Arex Industries Q2 FY26: Profit Surge Masks Underlying Margin Volatility and Structural Concerns

Despite the headline profit improvement, deeper analysis reveals persistent margin volatility, stagnant revenue growth, and deteriorating technical momentum. The company's operating margin of 20.22% in Q2 FY26, whilst a quarterly high, masks erratic performance across recent quarters. With the stock down 12.50% over the past year and trading in a mildly bearish technical trend, investors are questioning whether this quarter's bounce represents genuine operational improvement or merely cyclical fluctuation in a structurally challenged business.

The September 2025 quarter results paint a picture of a company struggling to establish consistent operational momentum. Net sales of ₹13.01 crores represented a modest 5.43% year-on-year improvement from ₹12.34 crores in Q2 FY25, but the sequential 15.44% jump from Q1 FY26's ₹11.27 crores suggests quarterly volatility rather than sustainable growth trajectory. For context, the company's revenue has remained essentially flat over the past five years, with FY25 sales of ₹51.00 crores matching FY24 levels exactly, reflecting zero growth in a challenging textile environment.

Financial Performance: Profit Recovery Built on Shaky Foundations

The September quarter's profit performance, whilst impressive on headline metrics, reveals concerning underlying dynamics when dissected. Operating profit (PBDIT excluding other income) surged to ₹2.63 crores in Q2 FY26 from ₹1.37 crores in Q2 FY25, driving the operating margin to 20.22% from 11.10% a year earlier. However, this represents the third consecutive quarter of wild margin swings—from 9.79% in March 2024 to 19.28% in June 2024, plummeting to 11.10% in September 2024, rebounding to 19.55% in December 2024, collapsing again to 13.92% in March 2025, and now reaching 20.22%. Such volatility signals operational instability rather than consistent execution.

The profit before tax of ₹1.27 crores in Q2 FY26 marked a dramatic 273.53% sequential improvement from Q1 FY26's ₹0.34 crores, but remained below the ₹1.23 crores recorded in both Q4 FY25 and Q2 FY25. The PAT margin of 7.69% in the latest quarter, whilst the highest in recent periods, contrasts sharply with the 2.22% and 2.06% margins in the preceding two quarters. This erratic profitability pattern raises questions about the sustainability of cost management initiatives and pricing power in a competitive textile market.

Employee costs of ₹4.10 crores in Q2 FY26 represented 31.51% of revenues, up from 31.01% in Q1 FY26 but down from 34.93% in Q2 FY25, indicating modest improvement in labour productivity. Interest costs remained stable at ₹0.29 crores quarter-on-quarter, whilst depreciation held steady at ₹1.06 crores. The tax rate of 21.26% in Q2 FY26 was significantly lower than the 33.72% in Q2 FY25, providing a meaningful boost to net profit that may not be sustainable going forward.

Operational Challenges: Weak Returns Signal Capital Inefficiency

Beneath the surface-level profit recovery lies a troubling picture of capital efficiency. Arex Industries' average return on equity (ROE) of 6.76% over recent years falls significantly short of acceptable thresholds for equity investors, indicating the company generates inadequate returns on shareholder capital. The latest ROE of 9.70% for FY25, whilst an improvement, remains weak compared to peer benchmarks and broader market standards. This persistent underperformance in capital returns raises fundamental questions about the business model's viability and management's ability to deploy capital effectively.

The company's average return on capital employed (ROCE) of 8.78% further underscores operational inefficiency. Even the latest ROCE of 10.78% for FY25 barely exceeds the company's cost of capital, suggesting minimal value creation for stakeholders. The average EBIT to interest coverage ratio of 2.99 times, whilst adequate, provides limited cushion during downturns. With average debt to EBITDA at 2.56 times and net debt to equity at 0.47, the company maintains moderate leverage, but the weak returns suggest this debt burden may be constraining rather than enhancing returns.

Balance sheet quality presents mixed signals. Total debt declined from ₹6.54 crores in March 2024 to ₹5.25 crores in March 2025, demonstrating deleveraging efforts. However, shareholder funds contracted from ₹31.61 crores to ₹25.67 crores over the same period, primarily due to reserves declining from ₹27.65 crores to ₹22.07 crores—a concerning erosion of equity value. Fixed assets decreased from ₹30.36 crores to ₹26.99 crores, reflecting ongoing depreciation without corresponding capital expenditure to drive growth. The sales to capital employed ratio of 1.03 indicates sluggish asset turnover, further evidence of operational inefficiency.

