TTM EPS is Rs 5.3 per share and the current share price is around Rs 870. As a result, the stock trades at a PE ratio of more than 160. Valuation is also stretched to price to book value.
IRCTC’s share price has skyrocketed in recent times as investors focus on the topic of unlocking.
In the past one year, it has grown by about 200%.
Snapshot of the most overvalued stocks from Equitymaster’s stock screener
Here’s a quick look at large-cap companies that are overvalued based on several key finances.
Please note that these parameters can be changed according to your selection criteria.
This will help you identify and weed out stocks that don’t meet your requirements and emphasize stocks with good indexes.
Why is stock valuation an important aspect?
In investing, the saying goes ‘buy low and sell high’. This is usually done by buying undervalued stocks and selling them when they are overvalued.
That’s why it’s important to know how to properly value a stock.
While people are always on the lookout for most undervalued stocks, finding overvalued stocks can help you implement investment strategies like: sell a stock.
That’s why, if you’re looking for overvalued stocks, the PE ratio is what you need to look at. You should also consider price versus book value.
But that doesn’t mean you should part with a stock just because it could have been a little more expensive.
While there are times when stocks are overvalued, there are times when they rallied even more and investors later regretted selling.
Here’s a short snippet of what Rahul Shah wrote about PE rates in March 2021, in one of the Profit Hunter’s editions:
Back in December 2000, Infosys, one of the biggest wealth creators, was trading at a hefty price with earnings multiples of about 130 times.
It’s a high growth company. It increased its earnings 36 times from fiscal year 01 to fiscal year 20.
However, despite the high growth, Infosys failed to outperform the benchmark index by a large margin.
Its share price has increased 14 times in the past 20 years. This is only marginally better than Sensex, which has delivered 12x returns.
This is one of the biggest lessons in investing.
Your future profits largely depend on the valuation you’re paying for a stock.
If you pay too high a valuation multiple, even a high-growth company cannot deliver better returns than the benchmark index.
Disclaimer: This article is for informational purposes only. It is not a stock recommendation and should not be treated as such.
(This article is provided from Equitymaster.com)
(This story has not been edited by NDTV staff and was automatically generated from the syndication feed.)
https://www.ndtv.com/business/the-five-most-overvalued-stocks-in-india-2650321 The five most overvalued stocks in India