BUSINESS VALUATION

DIGITAL ASSIGNMENT – 1

PROF. Dr. Sunitha

Team members: Chandru N 23MBA0001

Surubika S 23MBA0004
 VALUATION PROJECT

OVERVALUED OR UNDERVALUED STOCKS IN AN AUTOMOBILE

INDUSTRY SECTOR

Introduction:

The objective of this analysis is to evaluate and identify whether stocks in the automobile
industry sector are overvalued or undervalued. By analysing key financial metrics and applying
valuation models, this assessment aims to provide insights into potential investment
opportunities and risks within the sector. Given the dynamic nature of the automobile
industry—driven by technological advancements, regulatory changes, and market demand
fluctuations—accurate valuation is crucial for making informed investment decisions.

This report will assess companies based on valuation ratios such as the Price-to-Earnings (P/E)
ratio, Price-to-Book (P/B) ratio. By comparing these metrics against industry benchmarks, we
will determine if certain stocks are trading above or below their intrinsic value. The findings
will assist investors in identifying undervalued opportunities with strong growth potential
while avoiding overvalued stocks that may carry higher risk.

Objectives:

• Conduct a comprehensive evaluation of stocks in the automobile sector based on market

capitalization to determine fair value using fundamental analysis and valuation models.
• Compare key financial ratios against industry benchmarks to classify stocks as
overvalued or undervalued.
• Provide insights into potential investment opportunities by identifying undervalued
stocks with strong fundamentals.
• Highlight overvalued stocks that may pose investment risks due to inflated market
prices or weak financial performance.
• Offer actionable recommendations for investors based on findings, supporting informed
decision-making in stock selection.
Scope:

• The automobile industry is constantly evolving with advancements in electric vehicles

(EVs), autonomous driving, and smart mobility solutions, creating new investment
opportunities and valuation dynamics.

• Government policies on emissions, sustainability, and safety standards directly impact

automakers, affecting stock performance and investor sentiment.

• The industry is highly cyclical, meaning valuations fluctuate based on economic

conditions, making it crucial to assess when stocks are overvalued or undervalued.

• Operating on a global scale, the automobile industry is influenced by local consumer

trends, fuel prices, and infrastructure developments, providing diverse investment
considerations.

Automobile Industry and its current trends:

The automobile industry is undergoing significant transformations driven by the rapid adoption
of electric vehicles (EVs), technological advancements in autonomous driving, and the
integration of AI-powered mobility solutions. With an industry P/E ratio of 19.64 and a P/B
ratio of 4.26, the sector is currently valued at a moderate level, reflecting a balance between
growth expectations and financial performance. Supply chain disruptions, including
semiconductor shortages and fluctuating raw material costs, continue to pose challenges, while
evolving regulatory frameworks focused on emissions and sustainability are reshaping
automakers' strategies. Consumer preferences are shifting towards SUVs, premium vehicles,
and digitally enhanced experiences, influencing manufacturers' production and marketing
approaches. As companies navigate these changes, the valuation of automobile stocks remains
a key indicator for investors assessing potential opportunities and risks within the sector.
Data Collection and analysis:

The data for this analysis was collected from the Groww website, incorporating a mix of large-
cap, mid-cap, and small-cap companies within the automobile sector. By categorizing
companies based on market capitalization, the evaluation provides a comprehensive view of
valuation trends across different segments of the industry. The analysis was conducted by
assessing key financial metrics such as the P/E ratio, P/B ratio, and other valuation indicators
across high, medium, and low market cap companies. This segmentation allows for a deeper
understanding of how different-sized companies are valued relative to industry benchmarks
and helps identify investment opportunities or risks across various market capitalizations.

Valuation Models:

Relative Valuation:

The relative valuation of automobile stocks was conducted using P/E (19.64) and P/B (4.26)
ratios as benchmarks. Companies with significantly higher P/E or P/B ratios may be
overvalued, while lower ratios suggest potential undervaluation. By comparing these metrics
across large-cap, mid-cap, and small-cap companies, the analysis identifies investment
opportunities and risks within the sector.
1. Maruti Suzuki

• P/E (25.16) - Overvalued, P/B (4.11) - Undervalued

• The high P/E suggests that investors are expecting strong future earnings growth, which
is common for a market leader.
• A moderate P/B indicates that the stock is fairly valued in terms of its assets, meaning
the premium is justified due to Maruti's market position.
• Recommendation: Hold/Buy on dips, as Maruti has strong brand value and demand in
the Indian market.

2. Mahindra

• P/E (26.59) - Overvalued, P/B (4.67) - Overvalued

• A high P/E and P/B indicate that the stock is trading at a premium, likely due to strong
growth in its auto and farm equipment segments.
• While future growth potential remains strong, the stock is expensive at current levels.
• Recommendation: Hold, and wait for a correction before adding more positions.

3. Tata Motors

• P/E (7.75) - Undervalued, P/B (2.43) - Undervalued

• The low P/E suggests the stock is relatively cheap compared to earnings, making it a
good value investment.
• A low P/B means it is trading close to its book value, indicating limited downside risk.
• Recommendation: Buy, as the company is well-positioned in the EV segment and has
a strong global presence.