Industry Context: Garments Sector Headwinds Persist

The garments and apparels industry continues to face structural challenges, with demand volatility, intense competition from imports, and margin pressures characterising the operating environment. Arex Industries' stagnant revenue growth—₹51.00 crores in both FY25 and FY24—reflects these broader sectoral headwinds. The company's five-year sales growth of just 6.00% compares unfavourably to inflation, indicating real revenue contraction over the period. This underperformance becomes more pronounced when considering the stock's 12.50% decline over the past year, significantly lagging the garments sector's 3.44% return and the Sensex's 8.51% gain.

Competitive positioning within the micro-cap segment of the textile industry presents additional challenges. With a market capitalisation of just ₹57.00 crores, Arex Industries operates at a significant scale disadvantage compared to larger peers who can leverage economies of scale, invest in automation, and weather cyclical downturns more effectively. The company's ability to compete on price whilst maintaining margins remains questionable, as evidenced by the wild quarterly margin fluctuations. Without clear differentiation through product innovation, brand development, or vertical integration, the company risks becoming a price-taker in a commoditised market.

The absence of institutional investor interest—with 0.00% FII and mutual fund holdings—signals limited confidence in the company's growth prospects or governance standards. This institutional void creates liquidity constraints and valuation challenges, as evidenced by the stock's minimal trading volumes of just 100 shares on November 14, 2025. For a company attempting to establish credibility and attract growth capital, this institutional neglect represents a significant impediment to future expansion and value creation.

Peer Comparison: Valuation Premium Unjustified by Fundamentals

Comparative analysis against garments sector peers reveals Arex Industries trading at a significant valuation premium that appears disconnected from operational performance. The company's price-to-book ratio of 2.24 times substantially exceeds the peer average of approximately 0.90 times, with competitors like Mohite Industries (0.53x), Vinny Overseas (0.70x), Shiva Mills (0.63x), and Wires & Fabriks (1.10x) all trading at material discounts to book value. This premium becomes particularly difficult to justify given Arex's modest ROE of 6.76%, which trails Vinny Overseas (8.62%) and matches or exceeds only the weakest performers in the peer group.

The P/E ratio of 23.05 times appears reasonable on an absolute basis and sits below the peer average of approximately 32 times (excluding loss-making entities). However, this metric masks the quality differential—companies commanding higher P/E multiples like Wires & Fabriks (38.42x) and Kamadgiri Fashion (50.29x) do so based on stronger market positions, better growth visibility, or superior governance standards. Arex's P/E multiple, combined with its elevated P/BV ratio, suggests the market may be overestimating the sustainability of the recent profit recovery or underappreciating the structural challenges facing the business.

The company's leverage profile of 0.47 debt-to-equity compares favourably to peers like Mohite Industries (0.92) and Wires & Fabriks (2.50), positioning Arex as relatively conservatively capitalised. However, this conservative balance sheet has not translated into superior returns or growth, raising questions about management's capital allocation priorities. The absence of dividend payments across the peer group, including Arex (last dividend in September 2019), reflects the sector's cash generation challenges and limited capacity to reward shareholders through distributions.

Valuation Analysis: Fair Rating Masks Overvaluation Risk

Current valuation metrics suggest Arex Industries trades at the upper end of fair value, with limited margin of safety for investors. The company's enterprise value to EBITDA multiple of 8.03 times appears reasonable for a stable, growing business but seems stretched for a company demonstrating zero revenue growth and volatile margins. The EV/EBIT ratio of 15.74 times further underscores this concern, particularly when compared to the weak EBIT to interest coverage of 2.99 times. The EV to sales ratio of 1.39 times implies the market values the entire revenue stream at 1.4 years of sales—optimistic given the stagnant top line and margin unpredictability.

The stock's current price of ₹140.00 represents a 20.90% decline from the 52-week high of ₹177.00 reached earlier in the year, but only a 5.58% premium to the 52-week low of ₹132.60. This proximity to recent lows, despite the Q2 profit recovery, suggests investors remain sceptical about the sustainability of the improvement. The book value per share of ₹71.34 implies the stock trades at 1.96 times book value (based on current price), a premium that appears unjustified given the sub-10% ROE and deteriorating equity base.

Historical valuation grade changes provide additional context. The stock's valuation assessment oscillated between "Fair" and "Attractive" throughout August and September 2025, eventually settling at "Fair" on September 23, 2025. This frequent re-rating reflects the market's difficulty in establishing conviction around the company's intrinsic value, driven by the volatile quarterly performance and uncertain growth trajectory. For value-oriented investors, the current "Fair" rating suggests limited upside potential without significant operational improvement or multiple compression.

Shareholding Pattern: Stable Promoter Base, Zero Institutional Interest

The shareholding structure reveals a promoter-dominated company with minimal institutional participation. Promoter holding stood at 70.60% as of September 2025, essentially unchanged from 70.48% in the preceding three quarters. A marginal 0.12% increase occurred between March 2025 and June 2025, but this minor adjustment does little to alter the overall ownership profile. The promoter group, led by founder Dinesh Apparao Bilgi (21.18%) and family members including Bhavanaben Dineshbhai Bilgi (11.29%), Chirag Dineshbhai Bilgi (6.29%), and Neel Dinesh Bilgi (6.22%), maintains firm control over the company's strategic direction.

