Is AU Small Finance overvalued or undervalued?

As of 8 July 2025, the valuation grade for AU Small Finance has moved from expensive to very expensive. This indicates a significant shift in perception regarding its market valuation. The company appears to be overvalued, given its current PE ratio of 28.96, a price-to-book value of 3.58, and a PEG ratio of 1.57. These ratios suggest that the stock is trading at a premium compared to its earnings growth potential.
In comparison to its peers, HDFC Bank has a PE ratio of 22.79 and ICICI Bank has a PE ratio of 21.78, both of which are lower than AU Small Finance's. Additionally, Kotak Mahindra Bank is categorized as very expensive with a PE of 32.13, but it does not provide a compelling justification for AU Small Finance's higher valuation. Notably, AU Small Finance's return over the past year has outperformed the Sensex, with a return of 27.36% compared to the Sensex's 4.69%, yet this does not mitigate the concerns around its current valuation.