The 5 Most Overvalued Stocks in India

Too much salt spoils the food.

A little salt adds flavor, but too much can ruin the taste. Balance is essential, making all the difference between enhancing and overwhelming.

The same idea applies to stocks. Value is good, indicating a company's strength and growth potential. But when prices surge far above a company's true worth, stocks become overvalued. This brings risks. Investors may fear a correction, as prices may fall back to more realistic levels.

Overvalued stocks can bring quick returns due to strong demand. Investors often see them as momentum stocks, which may continue to rise in the short term. Some investors view these stocks as resilient against minor market dips, betting that popularity will push prices even higher.

However, there are significant downsides. Overvalued stocks face higher volatility and risk of sudden drops if a market correction occurs. Their inflated prices don't always align with long-term growth, making them riskier for sustained investment.

Hence, it is important for an investor to keep an eye on overvalued stocks and their potential impacts.

In this article, we'll discuss five such stocks. Read on to learn more.

#1 Adani Transmission

First on the list is Adani Transmission.

Adani Transmission is the energy transmission and distribution business arm of the Adani group, one of India's largest business conglomerates. From June 2023, its name is changed to Adani Energy Solutions.

In the last one year the company's share price has rallied 26.9%.

Shares of the company are currently trading at a price-to-earnings ratio (P/E) of 354x. This means for every one rupee of earnings, shareholders are willing to pay Rs 354. Its price to book value (P/BV) is also high at 8.8x.

Its dominant position in the high-growth energy sector could be the reason for such high valuations.

Adani Transmission Financial Snapshot (2020-2024)

Year	FY20	FY21	FY22	FY23	FY24
EPS (Rs)	5.9	10.7	10.3	10.7	10
EPS Growth (%)	NA	81.4	-3.7	3.9	-6.5
Debt-to-Equity (x)	4.9	4.4	4.5	2.7	2.7
Return on Equity (%)	13.5	21.2	18	10.9	9.5
Return on Capital Employed (%)	11	11.4	10.8	10.4	9.8

Data Source: Ace Equity

The company's financials are improving in the last five years, with revenue and net profit growth CAGR coming in at 17.9% and 16.4%, respectively.

However, it is important to note here that rise in income has not translated into rise EPS. Also the company's RoE and RoCE are on a downward trajectory in the past years.

On the other hand, the long-term debt of the company has also come down significantly, but it is still too high. The debt-to-equity ratio is at 2.7x.

Coming to the company's return on equity (RoE), the five-year average stood at 14.6%. The five-year average return on capital employed (RoCE) was also high at 10.7%. This was on the back of improving profitability.

During Q2 FY25, the company' revenue stood Rs 61.8 billion (bn) in Q2 FY25 compared to Rs 36.7 bn reported in Q2 FY24, reflecting a growth rate of about 68.3%. The revenue growth suggests higher power demand.

On the profitability front, the company's net profit increased to Rs 7.7 bn from Rs 2.9 bn reported in the year ago period, up 171.3%. This impressive rise in net profit can be attributed to improved cost efficiencies and operational optimisations.

In the last board meeting, the board of directors also approved fundraising plans of Rs 20 bn via issue of non-convertible debentures (NCD) in one or more tranches.

The company's financial performance is improving, and so are its valuations. Hence, it is important to keep an eye on the debt, given Adani Transmissions' rapid expansion plans.

To know more, check out Adani Transmission fact sheet and quarterly results.

#2 Zomato

Next on the list is Zomato.

Zomato is a multinational restaurant aggregator and food delivery company. Zomato provides information, menus and user-reviews of restaurants as well as food delivery options from partner restaurants.

In the last one year the company's share price has rallied 129.8%.

The company's current P/E and P/BV ratios are 560x and 10.4x, respectively. High valuations of the company are driven by rising profits.

Zomato Financial Snapshot (2021-2024)

Year	FY21	FY22	FY23	FY24
EPS (Rs)	-0.9	-1.4	-1.1	0.4
EPS Growth (Rs)	NA	NA	NA	NA
Debt-to-Equity (x)	0	0	0	0
Return on Equity (%)	-10.5	-7.9	-5.3	1.8
Return on Capital Employed (%)	-10.4	-7.9	-5.3	1.8

Data Source: Ace Equity

Zomato's profitability has significantly improved, with RoE and RoCE climbing from -10.5% and -10.4% four years ago to 1.8% and 1.8% in the last financial year, respectively.

It is pertinent to note that the company has no long term debt in its books.

The company's revenue has grown at a CAGR of 56% in the last five years, owing its new ventures like Blinkit and Hyperpure. It also turned profitable in the financial year 2024 after reporting consistent losses since inception.

The quick commerce operator continued to perform well even in the recent quarter. In September 2024 quarter, its revenue and profit grew by 68.5% YoY and 388.9% YoY.

Recently Zomato's board of directors approved a proposal to raise Rs 85 bn via the issuance of equity shares through the qualified institutional placement (QIP) mode. The company has big cash reserves despite which the company is raising more funds.

Additionally, Blinkit, Zomato's quick commerce unit, has ambitious plans to establish 2,000 stores by the end of 2026.

To know more about Zomato, check out its factsheet and latest quarterly results.

#3 Adani Green Energy

Next on our list is the largest renewable energy developer, Adani Green Energy.

In the last one year, shares of the company have gained 75.4%.

Its shares are currently trading at a P/E of 199x, as against 242.5x at the end of the financial year 2024. The P/BV ratio has also decreased from 47.8x in March 2024 to 24.5x at present.

