Arex Industries Q3 FY26: Margin Compression Amid Stagnant Revenue Growth

The December quarter results paint a troubling picture for the micro-cap textile player. With revenue essentially flat at ₹12.99 crores compared to ₹13.01 crores in Q2 FY26, the company's inability to generate top-line growth has been compounded by a dramatic erosion in profitability metrics. The operating profit before depreciation, interest, and tax (PBDIT) excluding other income collapsed to ₹1.52 crores from ₹2.63 crores in the previous quarter, marking the lowest level in the past eight quarters. This deterioration translated into an operating margin of just 11.70%, down sharply from 20.22% in Q2 FY26 and significantly below the 19.55% achieved in the year-ago quarter.

The stock, currently trading at ₹141.70, has exhibited minimal movement in recent sessions with negligible volumes, reflecting investor apathy towards the company's deteriorating fundamentals. Trading below its 5-day, 20-day, 50-day, and 100-day moving averages, the technical picture remains decidedly bearish, with the stock classified as "Mildly Bearish" after transitioning from a "Bearish" trend on January 21, 2026. Over the past year, Arex Industries shares have declined 7.99%, underperforming the Sensex which gained 8.61% during the same period, resulting in a negative alpha of 16.60 percentage points.

Financial Performance: Profitability Under Severe Pressure

The December quarter witnessed a concerning deterioration across all profitability parameters. Net sales of ₹12.99 crores represented a marginal 0.15% decline quarter-on-quarter and a 1.59% drop year-on-year, signalling stagnation in the company's core business operations. More alarming was the sharp contraction in operating profitability, with PBDIT excluding other income plunging to ₹1.52 crores from ₹2.63 crores in Q2 FY26, a sequential decline of 42.21%. This translated into an operating margin of 11.70%, the lowest recorded in the past eight quarters and a stark contrast to the 20.22% margin achieved just one quarter earlier.

Employee costs surged to ₹5.12 crores in Q3 FY26 from ₹4.10 crores in the previous quarter, representing a 24.88% sequential increase that directly pressured margins. This spike in labour expenses, combined with stagnant revenue, created a severe margin squeeze. The gross profit margin contracted to 9.70% from 17.99% in Q2 FY26, whilst the PAT margin plummeted to just 2.00% from 7.69%, reflecting the company's inability to manage its cost structure effectively. Profit before tax (excluding other income) stood at a meagre ₹0.20 crores, the lowest in the recent eight-quarter period and down from ₹1.27 crores in Q2 FY26.

The quality of earnings deteriorated significantly, with the company reporting a negative tax rate of -30.00% for Q3 FY26, indicating tax credits or adjustments that temporarily boosted net profit. Without this tax benefit, the underlying profitability would have been even weaker. Interest costs remained relatively stable at ₹0.26 crores, whilst depreciation held steady at ₹1.06 crores, suggesting that the margin compression was primarily driven by operational inefficiencies rather than financial leverage or asset-related issues.

Operational Challenges: Cost Structure Out of Control

The dramatic margin compression in Q3 FY26 points to fundamental operational challenges that extend beyond typical seasonal fluctuations. Employee costs surged by nearly 25% quarter-on-quarter, an unusual spike that suggests either significant workforce expansion, wage inflation, or one-time labour-related expenses. For a company generating just ₹12.99 crores in quarterly revenue, an employee cost burden of ₹5.12 crores (39.41% of sales) is exceptionally high and raises questions about labour productivity and operational efficiency.

From a balance sheet perspective, Arex Industries maintains a modest financial profile. Shareholder funds stood at ₹25.67 crores as of March 2025, down from ₹31.61 crores in the previous year, reflecting a reduction in reserves. Long-term debt decreased to ₹5.25 crores from ₹6.54 crores, indicating some deleveraging efforts. However, the company's return on equity (ROE) of 8.59% and return on capital employed (ROCE) of 9.14% remain weak by industry standards, suggesting inefficient capital utilisation. The book value per share stands at ₹71.34, whilst the stock trades at ₹141.70, implying a price-to-book ratio of 1.89x.

The company's working capital management appears stable, with current assets of ₹17.87 crores against current liabilities of ₹13.58 crores as of March 2025, providing a current ratio of approximately 1.32x. Fixed assets have gradually declined from ₹30.36 crores in March 2024 to ₹26.99 crores in March 2025, reflecting ongoing depreciation without significant capital expenditure. Cash flow from operations remained healthy at ₹8.00 crores in FY25, matching the previous year's performance, though this was entirely consumed by financing activities, leaving negligible net cash generation.

