Meta Description: Discover why Undervalued Growth Stocks like Indiamart, Aavas Finance, and KNR Construction show strong revenue and profit growth but stagnant stock prices. Understand the disconnect and key risks before investing.
Undervalued Growth Stocks: Hidden Opportunities or Value Trap? 3 Companies with Growing Profits but Flat Stocks
The Strange Disconnect Between Growth and Stock Prices
In the stock market, we often expect that consistent revenue and profit growth will translate into rising share prices. But reality doesn’t always match expectations. Sometimes, companies report robust financial performance, yet their stock prices remain flat—or even decline.
In this blog, we’ll analyze three such companies—Indiamart Intermesh Ltd, Aavas Financiers Ltd, and KNR Construction Ltd. All three have demonstrated solid business growth over the last five years, but their share price trajectories tell a very different story. We’ll explore their performance, reasons behind the disconnect, and whether investors should consider these companies hidden opportunities or potential traps.
Case Study 1: Indiamart Intermesh Ltd
- Sales CAGR (5 years): 17%
- Profit CAGR (5 years): 29%
- Stock CAGR (5 years): Just 5%
Why hasn’t the stock moved?
Indiamart is India’s largest B2B online marketplace, connecting buyers with suppliers. Despite solid fundamentals, growth in paid subscribers has stagnated. The churn rate, particularly among Silver-tier suppliers, is high—about 7% monthly. Weak first-tier retention signals lower platform engagement.
Margins also normalized after the COVID boom, falling from 49% to 39%, while average revenue per user (ARPU) remained flat at ₹44,000. This led to a derating in valuation, as the P/E multiple dropped from pandemic highs.
Q1 FY26 Highlights:
- Revenue: ₹372 crore (+12.4% YoY)
- Net Profit: ₹154 crore (+35.1% YoY)
- Net Profit Margin: 41.4% (expanded 696 bps)
The growth came mainly from Gold and Platinum subscribers, who have low churn and strong upsell potential. However, new customer additions remain slow, and concentration risk is rising—top 10% of clients now contribute 50% of revenues.
Risks for Indiamart Investors:
- High churn in lower-tier customers
- Dependence on top clients (concentration risk)
- Rising competition from Reliance, Udaan, Amazon Business
- Margin volatility due to fluctuating ad spends
While the balance sheet is strong (₹2,788 crore in investments), growth sustainability remains questionable unless churn stabilizes and customer additions pick up.
Case Study 2: Aavas Financiers Ltd
- Sales CAGR (5 years): 21%
- Profit CAGR (5 years): 18%
- Stock CAGR (5 years): 4% (down 13% in last year)
Business Model and Challenges
Aavas provides affordable housing finance to low- and middle-income households in semi-urban and rural India. While the demand for housing loans remains strong, rising borrowing costs and shrinking spreads have hit the company’s margins.
- Net Interest Margin (NIM) slipped from 8.28% in FY18 to 7.64% in FY25.
- Gross NPAs rose to 1.22% in Q1 FY26.
- Early stress indicators (1+ DPD loans) increased sharply to 4.15%.
Q1 FY26 Highlights:
- Net Income: ₹354 crore (+15.7% YoY)
- Interest Expense: ₹274 crore (+15.8% YoY)
- PAT: ₹139 crore (+10.4% YoY)
Profitability lagged revenue growth due to higher operating costs and credit stress.
Growth Outlook
Aavas is targeting 18–20% AUM growth in FY26, with disbursements expected to exceed 20% growth. Management plans branch expansion in Tamil Nadu and partnerships with India Post Payments Bank and CSCs to boost distribution.
However, risks include:
- Geographic concentration (Rajasthan = 33% of AUM)
- Weak borrower profiles (60% self-employed in semi-urban/rural areas)
- Declining spreads amid rising funding costs
Despite steady demand, asset quality stress and regional dependency make the stock less attractive for the near term.
Case Study 3: KNR Construction Ltd
- Sales CAGR (5 years): 14%
- Profit CAGR (5 years): 32%
- Stock CAGR (5 years): 10% (down 42% in last year)
Sectoral Headwinds
KNR Construction is a leading EPC contractor in roads and highways. The stock decline is largely due to:
- Slow order inflows due to tighter NHAI norms
- Rising receivables, especially from irrigation projects
- Delayed payments at the Kaleshwaram Irrigation Project (~₹1,300 crore stuck)
Q1 FY26 Highlights:
- Sales: ₹63 crore (–37.8% YoY)
- Operating Profit: –34% YoY
- Net Profit: ₹123 crore (–26% YoY)
Despite muted execution, cost control improved OPM to 29.9%, but revenue weakness outweighed margin gains.
Growth Outlook
KNR is diversifying into mining contracts, with a major coal block order from NTPC worth ₹4,800 crore. However, execution will begin only by FY27. Meanwhile, receivables and working capital stress are weighing down cash flows.
Key risks include:
- Order inflow slowdown
- Weak cash flow due to stuck receivables
- Higher debt (+89% YoY) to fund working capital
Unless collections improve, the stock may remain under pressure despite a strong order book.
Why This Disconnect Happens in Stocks
The disconnect between financial growth and stock performance usually happens due to:
- Valuation Derating – Strong past growth may already be priced in.
- Sector Headwinds – Macro or regulatory risks drag stocks down despite company-level growth.
- Balance Sheet Stress – High receivables, rising debt, or weak asset quality scare investors.
- Market Sentiment – Sometimes, investors prefer other sectors or safer plays, keeping stocks undervalued.
For Indiamart, churn and competition are key worries. For Aavas, asset quality stress overshadows housing demand. For KNR, receivables and execution delays are major risks.
Conclusion: Opportunity or Value Trap?
All three companies—Indiamart, Aavas Finance, and KNR Construction—show that growth in sales and profits does not always guarantee stock price appreciation. Investors need to look beyond earnings and examine:
- Customer churn & concentration risks
- Asset quality and funding costs
- Working capital cycles and receivable delays
- Sector-specific headwinds
For long-term investors, these companies may offer research-worthy opportunities if risks are managed well. But until execution stabilizes, they could also turn out to be value traps.
Disclaimer: This article is for educational purposes only and should not be considered financial advice.As always, do your own due diligence and consult a financial advisor before investing.
Investment in securities markets is subject to market risks. Please read all related documents carefully before investing.
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