The quarterly results reveal troubling operational challenges, with revenue declining 7.97% sequentially to ₹362.08 crores and operating margins turning negative at -1.88%. This marks the first quarterly loss for the company in recent periods, raising questions about the sustainability of the paper sector's profitability amid weak demand conditions and elevated input costs.
Quarterly Performance Trend: Steep Deterioration
| Quarter | Revenue (₹ Cr) | QoQ Change | Net Profit (₹ Cr) | QoQ Change | Operating Margin |
|---|---|---|---|---|---|
| Sep'25 | 362.08 | ▼ 7.97% | -20.26 | ▼ 148.60% | -1.88% |
| Jun'25 | 393.42 | ▼ 3.42% | 21.31 | ▲ 171.46% | 8.54% |
| Mar'25 | 407.37 | ▲ 5.62% | 7.85 | ▼ 32.62% | 4.98% |
| Dec'24 | 385.70 | ▼ 10.78% | 11.65 | ▼ 72.08% | 7.34% |
| Sep'24 | 432.28 | ▲ 36.85% | 41.72 | ▲ 50.72% | 12.10% |
| Jun'24 | 315.89 | ▼ 13.31% | 27.68 | ▼ 27.95% | 10.66% |
| Mar'24 | 364.38 | — | 38.41 | — | 9.67% |
Financial Performance: Margin Collapse Drives Loss
The Q2 FY26 results reveal a comprehensive breakdown in operational performance. Net sales of ₹362.08 crores declined 7.97% sequentially from ₹393.42 crores in Q1 FY26 and fell 16.24% year-on-year from ₹432.28 crores in Q2 FY25. This marks the lowest quarterly revenue figure in recent periods, reflecting weak demand conditions across the paper manufacturing sector.
More concerning is the complete erosion of operating profitability. Operating profit before depreciation, interest, and tax (excluding other income) turned negative at ₹-6.81 crores in Q2 FY26, compared to a positive ₹33.60 crores in Q1 FY26 and ₹52.31 crores in Q2 FY25. The operating margin contracted sharply to -1.88% from 8.54% in the previous quarter, indicating that core manufacturing operations are now loss-making.
The company's reliance on other income of ₹10.18 crores partially cushioned the operating loss, but this non-core income stream declined significantly from ₹27.23 crores in Q1 FY26 and ₹30.33 crores in Q2 FY25. Interest costs rose to ₹4.20 crores from ₹5.76 crores in Q1 FY26, whilst depreciation increased to ₹26.91 crores from ₹25.90 crores, reflecting the impact of recent capital expenditure on the asset base.
The profit before tax stood at ₹-27.75 crores, resulting in a tax credit of ₹7.49 crores. The final net loss of ₹20.26 crores translates to an earnings per share of ₹-1.02, the lowest in recent history. The PAT margin deteriorated to -5.60% from 5.42% in Q1 FY26, highlighting the severity of the profitability crisis.
Operational Challenges: Sector-Wide Headwinds
The sharp margin compression reflects a combination of factors plaguing the paper manufacturing industry. Whilst the company has not provided detailed operational commentary, the negative operating margins suggest that raw material costs, particularly for wood pulp and chemicals, have remained elevated even as realisation pressures intensified. Employee costs remained relatively stable at ₹43.57 crores, but as a percentage of sales, they increased to 12.03% from 10.94% in Q1 FY26, indicating deteriorating operating leverage.
The company's return on equity has weakened substantially to 4.25% on a trailing basis, down sharply from the five-year average of 13.81%. This represents a significant deterioration in capital efficiency, with the company now generating minimal returns on shareholder equity. The return on capital employed similarly declined to 10.61% from a robust five-year average of 30.08%, indicating that the company's asset base is being underutilised in the current demand environment.
Critical Alert: First Quarterly Loss in Recent History
The Q2 FY26 loss of ₹20.26 crores marks the first quarterly loss in recent periods and signals a fundamental shift in the operating environment. The negative operating margin of -1.88% indicates that core manufacturing operations are loss-making at current price and cost levels, raising serious questions about near-term profitability prospects.
Key Risk: If demand conditions do not improve materially or if the company cannot implement aggressive cost reduction measures, sustained losses could erode the balance sheet strength accumulated during better times.