Industry Context: Struggling in a Challenging Textile Landscape

The garment and apparel industry has faced persistent headwinds over the past year, with global demand softness, rising input costs, and intense competition from both domestic and international players. Arex Industries operates in a highly fragmented market where scale advantages and operational efficiency are critical to maintaining profitability. The company's micro-cap status (₹51.00 crores market capitalisation) limits its ability to negotiate favourable terms with suppliers or invest in automation and technology upgrades that could improve margins.

The sector has witnessed margin pressure across the board, with many players struggling to pass on increased labour and raw material costs to price-sensitive customers. Arex's 11.70% operating margin in Q3 FY26, whilst weak on an absolute basis, must be viewed in the context of broader industry challenges. However, the company's inability to maintain even modest margin stability suggests company-specific execution issues rather than purely sector-wide problems.

The company's debt-to-EBITDA ratio of 2.37x and EBIT-to-interest coverage of 2.99x suggest moderate financial leverage, though these metrics are based on historical averages and may deteriorate if current profitability trends persist. The absence of institutional holdings (0.00% from FIIs, mutual funds, and insurance companies) reflects limited investor confidence and raises concerns about corporate governance, disclosure quality, and growth prospects.

Peer Comparison: Valuation Premium Unjustified by Performance

When compared to industry peers, Arex Industries' valuation metrics appear disconnected from its operational performance. The company trades at a price-to-earnings (P/E) ratio of 20.48x, which, whilst not excessive in absolute terms, appears rich given the deteriorating earnings trajectory and weak return ratios. The price-to-book value of 1.89x represents a significant premium to peers such as Vinny Overseas (0.67x), Wires & Fabriks (1.04x), and Mohite Industries (0.44x), despite Arex's modest ROE of 8.59%.

Arex Industries does benefit from a relatively higher ROE of 8.59% compared to most peers (peer average approximately 3.00%), which partially justifies its valuation premium. However, this ROE advantage is eroding rapidly given the recent margin compression and profitability challenges. The company's debt-to-equity ratio of 0.39 is moderate and better than several peers, indicating prudent financial management, though this conservative leverage approach may also limit growth potential.

The absence of dividend payments across the peer group, including Arex Industries, is noteworthy. Wires & Fabriks is the only comparable company offering a minimal dividend yield of 0.06%. Arex's last dividend of ₹2 per share was paid in September 2019, over seven years ago, suggesting limited cash generation or a preference to retain earnings for business reinvestment. However, with deteriorating profitability, the prospect of dividend resumption appears remote in the near term.

Valuation Analysis: Premium Pricing for Deteriorating Fundamentals

At the current price of ₹141.70, Arex Industries trades at a P/E ratio of 20.48x based on trailing twelve-month earnings, which appears expensive given the company's weak growth profile and deteriorating margins. The stock's price-to-book value of 1.89x represents a substantial premium to book value of ₹71.34 per share, a valuation multiple that is difficult to justify given the ROE of just 8.59% and declining profitability trends. The enterprise value-to-EBITDA multiple of 7.10x and EV-to-sales of 1.23x are moderate in absolute terms but appear rich relative to the company's operational challenges.

The stock's valuation grade has fluctuated between "Fair" and "Attractive" over the past few months, currently classified as "Fair" as of January 27, 2026. However, this assessment appears generous given the recent quarterly performance. The 52-week trading range of ₹128.30 to ₹175.00 shows significant volatility, with the current price approximately 10.44% above the 52-week low but 19.03% below the 52-week high. This positioning suggests the market has partially priced in the deteriorating fundamentals, though further downside appears likely if profitability trends do not reverse.

Based on the company's weak earnings trajectory, deteriorating margins, and modest growth prospects, a fair value estimate would place the stock closer to book value, suggesting a target price around ₹75-80 per share, implying a potential downside of approximately 43-45% from current levels. This valuation assumes no meaningful improvement in operational performance and factors in the company's weak competitive positioning and limited institutional interest.

Shareholding Pattern: Stable Promoter Base, Zero Institutional Interest

The shareholding structure of Arex Industries reveals a stable promoter base controlling 70.60% of equity as of December 2025, unchanged from the previous quarter. Promoter holding increased marginally by 0.12% in June 2025 (from 70.48% to 70.60%) and has remained steady since. The promoter group, led by founder Dinesh Apparao Bilgi (21.18%) and family members, demonstrates long-term commitment with zero pledging of shares, a positive signal for corporate governance.

