Overvalued Stocks in India 2024

An overvalued stock trades above its justified price, often indicated by a high P/E ratio, suggesting its price doesn’t align with projected earnings growth.
Overvalued Stocks in India 2024
3 min
16-December-2024

Overvalued stocks are those whose market price exceeds their intrinsic value. Investors often overhype these stocks, leading to high price-to-earnings (PE) and price-to-book (PB) ratios and low dividend yields. Such stocks are typically popular but offer limited margin of safety. Any negative news or underperformance can trigger a significant decline in their price.

List of overvalued stocks in India

The most overvalued stocks in India are-

Stock Name

Market Cap (in Cr)

ADANI GREEN ENERGY

1,90,044

JIO FINANCIAL SERVICES

2,15,821

TRENT

2,48,850.10

CG POWER & INDUSTRIAL

1,17,530

INFO EDGE

1,12,787

BHARTI AIRTEL

10,07,633

SIEMENS

2,83,790.50

ABB INDIA

1,67,203.10

AVENUE SUPERMARTS

2,37,648

APOLLO HOSPITALS

1,04,442

DIVIS LABORATORIES

1,55,470.30

DIXON TECHNOLOGIES

1,12,654.80

MAX HEALTHCARE INSTITUTE

1,15,152.20

BHARTI AIRTEL

40,186.60

APOLLO HOSPITALS

1,04,376.20

PIDILITE INDUSTRIES

1,62,241.30

BAJAJ HOLDINGS & INVESTMENT

1,22,684.40

VARUN BEVERAGES

83,851.34

UNITED SPIRITS

1,10,499.10

HAVELLS INDIA

1,10,161.50

INDIAN HOTELS

1,22,806.60

TATA STEEL

1,85,768.20


Disclaimer:
 The market capitalisation values mentioned above were fetched on 16th December 2024. These values are subject to change based on various factors such as market conditions, company performance, and economic trends. Please refer to the SEBI or stock exchanges' websites to obtain the most current market capitalisation for any particular stock

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What is an overvalued stock?

An overvalued stock is the share of any listed company that is currently trading above its intrinsic value or true worth. This value can be identified using the company’s earning potential or the value addition it offers its shareholders. When a stock is trading above its actual worth, the rationale is that in the future, when a market correction occurs, the price of the stock may decline to reflect its true value.

So, when you perform fundamental analysis and identify that a stock is overvalued, the consensus is to avoid investing in the company. This sums up the meaning of overvalued stocks and how investors tend to perceive them.

How to determine whether a stock is overvalued?

Fundamental analysis and evaluation of financial ratios can help you identify overvalued stocks easily. Check out some examples of overvalued stocks below and look at the different ways to find out the valuation of a stock.

1. Price-to-Earnings (P/E) ratio

The P/E ratio of a company compares its current market price to the Earnings per Share (EPS). So, it essentially tells you how much shareholders are paying per rupee of earnings they receive from each stock. As a rule of thumb, a higher P/E ratio indicates that the stock may be overvalued because shareholders in the market are paying more money for each rupee of earnings from the company’s shares.

For example, if a stock has a P/E ratio of 40, it means the company’s market price is 40 times its EPS. To decide whether or not this indicates an overvalued stock, you can compare the company’s P/E ratio with the industry’s.

2. Price-to-Book (P/B) ratio

The P/B ratio can also help you identify overvalued stocks. This financial metric compares the current price of a company in the market with the book value per share. By analysing this ratio, you can check the amount that shareholders pay for a share relative to its book value. A high P/B ratio indicates that the stock may be overvalued because you are paying more for it than its book value indicates.

3. Price/Earnings-to-Growth (PEG) ratio

The PEG ratio builds upon the P/E ratio. To compute this metric, you divide the P/E ratio by the rate of EPS growth. In other words, you can use this ratio to see how a company’s value stacks up against its earnings growth. A lower PEG ratio indicates that the company may be undervalued because its P/E ratio is much lower than its EPS growth. Conversely, a high PEG ratio is a possible sign of overvalued stocks.

4. Discounted Cash Flow (DCF) method

In addition to checking financial ratios, you can also use the DCF method to find the valuation of a company. This method involves discounting the future cash flows of a company to their present values to find the true value of the entity (and, thereby, the true value per share). If the market price is above the value per share, you have an overvalued stock.

For example, say the value of a company comes out to be Rs. 20 crores as per the DCF method. Now, if the company has 10 lakh outstanding shares, the true value per share turns out to be Rs. 200. If the current market price of the company’s shares is, say Rs. 320, it indicates overvaluation

Advantage of overvalued stocks

The primary advantage of holding overvalued stocks in India lies in their potential for significant gains during periods of economic expansion. However, this strategy requires a deep understanding of market cycles and the ability to identify and capitalize on mispriced securities. Investors who have held overvalued stocks during previous periods of economic optimism may be able to profit by selling them at peak valuations.

Disadvantages of overvalued stocks

The primary risk associated with overvalued stocks is the potential for significant losses, particularly if the market corrects and the stock price falls back to its intrinsic value. Additionally, accurately identifying overvalued stocks requires a keen understanding of market dynamics and a strong grasp of fundamental analysis. Therefore, it is crucial to conduct thorough research and exercise caution when considering investments in overvalued stocks.

Should you invest in overvalued stocks?

Now that you know the meaning of overvalued stocks and their advantages and disadvantages, you may be wondering if they are good investments. As a general rule, you can consider investing in these stocks if:

  • You are aiming for short-term profits
  • You have a fairly high tolerance for risk
  • You believe that fundamental factors may sustain the stock’s high valuation
  • You want to diversify your portfolio, and the overvalued stocks are a part of a broader investment strategy

Conclusion

Identifying overvalued stocks is an essential part of fundamental analysis. If you are planning to invest in certain companies over the long term, it is crucial to be clear about how the market currently values those stocks. This will help you narrow down suitable companies before you invest in the stock market.

That said, keep in mind that overvalued stocks may not always undergo a correction within the investment horizon you have in mind. So, if you assess that some overvalued stocks may have the potential to rise further before declining, your investment strategy can leverage this upside.

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Frequently asked questions

What is the meaning of an overvalued stock?

Overvalued stocks are shares that trade at a higher price than their intrinsic or fair value. This can occur due to various factors, including a decline in the company's financial performance or a surge in buying activity driven by emotional rather than rational decision-making.

How to know if the Indian stock market is overvalued?

A high P/E ratio relative to historical averages suggests that the stock may be overvalued or that the market anticipates future growth.

What is an example of an overvalued stock?

Identifying a specific overvalued stock can be challenging and often subjective, as it depends on various factors and individual interpretations. However, in recent years, some investors have argued that certain technology stocks, particularly those in the artificial intelligence sector, might have been overvalued during periods of rapid growth and market exuberance.   

It's important to note that overvaluation is often a matter of opinion and can change over time. A stock that may be considered overvalued today could become undervalued tomorrow if its underlying fundamentals improve or market sentiment shifts. 

Are Indian stocks overvalued?

Whether Indian stocks are overvalued is a subject of ongoing debate. While some analysts argue that certain sectors and individual stocks may be overvalued due to recent market exuberance and high valuations, others contend that India's long-term growth potential justifies these valuations. 1 It's essential to consider factors like economic growth, corporate earnings, interest rates, and global market trends when assessing the overall valuation of the Indian stock market. It's advisable to conduct thorough research or consult with a financial advisor before making investment decisions.

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