On the balance sheet front, the company maintains a relatively strong position with shareholder funds of ₹1,940.83 crores as of March 2025, though this will be reduced by the recent quarterly loss. Long-term debt increased to ₹135.42 crores from ₹47.30 crores in the previous year, reflecting borrowings to fund capital expenditure. The company remains a net cash entity with negligible debt-to-equity ratio, providing some cushion to weather the current downturn.
Cash Flow Concerns: Operating Cash Turns Negative
The annual cash flow statement for FY25 reveals emerging strains. Cash flow from operations turned negative at ₹-55.00 crores, down sharply from a positive ₹318.00 crores in FY24. This deterioration was driven by adverse working capital movements of ₹-192.00 crores, suggesting inventory build-up or slower receivables collection. The company invested ₹61.00 crores in capital expenditure and other investments, whilst cash flow from financing activities was positive at ₹109.00 crores due to increased borrowings.
The closing cash balance declined to ₹3.00 crores from ₹11.00 crores, indicating tighter liquidity. Whilst the company's overall balance sheet remains healthy, the negative operating cash flow is a concerning trend that needs to reverse quickly as working capital normalises and profitability recovers.
Industry Context: Paper Sector Under Pressure
Andhra Paper's struggles mirror broader challenges facing the paper manufacturing industry. The sector has been grappling with weak demand from key end-user segments, including packaging, printing, and writing paper. Overcapacity in certain segments has led to intense pricing pressure, whilst raw material costs, particularly for imported wood pulp, have remained stubbornly high due to global supply dynamics and currency fluctuations.
The company's year-on-year revenue decline of 16.24% in Q2 FY26 and the sequential decline of 7.97% suggest that demand conditions have not improved materially. The paper industry typically experiences seasonal variations, with the September quarter often being weaker due to monsoon-related disruptions and lower industrial activity. However, the magnitude of the decline and the negative margins indicate structural rather than purely seasonal challenges.
Sector Dynamics: Pricing Power Erosion
The paper manufacturing sector has seen significant pricing power erosion over the past year. Whilst raw material costs have moderated from peak levels, they remain elevated relative to historical norms. Simultaneously, competitive intensity has increased as companies chase volumes to maintain capacity utilisation, leading to aggressive pricing that has compressed margins across the industry.
Peer Comparison: Relative Underperformance
| Company | P/E Ratio | P/BV Ratio | ROE (%) | Debt to Equity | Dividend Yield |
|---|---|---|---|---|---|
| Andhra Paper | 18.59x | 0.79x | 13.81% | -0.24x | 1.30% |
| JK Paper | 21.88x | 0.12x | 16.86% | 0.04x | 1.30% |
| West Coast Paper | 11.77x | 0.85x | 17.09% | -0.22x | 1.11% |
| Seshasayee Paper | 19.62x | 0.08x | 9.67% | -0.23x | — |
| Pudumjee Paper | 10.41x | 1.87x | 16.41% | -0.27x | 0.52% |
Compared to peers, Andhra Paper trades at a P/E ratio of 18.59x, which appears expensive given the recent loss and deteriorating fundamentals. The company's ROE of 13.81% (on a five-year average basis) is now below peers like JK Paper (16.86%) and West Coast Paper (17.09%), though the trailing ROE of 4.25% is significantly weaker. The price-to-book ratio of 0.79x is in line with West Coast Paper but higher than JK Paper and Seshasayee Paper, suggesting limited valuation comfort.
The company's net cash position (negative debt-to-equity of -0.24x) provides some balance sheet strength relative to peers, but this advantage is diminishing as the company burns cash and increases borrowings to fund capital expenditure. The dividend yield of 1.30% matches JK Paper but is higher than most peers, though the sustainability of dividends is now questionable given the quarterly loss.
Valuation Analysis: Premium Unjustified by Fundamentals
At the current price of ₹77.15, Andhra Paper trades at a P/E ratio of 18.59x based on trailing twelve-month earnings, which includes the recent loss. This valuation appears expensive relative to the sector average P/E of 15x and particularly so given the negative financial trend. The price-to-book ratio of 0.79x offers some discount to book value of ₹97.60 per share, but this discount is insufficient given the deteriorating return profile.
