Amarjothi Spinning Mills Q3 FY26: Sharp Profit Decline Amid Demand Headwinds

The December 2025 quarter marked the weakest performance for Amarjothi Spinning Mills in recent memory, with net sales plummeting to ₹28.14 crores, representing a sequential decline of 40.11% and year-on-year contraction of 31.43%. This sharp revenue deterioration underscores the severe demand challenges facing India's textile sector, particularly in the cotton yarn segment where Amarjothi operates with its 12,096 spindles capacity at Pudusuripalayam.

Despite the revenue collapse, the company demonstrated resilient cost management, with operating margins expanding to 17.84% from 14.28% in the previous quarter. However, this margin improvement proved insufficient to offset the dramatic top-line contraction, resulting in absolute operating profit declining to ₹5.02 crores from ₹6.71 crores quarter-on-quarter.

Financial Performance: Margin Resilience Fails to Offset Revenue Collapse

The December 2025 quarter exposed the fundamental vulnerability of Amarjothi's business model to demand volatility. Net sales of ₹28.14 crores represented the lowest quarterly revenue in over two years, falling significantly below the company's historical run-rate. On a year-on-year basis, revenues contracted by 31.43%, indicating that the weakness extends beyond seasonal factors to reflect deeper structural challenges in textile demand.

Operating profit before depreciation, interest, tax and other income (PBDIT excluding OI) declined to ₹5.02 crores from ₹6.71 crores sequentially, despite the operating margin expanding by 356 basis points to 17.84%. This margin expansion, whilst commendable, appears driven primarily by reduced raw material costs and better capacity utilisation on the reduced production volumes rather than pricing power or product mix improvements.

Employee costs remained relatively stable at ₹5.83 crores, representing 20.72% of net sales in Q3 FY26 compared to 11.23% in Q2 FY26, highlighting the challenge of fixed cost absorption during revenue downturns. Interest expenses of ₹1.85 crores consumed a substantial 36.84% of operating profit, underscoring the company's financial leverage despite modest debt levels.

The tax rate of 17.14% in Q3 FY26 remained consistent with historical levels, whilst other income of ₹0.61 crores provided some cushion, likely reflecting treasury income and windfall gains from the company's wind power generation assets. Net profit margin compressed to 5.12% from 5.66% in the previous quarter, reflecting the inability of margin expansion to fully offset the revenue decline's impact on absolute profitability.

Operational Challenges: Weak Interest Coverage Signals Stress

Beneath the surface-level numbers, Amarjothi's operational metrics reveal concerning trends. The operating profit to interest coverage ratio deteriorated to 2.71 times in Q3 FY26, marking the lowest level in recent quarters and significantly below the company's five-year average of 2.89 times. This weakening coverage ratio, whilst still above the critical threshold of 2.0 times, signals diminishing financial flexibility.

Return on equity (ROE) averaged 7.23% over the past five years, substantially below the 15% threshold typically expected from manufacturing businesses. The latest ROE of 6.15% for FY25 indicates further deterioration in capital efficiency. Return on capital employed (ROCE) of 10.33% for FY25, whilst marginally better than the five-year average of 9.75%, remains unimpressive for a capital-intensive textile business.

The balance sheet as of March 2025 showed shareholder funds of ₹192.07 crores, with long-term debt of ₹43.63 crores resulting in a conservative debt-to-equity ratio of 0.23 times. Fixed assets of ₹123.31 crores represent the company's spinning infrastructure and wind power assets, whilst current assets of ₹145.15 crores provide reasonable working capital coverage. However, the decline in current assets from ₹162.10 crores in FY24 to ₹145.15 crores in FY25 suggests inventory liquidation or reduced receivables, potentially indicating demand weakness even before the Q3 FY26 collapse.

Textile Sector Headwinds: Demand Weakness Persists

Amarjothi's performance must be contextualised within the broader challenges facing India's textile sector. The cotton yarn segment has experienced significant demand volatility due to subdued export markets, inventory corrections at downstream garment manufacturers, and intense competition from synthetic fibres. The company's 31.43% year-on-year revenue decline in Q3 FY26 substantially underperformed the garments and apparels sector, which posted a more modest 1.86% decline over the past year.

The company's sales-to-capital-employed ratio of 0.91 times indicates suboptimal asset utilisation, with the installed spindle capacity likely operating well below optimal levels during Q3 FY26. This underutilisation creates a vicious cycle where fixed costs cannot be adequately absorbed, pressuring margins despite improved raw material economics.

