5 Most Overvalued Stocks in India

5 Most Overvalued Stocks in India, After a year full of uncertainties, there are fewer overvalued stocks in the Indian share market right now.

Inflation scare, Russia-Ukraine conflict, among other reasons caused a market correction so deep that many stocks fell like nine pins. Their absurdly high valuations were not justified.

As we move into a new year, let’s take a look at the top overvalued stocks in India right now and what lies in store for them in 2023.

The reason we are highlighting the overvalued stocks right now is because most of these are highly popular stocks and many retail investors track them closely. Join Our Instagram Channel

Taking note of their valuations, growth prospects, etc might give you more context as to whether these will do well in 2023 or a massive crash lies ahead for them.


1. Adani Total Gas

First on the list of most overvalued stocks in India is Adani Total Gas. Join Our Telegram Channel

This shouldn’t come as a surprise honestly, as most Adani group stocks trade in the uncharted territory.

In the last one year, the share price of Adani Total Gas has zoomed 108%.

Shares of the company are currently trading at a price-to-earnings ratio (P/E) of 804.8x, as against 463.9x as on 31 March 2022.

This means for every one rupee of earnings, shareholders are willing to pay Rs 804.

The price to book value (P/BV) has also gone up to 148.5x from 97.8x in March 2022.

While the valuations have gone up significantly, the company’s earnings yield has taken a hit. Earnings yield is a stock’s expected return.

For Adani Total Gas, the current earnings yield is 0.1%. This means that for every Rs 100 worth of shares owned, the shareholders can expect to earn Rs 0.1 from their investment in the company.

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

Adani Total Gas Financial Snapshot (2018-2022)

2017-2018 2018-2019 2019-2020 2020-2021 2021-2022
EPS (Rs) 0.6 2.2 4 4.2 4.6
EPS Growth (%) 244.4% 82.5% 6.1% 10.2%
Earnings yield (%) 1.6% 4.6% 0.4% 0.2%
P/E (x) 0 62 21.8 228.4 463.9
P/BV (x) 0 12.8 6.4 54.6 97.8
Debt-to-Equity (x) 1.3 0.4 0.3 0.3 0.4
Return on Equity (%) 16.2% 20.8% 29.7% 24.4% 20.9%
Return on Capital Employed (%) 17% 30.8% 33.3% 30% 26.4%

Data Source: Ace Equity

Coming to the company’s return on equity (RoE), the five-year average stood at 22.4%. The five-year average return on capital employed (RoCE) was also high at 27.5%. This was on the back of improving profitability.

Over the years, the company has managed to deleverage its balance sheet, and its current debt-to-equity ratio is 0.4x, lower than its five-year average of 0.5x.

A high RoE and RoCE, with a declining debt to equity, show that the quality of the business is improving.

In the last five years, Adani Total Gas has grown its revenues at a compound annual growth rate (CAGR) of 16.3%, driven by higher volumes due to capacity addition. The net profit also grew at a CAGR of 25.1% during the same period.

In the September 2022 quarter, the company’s revenue grew by 71% year-on-year (YoY) due to an increase in prices. The net profit, however, fell by 12.3% YoY due to an increase in input gas prices.

The company has good growth prospects as it was awarded 15 geographical areas (GA) by the Petroleum and Natural Gas Regulatory Board (PNGRB). To complete these projects, it needs to spend a capex of Rs 55 billion (bn), which will be via a mix of debt and equity.

Taking on more debt might increase the company’s financial risk. To add to this, any delay in execution can result in hefty penalties affecting its profitability. So debt will be a key monitorable.


2. Adani Green Energy

Next on our list is the largest renewable energy developer, Adani Green Energy. Join Our Instagram Channel

In the last one year, shares of the company have gained 40%.

The company’s current P/E and P/BV ratios are 560x and 44.3x, respectively. This, against a P/E and P/BV ratio of 479x and 89.4x, respectively, as on 31 March 2022. Its dominant position in the high-growth renewable energy sector could be the reason for such absurd valuations.

To add to the high valuations, the company has an earnings yield of 0.2%, much lower than the interest on a savings bank account.