However, the complete absence of institutional investors is a glaring red flag. Foreign institutional investors (FIIs), mutual funds, insurance companies, and other domestic institutional investors collectively hold 0.00% of the company's equity. This lack of institutional participation suggests limited analyst coverage, poor liquidity, and concerns about the company's growth prospects, financial transparency, or governance standards. The remaining 29.40% is held by non-institutional investors, likely comprising retail shareholders and high-net-worth individuals.

The absence of institutional buying interest, despite the stock's recent price correction, indicates that sophisticated investors do not view the current valuation as attractive. This institutional vacuum also contributes to low trading volumes, as evidenced by the negligible volume of just 2 shares traded on January 27, 2026, making the stock highly illiquid and unsuitable for meaningful position building by larger investors.

Stock Performance: Consistent Underperformance Across Timeframes

Arex Industries' stock price performance has been disappointing across most timeframes, with the shares generating a negative return of 7.99% over the past year compared to the Sensex's gain of 8.61%, resulting in a negative alpha of 16.60 percentage points. The underperformance is even more pronounced when compared to the broader market rally over longer periods. Over three years, the stock has returned 16.72% compared to the Sensex's 37.97%, and over five years, whilst Arex has delivered 140.17% returns, this significantly lags the Sensex's 72.66% gain when adjusted for the company's high volatility of 50.58%.

The stock's recent technical positioning is weak, trading below all key moving averages including the 5-day (₹133.78), 20-day (₹137.10), 50-day (₹142.86), and 100-day (₹147.79) averages. The technical trend classification of "Mildly Bearish" reflects persistent selling pressure, with the stock having transitioned from "Bearish" to "Mildly Bearish" on January 21, 2026 at ₹128.70, near the 52-week low of ₹128.30. Key technical indicators present a mixed picture, with MACD showing "Mildly Bullish" on the weekly chart but "Bearish" on the monthly chart, whilst Bollinger Bands indicate "Mildly Bearish" across both timeframes.

The stock's high beta of 1.50 (adjusted) classifies it as significantly more volatile than the broader market, with a standard deviation of 50.58% over the past year compared to the Sensex's 11.28%. This elevated volatility, combined with negative risk-adjusted returns of -0.16 compared to the Sensex's positive 0.76, places Arex Industries firmly in the "HIGH RISK LOW RETURN" category. The Sharpe ratio is negative, indicating that investors are not being compensated for the substantial volatility risk they are assuming.

Investment Thesis: Deteriorating Fundamentals Outweigh Valuation Appeal

The investment case for Arex Industries has weakened considerably following the Q3 FY26 results. Whilst the company's proprietary Mojo Score of 23/100 and "STRONG SELL" rating reflect the challenging fundamentals, the underlying business deterioration appears even more severe than these metrics suggest. The company's quality grade of "Below Average" is based on weak long-term financial performance, with 5-year sales growth of just 6.00% and average return on equity of 8.59%, both significantly below industry standards for value creation.

The near-term drivers are decidedly negative, with quarterly financial trends classified as "Negative" and technical indicators showing "Mildly Bearish" momentum. The company's financial trend turned negative in Q3 FY26 due to operating profit hitting its lowest level at ₹1.52 crores, operating margin collapsing to 11.70%, and profit before tax (excluding other income) reaching a multi-quarter low of ₹0.20 crores. These deteriorating metrics suggest fundamental operational challenges rather than temporary headwinds.

The valuation, whilst classified as "Fair" by the Mojo system, appears increasingly disconnected from operational reality. The stock's P/E of 20.48x and P/BV of 1.89x are difficult to justify given the negative earnings momentum, weak return ratios, and absence of growth catalysts. The company's debt management has been prudent, with debt-to-equity of 0.39 and no promoter pledging, but these positives are insufficient to offset the structural profitability challenges and competitive weaknesses.

Key Strengths & Risk Factors

Outlook: Critical Need for Operational Turnaround

The outlook for Arex Industries remains challenging with limited near-term catalysts for improvement. The company faces a critical need to address the margin compression that has devastated profitability in recent quarters. Without immediate action to control employee costs, improve operational efficiency, and stabilise revenue growth, the financial deterioration is likely to continue. The absence of institutional investors and analyst coverage means the company lacks external pressure and support for necessary reforms.

For the company to restore investor confidence, management must demonstrate tangible progress in Q4 FY26 results, expected in May 2026. Key metrics to monitor include operating margin recovery towards 15%, employee cost normalisation to below 35% of revenue, and stabilisation of net profit margins above 5%. Any further deterioration in these parameters would likely trigger additional selling pressure and potentially push the stock towards book value levels around ₹71-75 per share.