Stock Market Shock: Kotak's Bold Call on Overvalued Stocks - Are Your Investments at Risk?

Overvalued Stocks Highlighted by Kotak Institutional Equities

Kotak Institutional Equities' latest report highlights companies with inflated market caps despite lacking profit margin opportunities. The report notes a clear disconnect between narratives and numbers, with certain stocks' market caps not matching their best-case profit projections.

Key Highlights

Inflated Market Caps: Several companies, including BHEL, Eicher Motors, and Cochin Shipyard, have been flagged for having inflated market caps.
Profitability Concerns: The report questions the sustainability of high market valuations given the current and projected profit margins.
Unrealistic Growth Expectations: High growth expectations are not aligned with the actual market conditions and profitability.

Detailed Analysis

BHEL (Bharat Heavy Electricals Limited)

Market Cap Surge: BHEL's stock surge added Rs 77,800 crore in market cap last year.
Profit Pool Mismatch: The thermal BTG industry's profit pool is Rs 32,000-64,000 crore, assuming India meets its FY2032 target of 80GW new thermal capacity.
Unrealistic Sales Expectations: To justify its market cap, BHEL would need to execute 25 GW of annual thermal orders indefinitely.
Current Market Cap: Rs 1.10 lakh crore.
Implied Annual Sales: 20-30 GW of annual BTG sales, implying an annual thermal capacity of 10-15 GW with a 5% PAT margin.
Implied PAT and Sales: Rs 7,300-11,000 crore PAT and Rs 1,46,900-2,20,300 crore annual sales.

Cochin Shipyard Ltd (CSL)

Market Cap Increase: Rs 67,300 crore in the past year and Rs 51,700 crore in the past three months.
Profit Pool: Rs 5,000-9,000 crore, assuming a new aircraft carrier costs Rs 40,000-50,000 crore with a 12-18 percent net profit margin.
NPV-Based Value Accretion: Lower due to long construction and delivery times for aircraft carriers.
Implied Deliveries: CSL would need to deliver 9-13 aircraft carriers to justify its market cap.
Context: The US has 11 aircraft carriers, and China has three.

Two-Wheeler Companies

Companies Highlighted: Eicher Motors Ltd, Hero MotoCorp, and TVS Motors.
Market Cap Addition: Rs 1.8 lakh crore since March 2023.
India’s Two-Wheeler Market: Yet to recover to FY19 levels.
High Profitability Unsustainable: Current high profitability and return ratios are not expected to last in the long term.
Sales Requirements:
- Eicher Motors Ltd: Needs to sell 3 million two-wheelers by FY35 and almost 6 million by FY40.
- Hero MotoCorp and TVS Motors: Face similar challenges in scaling sales.

PSU Stocks Valuations

Overvalued PSUs: Many PSU stocks have high P/E, P/B, or EV/assets ratios despite stagnant or declining fundamentals.
Operational and Financial Turnarounds: Significant improvements are needed for these companies to justify their current market cap.

Conclusion

Kotak Institutional Equities' report highlights significant concerns regarding the market valuations of several companies. The report underscores the disconnect between market caps and profit projections, calling for realistic growth expectations and profit margins to align with market realities.

Key Takeaways

Market Cap vs. Profitability: There's a notable gap between market valuations and actual profit potential.
Growth Expectations: Many companies need unrealistic growth to justify their market caps.
Sector-Specific Concerns: Different industries face unique challenges in aligning valuations with profitability.