The EV-to-EBITDA multiple of 7.88x and EV-to-sales ratio of 0.65x suggest moderate valuation levels on an enterprise value basis. However, these metrics are backward-looking and do not reflect the sharp deterioration in recent quarterly performance. The company's proprietary Mojo score of 41 out of 100 and "SELL" rating reflect the challenging fundamentals and expensive valuation.
The stock has declined 28.41% from its 52-week high of ₹107.76, reflecting the market's recognition of deteriorating fundamentals. However, at 17.41% above the 52-week low of ₹65.71, there remains significant downside risk if the company posts another loss in Q3 FY26 or if guidance suggests prolonged weakness. The valuation grade has shifted from "Fair" to "Expensive" and then to "Very Expensive" before settling at "Expensive," indicating that the stock has not corrected sufficiently to reflect the fundamental challenges.
Shareholding Pattern: Stable Promoter Base
| Category | Sep'25 | Jun'25 | Mar'25 | Dec'24 | QoQ Change |
|---|---|---|---|---|---|
| Promoter | 72.45% | 72.45% | 72.45% | 72.45% | 0.00% |
| FII | 0.78% | 0.84% | 0.96% | 1.02% | -0.06% |
| Mutual Funds | 4.30% | 4.30% | 4.30% | 4.30% | 0.00% |
| Insurance | 0.37% | 0.37% | 0.37% | 0.37% | 0.00% |
| Other DII | 0.01% | 0.01% | 0.00% | 0.00% | 0.00% |
| Non-Institutional | 22.09% | 22.03% | 21.92% | 21.86% | +0.06% |
The shareholding pattern reveals a stable promoter base with West Coast Paper Mills Ltd. holding 72.45% stake, unchanged over the past year. This strong promoter holding provides governance comfort and suggests long-term commitment to the business. However, foreign institutional investors have been gradually reducing their stake, declining from 1.35% in September 2024 to 0.78% in September 2025, indicating waning confidence amongst sophisticated investors.
Mutual fund holding has remained stable at 4.30%, whilst insurance companies hold a minimal 0.37%. The low institutional holding of just 5.46% suggests limited interest from professional investors, which could contribute to lower liquidity and higher volatility. Non-institutional investors have marginally increased their stake to 22.09%, though this could reflect retail investors averaging down on price declines rather than positive conviction.
Stock Performance: Severe Underperformance Across Timeframes
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | -1.15% | -1.30% | +0.15% |
| 1 Month | -6.72% | +1.86% | -8.58% |
| 3 Months | +1.34% | +3.44% | -2.10% |
| 6 Months | +5.93% | +3.31% | +2.62% |
| YTD | -18.61% | +6.62% | -25.23% |
| 1 Year | -22.50% | +3.65% | -26.15% |
| 2 Years | -30.95% | +28.25% | -59.20% |
| 3 Years | -18.29% | +36.69% | -54.98% |
The stock's performance has been dismal across most timeframes. Over the past year, Andhra Paper has declined 22.50% whilst the Sensex gained 3.65%, resulting in a negative alpha of -26.15 percentage points. The year-to-date decline of 18.61% compares poorly with the Sensex's 6.62% gain, highlighting the severity of the underperformance.
The two-year and three-year returns are even more concerning, with the stock down 30.95% and 18.29% respectively, whilst the Sensex surged 28.25% and 36.69%. This sustained underperformance reflects both the cyclical downturn in the paper sector and company-specific execution challenges. The stock has also underperformed its sector, with the Paper, Forest & Jute Products index declining 5.28% over the past year compared to Andhra Paper's 22.50% fall.
The high beta of 1.35 indicates that the stock is significantly more volatile than the broader market, amplifying both gains and losses. The negative risk-adjusted return of -0.64 and high volatility of 35.22% classify the stock as "HIGH RISK LOW RETURN," making it unsuitable for risk-averse investors. The stock currently trades below all key moving averages (5-day, 20-day, 50-day, 100-day, and 200-day), with the technical trend classified as "SIDEWAYS" after recently shifting from "BEARISH."
