eMudhra downgraded to 'Hold' by MarketsMOJO due to high valuation and institutional investor participation

eMudhra, a midcap IT software company, has recently been downgraded to a 'Hold' by MarketsMOJO on October 29, 2024. This decision was based on various factors, including the company's high management efficiency with a ROE of 18.10%, strong ability to service debt with a low Debt to EBITDA ratio of 0.40 times, and healthy long-term growth with an annual operating profit growth rate of 23.34%. Additionally, eMudhra has declared positive results for the last 9 consecutive quarters, with its highest operating cash flow at Rs 72.52 crore, highest net sales at Rs 141.22 crore, and highest PAT at Rs 21.93 crore.
Technically, the stock is currently in a mildly bullish range, with the DOW being bullish since October 29, 2024. Another positive factor is the increasing participation of institutional investors, who have collectively increased their stake by 0.91% in the previous quarter and now hold 19.43% of the company. This indicates that these investors have better capabilities and resources to analyze the fundamentals of companies compared to retail investors.

eMudhra has also shown market-beating performance, with a return of 95.05% in the last year, significantly higher than the market (BSE 500) returns of 35.31%. However, with a ROE of 11.4, the stock is currently trading at a very expensive valuation with a 10.9 Price to Book Value. It is also trading at a premium compared to its average historical valuations. While the stock has generated a high return in the past year, its profits have only risen by 22.1%, resulting in a PEG ratio of 6.2.

In conclusion, while eMudhra has shown strong financial performance and market-beating returns, the current valuation of the stock may not be sustainable in the long run. Hence, MarketsMOJO has downgraded the stock to a 'Hold' and advises investors to carefully consider their options before making any investment decisions.