4 stocks with high valuations you should sell now | Economic Times

The liquidity-driven stock market rally continues, pushing the Sensex towards the 60k mark. An easy monetary policy maintained by global central bankers to fight covid induced economic weakness is the main reason behind it. However, global and Indian GDP levels are still below pre-covid levels. Equity markets though are at much higher levels. Sensex closed at 59,000 on 21 September, 41% higher than its pre-covid peak of 41,953 on 14 January 2020.The broader market may remain strong for some more time due to the continued money flow. Some sectors, like telecom, IT, pharma, etc, which benefited from the pandemic may also remain strong. Chemicals is also benefitting due to a structural change – the shift of manufacturing base from China to India. However, the market has started over discounting these positives, leading to very high valuations.“There is too much froth in the chemical sector and you can sell some stocks from there,” says Naveen Kulkarni, CIO, Axis Securities. The healthcare sector is a mixed bag—some stocks are overpriced, others quoting at reasonable valuations. Chasing all stocks, without considering their underlying value, is a common bull market phenomenon. “Don’t chase stocks without looking at their valuations. Even quality and growth stocks should be bought at reasonable prices,” says Daljeet Singh Kohli, CIO, StockAxis.com. Let us look at stocks you should be selling now.Valuations don’t match future prospects of these companies 86546086Dr Lal PathLabsAs mentioned earlier, healthcare stocks continues to be the darling of the markets now. These are also reporting good numbers thanks to the pandemic. Dr Lal PathLabs has reported bumper revenues in the first quarter of 2021-22 and the market has rewarded it with valuations well above historical values. However, analysts point out that 36% of its first quarter revenue was contributed by covid tests and the normalised revenues from core portfolio of tests grew only 15% yo-y. In other words, it is not fair to give Dr Lal PathLabs this high a valuation based on short-term opportunities arising out of a pandemic. “We believe Dr Lal PathLabs valuation post pandemic reflects irrational exuberance as there is opaque visibility on additional flow of volumes and revenues after the pandemic,” says a recent Prabhudas Lilladher report.Pidilite IndustriesIts strong Fevicol brand and the recent investor rush towards successful chemical companies have pushed valuations of Pidilite to very high levels now. Despite good management quality and free cash flows generated by it, investors should note that Pidilte is still an Indian adhesives manufacturing company and the industry is not yet out of the woods. For instance, Pidilite’s 120% y-o-y sales jump in the first quarter of 2021-22 was only because of the low base effect and its sales contracted by 4% if compared on 2-year CAGR basis. Cost inflation pressures are also there, though the recent correction in VAM prices has reduced its impact a bit. “Margin pressure and high comparables are likely to restrict earnings growth of Pidilite in the near term. We maintain sell because its current high valuation makes it unattractive,” says a recent Emkay report. Berger PaintsDecorative paints manufacturers have faced a double whammy during the first quarter of 2021-22. While raw material costs soared due to jump in oil prices, covid induced restrictions reduced demand and thereby the ability to pass on the cost increase to consumers. For instance, they could only do small price increases of 5-6% in the first half of 2021, compared to raw material inflation of 20-25%. Analysts are not attracted to Berger Paints because of its revenue underperformance and overvaluation compared to market leader Asian Paints. Berger Paints’ two-year topline CAGR is only 2.4% compared to 4.6% of Asian Paints. “While Berger Paints continues to execute well, its topline variance vis-à-vis Asian Paints hasn’t been meaningful and therefore, the premium it enjoys over Asian Paints is unjustified,” says Deepak Jasani, Head of Retail Research, HDFC Securities.AstralAstral is a fast growing CPVC pipe manufacturing company and only has low exposure to the price-sensitive agriculture segment. Astral also had to go through the second wave induced pains during the first quarter of 2021-22. However, pent up demand is helping Astral to bounce back fast and its pipes and adhesive revenues were up by 65% and 36% y-o-y respectively in July. Despite this, majority of analysts are maintaining ‘sell’ recommendation on this counter due to its high valuations. “While we like Astral for its robust growth and margin along with free cash flow (FCF) acceleration, its valuation (EV/EBITDA) has soared by around 50% on its five-year mean,” says Jasani.(Graphic by Sadhana Saxena/ET Prime)