Investment Thesis: Deteriorating Fundamentals Outweigh Balance Sheet Strength
The investment case for Andhra Paper has deteriorated significantly. The company's quality grade has been downgraded from "Good" to "Average," reflecting the sharp decline in financial performance. The financial trend is firmly "NEGATIVE," with the quarterly loss, negative operating margins, and deteriorating cash flow painting a concerning picture. The valuation remains "EXPENSIVE" despite the price correction, as the P/E ratio of 18.59x does not adequately reflect the earnings risk.
The technical trend has shifted to "SIDEWAYS" from "BEARISH," but the stock remains below all key moving averages, suggesting limited near-term upside momentum. The combination of negative fundamentals, expensive valuation, and weak technicals creates a challenging risk-reward profile for investors.
Key Strengths
- Strong Balance Sheet: Net cash position with debt-to-equity of -0.24x provides financial flexibility
- Stable Promoter Holding: 72.45% promoter stake demonstrates long-term commitment
- No Pledging: Zero promoter pledging indicates strong governance
- Historical Profitability: Five-year average ROCE of 30.08% demonstrates past capital efficiency
- Established Market Position: Long operating history in paper manufacturing sector
Key Concerns
- Quarterly Loss: First loss in recent history at ₹-20.26 crores raises profitability concerns
- Negative Operating Margins: -1.88% operating margin indicates core business is loss-making
- Weak Demand Environment: 16.24% YoY revenue decline reflects sector-wide challenges
- Deteriorating Returns: ROE collapsed to 4.25% from 13.81% five-year average
- Negative Cash Flow: Operating cash flow of ₹-55 crores in FY25 strains liquidity
- Expensive Valuation: P/E of 18.59x unjustified by current fundamentals
- Sector Headwinds: Paper industry facing pricing pressure and weak demand
Outlook: Recovery Uncertain Amid Sector Challenges
Positive Catalysts
- Improvement in paper sector demand from key end-user industries
- Moderation in raw material costs, particularly wood pulp prices
- Successful implementation of cost reduction initiatives
- Utilisation of balance sheet strength to weather downturn
- Seasonal pickup in demand during festive season quarters
Red Flags to Monitor
- Another quarterly loss in Q3 FY26 would signal prolonged weakness
- Further margin compression below current negative levels
- Continued negative operating cash flow straining liquidity
- Increased debt levels to fund operations or capex
- Promoter stake reduction or pledging of shares
- Dividend cut or suspension given quarterly loss
"The first quarterly loss in recent history, combined with negative operating margins and weak cash flow, signals a fundamental shift in Andhra Paper's operating environment that requires decisive management action and material improvement in sector conditions for recovery."
The path forward for Andhra Paper depends critically on the broader paper sector recovery and the company's ability to implement aggressive cost reduction measures. Management will need to demonstrate concrete action plans to restore operating profitability, manage working capital efficiently, and preserve balance sheet strength during this challenging period. Investors should closely monitor Q3 FY26 results for signs of stabilisation or further deterioration.
The Verdict: Avoid Until Clear Signs of Recovery Emerge
Score: 41/100
For Fresh Investors: Stay away from the stock. The combination of quarterly losses, negative operating margins, expensive valuation, and uncertain sector outlook creates an unfavourable risk-reward profile. Wait for at least two consecutive quarters of profitable operations and margin recovery before considering entry.
For Existing Holders: Consider reducing exposure or exiting positions. The deteriorating fundamentals and negative financial trend suggest further downside risk. If holding for the long term based on balance sheet strength, closely monitor Q3 FY26 results for signs of stabilisation. Set a mental stop-loss if the company posts another quarterly loss.
Fair Value Estimate: ₹65-70 (15-20% downside risk from current levels of ₹77.15)
Key Rationale: The first quarterly loss, negative operating margins of -1.88%, and deteriorating return profile (ROE down to 4.25%) indicate fundamental challenges that outweigh the company's balance sheet strength. The expensive valuation at 18.59x P/E and negative financial trend create limited upside potential whilst downside risks remain elevated. Recovery is contingent on sector-wide improvement and aggressive cost management, both of which remain uncertain.
Note- ROCE= (EBIT - Other income)/(Capital Employed - Cash - Current Investments)
⚠️ Investment Disclaimer
This article is for educational and informational purposes only and should not be construed as financial advice. Investors should conduct their own due diligence, consider their risk tolerance and investment objectives, and consult with a qualified financial advisor before making any investment decisions.