4. Ashok Leyland

• P/E (20.34) - Overvalued, P/B (5.58) - Overvalued

• A high P/E suggests that the stock is expensive based on earnings, meaning future
growth is already priced in.
• A high P/B ratio indicates that it is trading at a premium to its assets.
• Recommendation: Hold, as growth prospects are good, but it may not be the best entry
point.
5. Escorts Kubota

• P/E (27.29) - Overvalued, P/B (3.32) - Overvalued

• Both high P/E and P/B suggest that the stock is expensive and growth is already factored
into the price.
• Strong presence in the farm equipment sector, but limited upside potential at current
valuations.
• Recommendation: Hold/Sell partial, and re-enter at lower levels.

6. Ola

• P/E (-12.38) - Undervalued, P/B (3.43) - Undervalued

• A negative P/E suggests the company is operating at a loss, raising concerns about
profitability.
• A lower P/B means the stock is trading closer to its asset value, making it less risky in
that aspect.
• Recommendation: Speculative Buy for long-term investors who believe in the EV
space, but risky in the short term.

7. Mercury EV Tech

• P/E (193.54) - Overvalued, P/B (6.85) - Overvalued

• An extremely high P/E suggests the stock is priced for extreme growth, making it risky.
• A high P/B indicates it is trading well above its book value, showing potential
overvaluation.
• Recommendation: Avoid/Sell, as the valuation is too high, and a correction is likely.

8. Wardwizard

• P/E (196.93) - Overvalued, P/B (7.92) - Overvalued

• Like Mercury EV Tech, an extremely high P/E suggests overhyped valuation.
• A high P/B means the stock is expensive relative to its actual assets, making it a risky
investment.
• Recommendation: Sell/Avoid, as it is speculative and overvalued.

9. Hindustan

• P/E (15.32) - Undervalued, P/B (22.45) - Overvalued

 • A moderate P/E suggests that the stock is fairly valued in terms of earnings.
• However, a very high P/B indicates that the company is trading at a significant premium
to its assets, which can be risky.
• Recommendation: Hold, as earnings are stable, but the valuation is on the higher side.

Interpretation:

To simplify the analysis, we categorize the companies into three levels based on their P/E and
P/B ratios:

• High Valuation (Overvalued) → Maruti Suzuki, Mahindra, Escorts Kubota

• Mid Valuation (Fairly Valued to Slightly Overvalued) → Ashok Leyland, Mercury EV
Tech, Wardwizard
• Low Valuation (Undervalued/Potentially Underpriced) → Tata Motors, Ola, Hindustan

1. High-Valuation Companies (Overvalued Segment)

Maruti Suzuki, Mahindra, Escorts Kubota

• These companies have high P/E and P/B ratios, indicating strong market
confidence and high future growth expectations.

• The stocks are trading at a premium, meaning investors are willing to pay more
for future earnings.

• While they may be good for long-term holding, they are expensive right now,
making short-term gains limited.

Investment Strategy:

• Hold existing positions.

• Buy only on dips to get a better entry price.

• Avoid aggressive buying at current levels.

2. Mid-Valuation Companies (Fairly Valued to Slightly Overvalued)

Ashok Leyland, Mercury EV Tech, Wardwizard

• These companies have a moderate to high P/E and P/B ratio, meaning they are
not as overvalued as the first group but still trade at a premium.
 • Ashok Leyland is a stable company, but Mercury EV Tech and Wardwizard are
likely highly speculative.

• EV stocks are attracting premium valuations, but they may face a correction if
they don’t deliver expected growth.

Investment Strategy:

• Hold Ashok Leyland as it has decent growth prospects.

• Sell or avoid speculative EV stocks (Mercury EV Tech, Wardwizard) as their

valuations are dangerously high.

3. Low-Valuation Companies (Undervalued Segment)

Tata Motors, Ola, Hindustan

• These stocks have low P/E and/or P/B ratios, making them undervalued and
attractive for long-term investment.

• Tata Motors is the best pick from this group, as it has strong earnings and a
growing EV portfolio.

• Ola is risky since it is still loss-making (negative P/E), but it could be a high-
reward investment if it becomes profitable.

• Hindustan has mixed signals, as its P/E is fair, but P/B is extremely high,
meaning it’s overvalued in terms of assets but undervalued in terms of earnings.

Investment Strategy:

• Strong Buy: Tata Motors (best undervalued pick).

• Speculative Buy: Ola (only for risk-tolerant investors).

• Hold: Hindustan, but enter at a lower price.

Recommendations:

Overall Market Sentiment & Approach:

• High-valuation stocks (Maruti, Mahindra, Escorts Kubota) → Safe but

expensive. Buy on corrections.
 • Mid-valuation stocks (Ashok Leyland, Mercury EV Tech, Wardwizard) →
Some are safe (Leyland), but others are speculative. Avoid overhyped EV stocks.

• Low-valuation stocks (Tata Motors, Ola, Hindustan) → Best value picks. Tata
Motors is the strongest buy.

Conclusion:

This study evaluated automobile sector stocks to identify overvalued and undervalued
opportunities using P/E and P/B ratios. High-valuation stocks (Maruti Suzuki, Mahindra,
Escorts Kubota) are strong but expensive, best bought on dips. Mid-valuation stocks (Ashok
Leyland, Mercury EV Tech, Wardwizard) have mixed prospects, with speculative EV stocks
carrying high risk. Low-valuation stocks (Tata Motors, Ola, Hindustan) offer strong potential,
with Tata Motors being the best buy. Investors should focus on value stocks while cautiously
approaching overvalued and speculative investments.

THANK YOU