Amarjothi Spinning Mills Q2 FY26: Margin Compression Amid Persistent Revenue Decline

The company's stock has been under significant pressure, trading at ₹146.50 as of November 11, 2025, down 24.95% over the past year and substantially below its 52-week high of ₹239.70. With the stock currently in a bearish technical trend since mid-August and trading below all key moving averages, investor sentiment remains cautious despite the company's relatively attractive valuation metrics.

Financial Performance: Revenue Contraction Persists

Amarjothi Spinning Mills' Q2 FY26 performance reflects the ongoing headwinds facing India's textile sector. Net sales declined 10.56% sequentially to ₹46.99 crores from ₹52.54 crores in Q1 FY26, marking the third consecutive quarter of revenue contraction. On a year-on-year basis, sales fell 12.14% from ₹53.48 crores in Q2 FY25, highlighting the sustained pressure on demand and pricing in the yarn manufacturing segment.

Despite the revenue decline, the company demonstrated modest resilience in profitability metrics. Operating profit (PBDIT excluding other income) stood at ₹6.71 crores with a margin of 14.28%, representing a sequential improvement of 58 basis points from 13.70% in Q1 FY26, though still below the 16.65% achieved in Q4 FY25. Net profit margins expanded to 5.66% from 4.95% in the previous quarter, aided by lower interest costs which declined to ₹1.73 crores from ₹1.89 crores sequentially.

The improvement in margins despite falling revenues suggests better cost management and operational efficiency. Employee costs remained relatively stable at ₹5.28 crores compared to ₹5.55 crores in Q1 FY26, whilst depreciation declined marginally to ₹2.06 crores from ₹2.22 crores. The effective tax rate remained consistent at 20.36%, in line with the company's historical tax efficiency.

Operational Challenges: Capital Efficiency Under Pressure

The company's operational metrics reveal deeper concerns about capital productivity and return generation. Return on Equity (ROE) averaged 7.48% over recent periods, whilst Return on Capital Employed (ROCE) stood at 10.30% on average, both significantly below industry benchmarks and indicative of suboptimal capital utilisation. The latest ROCE of 9.53% and ROE of 7.08% underscore the challenges in generating adequate returns on the capital base.

Amarjothi's balance sheet presents a mixed picture. Total shareholder funds stood at ₹192.07 crores as of March 2025, marginally lower than ₹193.40 crores in the previous year, reflecting the modest profitability and dividend payouts. Long-term debt increased to ₹43.63 crores from ₹41.88 crores, resulting in a debt-to-equity ratio of 0.25, which remains manageable but warrants monitoring given the challenging operating environment.

Fixed assets declined to ₹123.31 crores from ₹141.65 crores year-on-year, primarily due to depreciation outpacing capital expenditure, whilst current assets fell to ₹145.15 crores from ₹162.10 crores, suggesting working capital optimization efforts. The company's EBIT to interest coverage ratio averaged 2.92 times, adequate but not robust, leaving limited cushion for further margin compression.

Industry Context: Textile Sector Headwinds

The Indian textile and apparel sector has faced significant headwinds through FY25 and into FY26, with weak global demand, inventory corrections, and intense competition from countries like Bangladesh and Vietnam impacting yarn manufacturers. Cotton price volatility and elevated power costs have further compressed margins across the industry, whilst the shift in global sourcing patterns post-pandemic has created structural challenges for traditional players.

Amarjothi's performance mirrors broader sector trends, with the Garments & Apparels industry posting a 1.84% decline over the past year. The company's 24.95% underperformance against this already weak sectoral benchmark highlights company-specific challenges beyond the industry-wide pressures. Capacity utilisation across spinning mills has remained subdued, with many players reporting utilisation rates below 80%, limiting operating leverage benefits.

The company's captive wind power generation provides some insulation from power cost inflation, a competitive advantage in the energy-intensive spinning business. However, this benefit has proven insufficient to offset the revenue and margin pressures from weak demand and pricing power erosion in the yarn market.

Peer Comparison: Valuation Discount Reflects Concerns

Amarjothi trades at a significant valuation discount to profitable peers, with a P/E ratio of 7.59 times compared to Bhandari Hosiery's 13.69 times and Pioneer Embroideries' 53.64 times. The company's price-to-book ratio of 0.51 times ranks amongst the lowest in the peer group, suggesting the market ascribes limited value to the company's asset base. This valuation gap reflects concerns about the sustainability of current profitability levels and the company's ability to generate adequate returns on capital.