Within the peer group, Amarjothi trades at a P/E ratio of 8.21 times, below peers like KG Petrochem (20.14x) and Bhandari Hosiery (12.15x), but above Vippy Spinpro (6.76x). The company's ROE of 7.23% exceeds most peers except Vippy Spinpro's impressive 14.54%, whilst its price-to-book ratio of 0.50 times suggests the market values the company at half its book value, reflecting scepticism about future earnings potential.

Valuation Analysis: Attractive Multiples Mask Fundamental Weakness

At the current market price of ₹144.00, Amarjothi Spinning Mills trades at seemingly attractive valuations: P/E of 8.21 times (versus industry average of 22 times), price-to-book of 0.50 times, and EV/EBITDA of 3.52 times. However, these depressed multiples reflect the market's concerns about earnings sustainability rather than representing genuine value.

The company's valuation grade has fluctuated between "Very Attractive" and "Fair" over the past year, currently standing at "Very Attractive" as of February 11, 2026. This classification, however, appears driven by mechanical multiple compression following the recent profit decline rather than improving fundamentals. The book value per share of ₹284.54 compared to the market price of ₹144.00 suggests a 50% discount to book value, but this discount may be justified given the weak return ratios and deteriorating earnings trajectory.

The dividend yield of 1.47% based on the latest dividend of ₹2.20 per share (ex-date September 18, 2025) provides modest income support, though the dividend payout ratio of 13.09% suggests limited commitment to shareholder distributions. With the current earnings trajectory, even this modest dividend may face pressure in future quarters.

Shareholding Pattern: Stable Promoter Base, Zero Institutional Interest

The shareholding pattern reveals a stable promoter holding of 60.08% that has remained unchanged over the past five quarters, indicating strong promoter commitment. Key promoters include Jaichander (28.34%) and Premchander Rajan (27.53%), with no pledging of promoter shares—a positive indicator of financial stability at the promoter level.

However, the complete absence of institutional investors—zero FII, mutual fund, and insurance holdings—represents a significant red flag. This institutional void suggests that professional money managers have evaluated Amarjothi and found the risk-reward profile unattractive, likely due to concerns about business scalability, governance standards, or growth prospects. The 39.92% non-institutional holding comprises primarily retail investors, who may lack the resources for thorough due diligence.

Stock Performance: Severe Underperformance Across All Timeframes

Amarjothi's stock performance has been dismal across virtually all timeframes, with the shares declining 17.93% over the past year whilst the Sensex gained 10.18%—a negative alpha of 28.11 percentage points. The underperformance extends across longer periods: two-year returns of -15.07% versus Sensex's +18.08%, three-year returns of -17.12% versus Sensex's +38.30%, and five-year returns of +39.60% versus Sensex's +62.82%.

The stock currently trades below all key moving averages—5-day (₹148.23), 20-day (₹139.10), 50-day (₹140.72), 100-day (₹145.65), and 200-day (₹159.08)—indicating sustained downward momentum. Technical indicators show a "Mildly Bearish" trend as of February 3, 2026, with MACD displaying mixed signals and RSI remaining neutral on weekly charts but bullish on monthly timeframes.

The stock's beta of 1.50 indicates significantly higher volatility than the broader market, with annualised volatility of 37.82% compared to Sensex's 11.44%. This high-beta, high-volatility profile combined with negative returns creates an unfavourable risk-adjusted return profile, with the risk-adjusted return of -0.47 for the past year highlighting the poor compensation for volatility endured.

Investment Thesis: Deteriorating Fundamentals Outweigh Valuation Appeal

The investment case for Amarjothi Spinning Mills presents a classic value trap scenario where superficially attractive valuations mask deteriorating fundamentals. The company's proprietary Mojo Score of 23 out of 100 with a "Strong Sell" rating reflects the confluence of negative factors: bearish technical trend, negative financial trend (Q3 FY26 marked as "Negative"), below-average quality grade, and weak long-term fundamental strength with only 11.46% CAGR in operating profits over five years.

The quality assessment reveals fundamental structural weaknesses: five-year sales growth of merely 6.38%, average ROCE of 9.75% (weak for manufacturing), average ROE of 7.23% (substantially below acceptable thresholds), and EBIT-to-interest coverage averaging just 2.89 times. Whilst the balance sheet shows no promoter pledging and modest leverage (debt-to-equity of 0.23), these positives are insufficient to offset operational underperformance.

Key Strengths & Risk Factors

Outlook: Critical Monitoring Points

The path forward for Amarjothi requires urgent demand recovery in the textile sector, particularly in export markets. The company's ability to sustain operations hinges on maintaining interest coverage above 2.0 times whilst navigating the current demand trough. Any further deterioration in revenue or profitability could trigger more severe financial stress, potentially forcing difficult decisions around dividend sustainability or capital structure optimisation.