The complete absence of foreign institutional investors (0.00%), mutual funds (0.00%), insurance companies (0.00%), and other domestic institutional investors (0.00%) represents a significant red flag. Institutional investors typically conduct rigorous due diligence before deploying capital, and their unanimous avoidance of Arex Industries suggests concerns about governance, growth prospects, liquidity, or fundamental business quality. The non-institutional holding of 29.40%, comprising retail and high-net-worth individuals, provides limited stability during market stress and contributes to the stock's liquidity challenges.

Positively, the promoter group maintains zero pledged shares, eliminating concerns about forced selling or financial distress at the ownership level. This clean pledge status, combined with stable promoter holding over recent quarters, indicates the founding family remains committed to the business. However, the lack of meaningful promoter buying during the stock's recent weakness—despite the 12.50% annual decline—raises questions about insider confidence in the near-term recovery trajectory.

Stock Performance: Persistent Underperformance Across Timeframes

Arex Industries' stock performance paints a picture of consistent value destruction across most meaningful timeframes. The shares declined 12.50% over the past year, significantly underperforming both the Sensex's 8.51% gain and the garments sector's 3.44% return, resulting in a negative alpha of 21.01 percentage points. This underperformance accelerated in recent months, with the stock down 10.26% over one month (versus Sensex +2.63%), down 6.42% over three months (versus Sensex +4.45%), and down 10.83% over six months (versus Sensex +3.51%). The year-to-date decline of 13.58% contrasts sharply with the Sensex's 7.74% gain, underscoring the market's loss of confidence in the company's prospects.

The risk-adjusted return profile appears particularly unfavourable. With a one-year volatility of 47.01%—nearly four times the Sensex's 12.26%—the stock exhibits extreme price fluctuations that generate negative risk-adjusted returns of -0.27 versus the Sensex's positive 0.69. The high beta of 1.50 confirms the stock's amplified sensitivity to market movements, making it unsuitable for risk-averse investors. The classification as "HIGH RISK LOW RETURN" accurately captures the unfavourable risk-reward profile, where elevated volatility fails to compensate investors with commensurate returns.

Technical indicators reinforce the bearish narrative. The stock trades below all key moving averages—5-day (₹142.80), 20-day (₹147.55), 50-day (₹149.96), and 100-day (₹152.62)—signalling sustained downward momentum. The current "Mildly Bearish" technical trend, which emerged on November 13, 2025, follows a period of oscillation between bearish and mildly bearish classifications throughout October and November. Multiple technical indicators including MACD (bearish on weekly and monthly), Bollinger Bands (mildly bearish), and KST (bearish to mildly bearish) all point to continued price pressure absent a significant fundamental catalyst.

Investment Thesis: Weak Fundamentals Meet Bearish Technicals

The investment thesis for Arex Industries confronts significant headwinds across multiple dimensions. The company's quality grade of "Below Average" reflects long-term financial performance characterised by weak returns on capital (average ROCE of 8.78%, average ROE of 6.76%), stagnant revenue growth (6.00% over five years), and moderate debt burden (debt to EBITDA of 2.56 times). The financial trend classification of "Flat" for Q2 FY26, despite the sequential profit improvement, indicates the market views the quarterly bounce as insufficient to establish a positive trajectory. The "Mildly Bearish" technical trend compounds these concerns, suggesting near-term price momentum remains unfavourable.

The proprietary Mojo score of 28 out of 100, placing the stock firmly in "STRONG SELL" territory (0-30 range), synthesises these various negative factors. This score, which has fluctuated between 26 and 31 over recent months—consistently within the "Strong Sell" to "Sell" range—reflects the persistent structural challenges facing the business. The score's key supporting factor—attractive valuation—appears insufficient to offset the weight of negative operational, quality, and technical indicators. The recommendation to "strongly consider selling" or "exit recommended" aligns with the comprehensive assessment of risk versus reward.

For investors evaluating Arex Industries, the central question becomes whether the Q2 FY26 profit recovery represents a genuine inflection point or merely cyclical noise within a structurally challenged business. The evidence tilts decisively towards the latter interpretation. Without meaningful revenue growth, consistent margin performance, improved capital returns, or institutional validation, the company faces an uphill battle to create sustainable shareholder value. The absence of dividends since 2019 further eliminates any income-based rationale for holding the shares.

Key Strengths & Risk Factors

Outlook: Critical Monitoring Points Ahead