Are consumer durables stocks overvalued?

3 Jan 2023 , 02:17 PM

Consumer durables stocks at NSE are currently trading at an average P/E ratio of 56.32. In comparison, Indian stocks are currently trading at a P/E ratio of 22. This makes consumer durables stocks the most expensive ones in terms of their valuation. 

P/E ratio is the price – to – earnings ratio. It is the ratio of market price of the share to its earnings per share. A high P/E ratio means that markets are expecting the company to show high Earnings Per Share growth.

Average P/B ratio at which consumer durable stocks are currently trading at NSE is 10.84. This is also the highest P/B ratio among all sectoral stocks. P/B ratio is the price-to-book value per share ratio. Book value per share is calculated by dividing total book value of equity of the company by total number of outstanding shares of the company. A high P/B value ratio again indicates that the stock is overvalued. Value investors, such as Benjamin Graham or Warrant Buffet, consider a stock to be expensive if its P/B ratio is above 1.5.

Consumer durables products include various types of electrical appliances, jewelry products, ceramic products, footwear products etc. These are products that last for some time, often more than 3 years.  One reason why NSE’s consumer durable index is trading at such a high average P/E ratio is because of the high weight of Titan in the index. Titan has a 33.70% weight in NSE’s Consumer Durables Index, currently. Titan’s stock is currently trading at a P/E ratio of 73. Now because of the high weight of Titan in the index, and because of its high P/E ratio, the average P/E ratio of entire consumer durables index has been pulled up. But this is not the whole story.

Take the case of Relaxo footwear. It is also a constituent of Nifty Consumer Durables Index. It is trading at a P/E ratio of 115 currently. Blue Star Ltd, another constituent is trading at a P/E ratio of 48.49. Bata India is trading at a P/E ratio of 68.03. Voltas is trading at a P/E ratio of around 70. Havells is trading at a P/E ratio of 65. Almost all the stocks that make up the Nifty Consumer Durables stock are trading at a very high P/E ratio.

Consumer durable stocks are sensitive to the state of the economy. During times of economic boom demand for these products tends to go up. During times of economic slowdown, demand for these products tends to slow down. Given the current state of Indian economy and the global economy, it is unlikely that consumer durables companies are going to see any sudden, unexpected spike in their revenues and profits, in the foreseeable future. There is a high probability that economic situation will exacerbate further in 2023. That makes consumer durable stocks currently overvalued.