Whilst Amarjothi's ROE of 7.48% exceeds that of Bhandari Hosiery (5.80%) and Pioneer Embroideries (6.68%), it trails Deepak Spinners' 10.04%, highlighting room for improvement. The company's conservative leverage profile with a debt-to-equity ratio of 0.25 provides financial flexibility but may also indicate underutilisation of financial leverage to enhance returns. The dividend yield of 1.52% is the highest amongst peers, though the modest payout ratio of 13.09% suggests limited confidence in sustained earnings growth.

Valuation Analysis: Attractive but Value Trap Risk

At the current price of ₹146.50, Amarjothi Spinning Mills trades at compelling valuation multiples across parameters. The P/E ratio of 7.59 times represents a 65% discount to the industry average of 22 times, whilst the P/BV ratio of 0.51 times implies the market values the company's net assets at half their book value. The EV/EBITDA multiple of 4.85 times and EV/Sales of 0.71 times further underscore the valuation discount.

However, the attractive valuation must be viewed through the lens of deteriorating fundamentals. The company's quality grade has been downgraded to "Below Average" from "Average" in recent months, reflecting concerns about long-term financial performance. The negative financial trend, persistent revenue decline, and weak return ratios suggest the low valuation may be justified rather than representing a genuine opportunity. The stock's classification as "Very Attractive" on valuation alone does not account for the execution risks and structural challenges facing the business.

Shareholding: Stable but Limited Institutional Interest

The shareholding pattern has remained completely static over the past five quarters, with promoters maintaining their 60.08% stake without any pledging. The absence of foreign institutional investors, mutual funds, and insurance companies reflects the company's micro-cap status and limited liquidity, with the entire non-promoter holding residing with retail and non-institutional investors at 39.92%.

This shareholding structure presents both advantages and concerns. The stable promoter holding with zero pledging demonstrates commitment and financial stability at the promoter level. However, the complete absence of institutional investors suggests limited professional investor interest, likely due to concerns about liquidity, scale, governance visibility, and growth prospects. The lack of institutional participation also implies reduced research coverage and market attention, contributing to the valuation discount.

Stock Performance: Persistent Underperformance

Amarjothi's stock performance has been dismal across all recent timeframes, with the shares down 24.95% over the past year compared to a 4.89% gain in the Sensex, resulting in negative alpha of 29.84 percentage points. The year-to-date performance is particularly concerning, with the stock plunging 33.04% against a 6.72% Sensex gain, representing underperformance of nearly 40 percentage points.

The technical picture is equally bearish. The stock entered a bearish trend on August 18, 2025, at ₹158.10 and has since declined further to ₹146.50, trading below all key moving averages including the 5-day (₹148.05), 20-day (₹149.05), 50-day (₹152.86), 100-day (₹165.55), and 200-day (₹167.74) levels. Multiple technical indicators including MACD, Bollinger Bands, and KST all flash bearish signals on both weekly and monthly timeframes.

The stock's high beta of 1.50 indicates significantly higher volatility than the broader market, with annualised volatility of 37.48% compared to the Sensex's 12.38%. This elevated volatility, combined with negative returns, results in a negative risk-adjusted return of -0.67, classifying the stock in the "High Risk Low Return" category. The 52-week price range of ₹141.50 to ₹239.70 reflects the sharp 41% decline from peak levels, with the current price just 3.53% above the 52-week low.

Investment Thesis: Multiple Red Flags Outweigh Valuation Appeal

The investment case for Amarjothi Spinning Mills presents a classic dilemma between attractive valuation metrics and deteriorating fundamental performance. The company's proprietary score of 17 out of 100 with a "Strong Sell" rating reflects the preponderance of negative factors overwhelming the valuation appeal. The score has progressively declined from 71 (Buy) in December 2024 to the current distressed level, mirroring the deterioration in both business performance and market sentiment.

The Mojo 4 Dots analysis reveals critical weaknesses across key parameters. Near-term drivers are decidedly negative, with the quarterly financial trend classified as negative and technical indicators uniformly bearish. Quality assessment has been downgraded to "Below Average," reflecting concerns about long-term financial performance, particularly the weak ROCE averaging 10.30% and ROE of 7.48%. Whilst valuation appears "Very Attractive" on traditional metrics, this low valuation is arguably justified given the quality and growth concerns rather than representing a mispricing opportunity.

Outlook: What Lies Ahead

The path forward for Amarjothi Spinning Mills depends critically on the recovery trajectory of the textile sector and the company's ability to arrest the revenue decline whilst protecting margins. Management's capacity to improve capital efficiency and generate adequate returns on the asset base will determine whether the current valuation discount narrows or widens further. Given the micro-cap nature and limited liquidity, the stock remains suitable only for high-risk investors with long investment horizons and patience to wait for a sector turnaround.