Adani Green Energy Financial Snapshot (2018-2022)

2017-2018 2018-2019 2019-2020 2020-2021 2021-2022
EPS (Rs) -1 -3 -0.1 1.3 3.1
EPS Growth (%) NA NA NA 132.8%
Earnings yield (%) 0.2% 0.2%
P/E (x) 0 -16.6 -356.7 662.3 479
P/BV (x) 0 4.1 9.2 53 89.4
Debt-to-Equity (x) 7.3 5.7 6.1 10.8 19.9
Return on Equity (%) -10.2% -24.4% -2.6% 8% 18.7%
Return on Capital Employed (%) 3.5% 4.9% 6.8% 10.5% 7%

Data Source: Ace Equity

With improved profitability, Adani Green’s RoE and RoCE have improved from -10.2% and 3.5% five years ago to 18.7% and 7% in the current fiscal.

However, this is offset by high debt. Adani Green Energy’s debt has gone up consistently. Currently, its debt to equity ratio is close to 20x.

To add to this, promoters have pledged 4.27% of their shares.

Nevertheless, the company’s revenue has increased threefold and has grown at a CAGR of 29.5% in the last five years, owing to higher power generation. It also turned profitable in the financial year 2021 after reporting consistent losses since inception.

The green energy player continued to perform well even in the recent quarter. In September 2022 quarter, the revenue and profit grew by 19.5% YoY and 46% YoY.

In line with the government’s renewable energy target of 500 gigawatts (GW) by 2030, 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 Energy plans to fund this through debt, high leverage on the balance sheet will deteriorate the quality of the business, which might affect its performance on the bourses.


3. Adani Enterprises

Third on the list is the flagship company of the Adani Group, Adani Enterprises. Join Our Telegram Channel

Shares of the company have rallied over 120% in the last one year.

Its shares are currently trading at a P/E of 413x, as against 285x at the end of the financial year 2022.

The P/BV ratio has also increased from 10x in March 2022 to 13.1x at present.

Several reasons led to this high valuation, including the company’s inclusion in the Nifty 50 index and promoters increasing stake in the company.

While valuations are going up, the company’s earnings per share (EPS) and earnings yield are falling.

In the last three years, the company’s EPS fell by 31% to Rs 7.1 in the financial year 2022. The earnings yield also decreased from a high of 7.5% to 0.4% during the same period.

Adani Enterprises Financial Snapshot (2018-2022)

2017-2018 2018-2019 2019-2020 2020-2021 2021-2022
EPS (Rs) 6.8 6.5 10.3 8.3 7.1
EPS Growth (%) -4.4% 58.5% -19.4% -14.9%
Earnings yield (%) 4.4% 4.4% 7.5% 0.8% 0.4%
P/E (x) 22.7 22.6 13.3 122.9 285.5
P/BV (x) 1.1 1.1 0.9 6.6 10
Debt-to-Equity (x) 1.2 0.8 0.7 0.9 1.8
Return on Equity (%) 2.5% 2.1% 5% 4.4% 2.4%
Return on Capital Employed (%) 12% 12.1% 13.2% 9% 8.1%

Data Source: Ace Equity

Adani Enterprises’ RoE and RoCE are also consistently below 10% for the last five years. In the financial year 2022, it reported an RoE and RoCE of 2.4% and 8.1%, respectively, the lowest in the last three years.

The company’s debt-to-equity has shot up to 1.8x as against 0.9x in the previous year after it announced various projects in airports, roads, and power segments. But the company is planning a mega Rs 200-bn FPO to raise funds and repay debt.

While the company’s revenue has grown at a CAGR of 12.5% in the last five years, the net profit only grew by a CAGR of 4.7%.

Its recent quarterly performance offset this. In the September 2022 quarter, the revenue and net profit have grown by 182% and 260% YoY due to higher revenues from its airport business.

Going forward, its ambitious growth plans are expected to support revenue in the medium term.

The company is expected to incur a capex of Rs 520 bn in the financial years 2023 and 2024, which it plans to fund majorly through debt. With the company’s debt-to-equity already above 1x, more debt will only increase the burden on its books.

If Adani Enterprises fails to meet its high-flying goals, it might not be long before the shares snap and enter a downward spiral.


4. Adani Transmission

Fourth on the list is yet again an Adani Group company, Adani Transmission. Join Our Instagram Channel

Shares of the company have gained 50% in the last one year.

On the valuation front, the P/E ratio of the company is 326x, as against 218x in March 2022. The P/BV ratio, on the other hand, is 27.7x, as against 38x.

In the last five years, the P/E multiple has gone up nearly 12 times, while the P/BV multiple saw a 7.6 times increase.

While the valuations are on fire, the earnings yield fell drastically. In financial year 2018, the company’s earnings yield was 5.4%, which fell to 0.5% in 2022.