Although the valuations have dropped since FY24, the stock is still trading at pretty high valuations.

Adani Green Energy Financial Snapshot (2020-2024)

Year	FY20	FY21	FY22	FY23	FY24
EPS (Rs)	-0.4	1.1	3.1	6.1	8
EPS Growth (%)		NA	181.8	96.8	31.1
Debt-to-Equity (x)	18.6	24.5	37.1	8.5	6.9
Return on Equity (%)	-8	21.1	41.1	16.5	20.8
Return on Capital Employed (%)	8.4	10.5	7	8.7	13.9

Data Source: Ace Equity

While the company's RoE and RoCE have exhibited volatility over the past five years, the overall trend suggests a reasonable level of profitability.

While the company has made significant strides in reducing its debt-to-equity ratio through debt repayment, the current ratio of 6.9x remains high.

The company's revenue has grown at a CAGR of 35% in the last five years. It also turned profitable in the financial year 2021 after reporting consistent losses since inception.

The company reported strong set of numbers during the last quarter. In September 2024 quarter, the revenue and net profit grew by 37.6% and 41.5% YoY driven by significant greenfield capacity additions and robust operational efficiency.

Its vision is to have a portfolio of 50 giga watt of renewable energy by 2030.

In Khavda, Gujarat, the company is building the world's largest renewable energy park. It will have a generation capacity of 30 GW of energy.

#4 Jio Financial Services

Next on the list is Jio Financial Services.

It is an Indian financial services company. Originally a subsidiary of Reliance Industries, it was demerged as an independent entity and listed on stock exchanges in August 2023.

The company provides financial services, including payment services and insurance broking. Its subsidiary Jio Finance holds an NBFC license from the RBI.

Shares of the company have rallied 47% in the last one year.

On the valuation front, the P/E ratio of the company is 174.3x, The P/BV ratio, on the other hand, is 1.5x.

Jio Financial Services Financial Snapshot (2020-2024)

Year	FY20	FY21	FY22	FY23	FY24
EPS (Rs)	0.4	0.2	0.3	0	2.5
EPS Growth (%)		NA	50	NA	NA
Debt-to-Equity (x)	0	0	0	0	0
Return on Equity (%)	11.9	6	7.5	0	1.2

Data Source: Ace Equity

Though Jio Financial Services' EPS has increased significantly in FY24 its RoE has declined significantly in the past five years. The current RoE is 1.2% which is significantly lower than 11.9% from RoE in FY20. The good news is that the company's debt-to-equity ratio is 0.

Coming to the company's performance, its revenue has grown at a CAGR of 84.5% in the last three years. The net profit, on the other hand, profit surged 135.4% CAGR.

In the September 2022 quarter, revenue grew by 14.1% YoY, boosted by launch of new products but its net profit grew marginally by 2.9% YoY, due to rising costs.

Recently, Jio Financial Services and BlackRock Inc. announced the incorporation of two joint ventures - Jio BlackRock Asset Management Private and Jio BlackRock Trustee Private - to enter India's mutual fund industry.

The company also received Reserve Bank of India's (RBI's) approval to operate as an online payment aggregator. As of 28 October 2024, Jio Payments Solutions, a Jio Financial subsidiary, is authorised to manage digital transactions.

To know more about Jio Financial Services, checkout its factsheet and latest quarterly results.

#5 Trent

Last on the list is Trent, a subsidiary of the 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 the last one year, the share price of Trent has rallied 231.4%.

The current P/E ratio of the company is 163.4x. Its book value multiple surged significantly and reached 58.6x.

Several reasons could be attributed to this run-up in valuations, such as the company's performance and booming fashion industry.

Trent Financial Snapshot (2020-2024)

Year	FY20	FY21	FY22	FY23	FY24
EPS (Rs)	3	-5.1	1	11.1	41.6
EPS Growth (%)		NA	NA	1010	274.8
Debt-to-Equity (x)	0	0.1	0	0.2	0.1
Return on Equity (%)	4.4	-7.8	1.5	15.2	36.3
Return on Capital Employed (%)	15.9	2.4	15.2	31.1	50.1

Data Source: Ace Equity

The company's earnings were impacted in FY20 and FY21 due to the impact of the lockdowns. However, from FY22 the company's business has picked up. A clear impact of better performance can also be seen in the growing RoE and RoCE.

Also, in the past five years the company's debt-to-equity ratio has remained low. In FY24 it reduced its long term debt to 0.1x.

In the last five years, its revenue grew by a CAGR of 36.7%. Its net profit, however, grew by a CAGR of 73.2% due to cost optimisation strategies.

To expand Trent's retail footprint, the management is focused on increasing its market share in smaller markets and also aims at establishing a notable online presence for the brand.

The company has set sights on an aggressive expansion strategy, with plans to inaugurate 30 to 40 new Westside stores each year.

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

Conclusion

In conclusion, while overvalued stocks can attract investors with their quick returns and popularity-driven growth, they carry significant risks. As prices climb far above their intrinsic worth, they become susceptible to corrections, which may lead to sudden declines.

This makes them highly volatile and unpredictable in the long run. Investors must exercise caution. Overvalued stocks may seem appealing in the short term, but their high price-to-earnings and price-to-book ratios can pose considerable risks, especially if market sentiment shifts.

Therefore, it's advisable to avoid investing in overvalued stocks, as such investments may lead to substantial losses in a market correction. Balancing growth potential with reasonable valuations is key to building a resilient portfolio.

To know what's moving the Indian stock markets today, check out the most recent share market updates here.

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...