RBC Capital Markets downgraded 3i Group plc on Monday to 'underperform' from 'sector perform' and cut the price target to 3,000p from 3,250p as it said the valuation was still "on the full side".
The bank said it was concerned that Dutch retailer Action, in which 3i holds a majority stake, is at risk of moving into a period of diminishing returns, given macro pressures on its customers, increased maturity and competition in major markets.
"This looks somewhat at odds with its premium valuation," RBC said. "We think 3i, including Action, remains a high quality business with a strong management team, but we see more valuation upside for several other stocks in the sector. Hence, we move our sector relative rating to underperform."
The bank said it had cut its price target on the stock owing to a revision of its longer-term expectations for the business.
"Despite a derating in recent months, Action is still trading at circa 28x CY26e price-to-earnings," it said.
"This looks on the full side to us, compared to others in European retail with stronger LFL sales outlooks."
In the European retail sector, RBC said it prefers the likes of Zara owner Inditex for topline momentum and inflecting free cash flow trends, on circa 24x CY26e P/E ex cash.
At 0940 GMT, 3i shares were down 1.7% at 3,233p.