Adani Transmission Financial Snapshot (2018-2022)

2017-2018 2018-2019 2019-2020 2020-2021 2021-2022
EPS (Rs) 10.4 5.1 6.8 11.1 11
EPS Growth (%) -51.1% 32.9% 64.9% -1.6%
Earnings yield (%) 5.4% 2.3% 3.6% 1.2% 0.5%
P/E (x) 18.4 42.9 28 81.6 218.6
P/BV (x) 5 5.2 4 16.4 38.1
Debt-to-Equity (x) 2.9 5.1 5.3 4.9 4.8
Return on Equity (%) 32% 12.7% 14.3% 22.8% 19.1%
Return on Capital Employed (%) 16.1% 9.2% 11% 11.4% 10.8%

Data Source: Ace Equity

Though Adani Transmission has managed to maintain its EPS at around Rs 11 per share, its RoE and RoCE have declined in the last five years.

The current RoE and RoCE are 19.1% and 10.8%, respectively, which declined from 32% and 16.1% five years ago.

To add to this, the company has always had a debt-to-equity above 1x. Though it has managed to reduce it from 5.3x to 4.8x in the last three years.

Promoters of Adani Transmission have also pledged 6.3% of their holdings to fund growth projects.

Coming to the company’s performance, its revenue has grown at a CAGR of 25.3% in the last five years due to the high demand for power. The net profit, however, grew marginally by 1.6% CAGR due to higher finance costs.

In the September 2022 quarter, revenue grew by 26.2% YoY, but its net profit declined by 34.7% YoY.

Going forward, the company’s revenue growth will be driven by new projects that are currently under construction.

Most of these projects are funded through debt that is denominated in US dollars. A depreciation in the rupee will increase the interest costs affecting the company’s profitability which might, in turn, affect the shares of the company.


5. Macrotech Developers

Last on the list of overvalued stocks is Macrotech Developers. Join Our Telegram Channel

Ever since the first wave of pandemic ended, the real estate industry has remained strong and is on an uptrend. Macrotech Developers, with its established market position, has enjoyed this boom.

In the last one year, the shares fell 15% due to market uncertainties. But the valuations shot up aggressively.

The current P/E ratio of the company is 303.6x, as against 45.1x in March 2022. Its book value multiple remained stable at 4.5x during the same time.

Several reasons could be attributed to this run-up in valuations, such as the company’s performance and boom in the real estate market.

The company’s EPS has improved by 27% in the last five years, indicating higher profits for shareholders. However, its earnings yield was low at 2.2% in March 2022.

Macrotech Developers Financial Snapshot (2018-2022)

2017-2018 2018-2019 2019-2020 2020-2021 2021-2022
EPS (Rs) 19.5 41.4 18.4 1 25
EPS Growth (%) 112.2% -55.6% -94.5% 2372.3%
Earnings yield (%) 2.2%
P/E (x) 0 0 0 0 45.1
P/BV (x) 0 0 0 0 4.7
Debt-to-Equity (x) 4.8 7.5 4.5 4.4 1
Return on Equity (%) 18.1% 40.5% 19.7% 1.2% 15.3%
Return on Capital Employed (%) 21% 70.2% 26.1% 13% 16.3%

Data Source: Ace Equity

Coming to its return ratios, the RoE and RoCE are at 15.3% and 16.3%, respectively, which is slightly lower than its five-year average.

In the last five years, its revenue grew marginally by a CAGR of 1.4%. Its net profit, however, grew by a CAGR of 8.7% due to lower interest costs.

The company also managed to reduce its debt substantially in the last five years. Its current debt-to-equity ratio is 1x as against 4.8x in the financial year 2018.

In September 2022 quarter, the company’s revenue fell by 17.6% YoY, and it also reported a loss of Rs 9 bn due to a one-time provision set aside by the company.

With the real estate industry in its growth phase, the company expects to grow its revenue and profits in the medium term.

However, it is important to note the industry is cyclical in nature and has immense competition. Mactoech Developers needs to continuously expand if it wants to increase its market share and maintain growth.

If it fails to do so, then there is a high chance that shares might come under pressure.


Will these stocks crash in 2023?

Despite several uncertainties, the above stocks have rewarded their investors handsomely in the year gone by.

However, there is no guarantee that they will continue to do so in 2023. By investing in overvalued stocks, you are just overpaying for the stock, and there is less margin of safety. Join Our Instagram Channel

Therefore, it’s a good idea to avoid investing in overvalued stocks.

Happy Investing!




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