Arihant Capital Markets Q2 FY26: Profit Surge Masks Revenue Decline Concerns

The quarter revealed a tale of two narratives: whilst sequential momentum improved dramatically from the dismal March quarter, the year-on-year comparison exposed deeper structural concerns. Net sales declined 30.27% year-on-year to ₹50.77 crores, continuing a troubling pattern of revenue erosion that has persisted across multiple quarters. The company's operating profit margin of 39.98% remained healthy but fell short of the 41.08% achieved in the corresponding quarter last year.

The micro-cap brokerage firm, incorporated in June 1992 and registered with SEBI as a stockbroker, operates across multiple exchanges including NSE, BSE, MCX, and NCDEX. With promoter Ashok Kumar Jain and family maintaining a stable 69.81% stake, the company has demonstrated resilience in navigating volatile capital markets, though its current performance raises questions about its ability to sustain growth amidst challenging industry dynamics.

Financial Performance: Sequential Recovery Amid Structural Headwinds

Arihant Capital's Q2 FY26 financial performance presents a complex picture of recovery and decline. The consolidated net profit of ₹12.70 crores represented a remarkable 64.94% quarter-on-quarter improvement from the dismal ₹7.70 crores in Q1 FY26, yet fell 32.48% short of the ₹18.81 crores achieved in Q2 FY24. This divergence between sequential momentum and year-on-year deterioration underscores the challenges facing the capital markets intermediary.

Revenue trends revealed persistent weakness, with net sales of ₹50.77 crores declining 30.27% year-on-year despite a modest 9.56% quarter-on-quarter improvement. The half-yearly performance for H1 FY26 showed net sales of ₹97.11 crores, marking a 33.47% decline compared to H1 FY25. This sustained revenue pressure reflects reduced trading volumes and lower client activity across the brokerage industry, exacerbated by volatile market conditions and regulatory changes impacting transaction economics.

Margin analysis provided some comfort, with the operating profit margin (excluding other income) expanding to 39.98% in Q2 FY26 from 34.18% in Q1 FY26, though remaining below the 41.08% achieved in Q2 FY24. The PAT margin of 25.01% showed improvement from the previous quarter's 16.62% but trailed the 25.83% margin from the corresponding period last year. This margin resilience despite revenue headwinds demonstrates effective cost management, with employee costs declining to ₹8.38 crores from ₹9.98 crores year-on-year.

Interest costs declined to ₹3.91 crores from ₹5.24 crores year-on-year, reflecting improved working capital management and potentially lower borrowing requirements. The tax rate of 21.88% remained reasonable and consistent with the company's historical effective tax rates. Depreciation remained stable at ₹0.83 crores, indicating controlled capital expenditure in line with business requirements.

Operational Challenges: Revenue Erosion Tests Business Model

The most pressing concern for Arihant Capital remains the sustained revenue decline across multiple quarters. The company's net sales have contracted from ₹72.81 crores in Q2 FY24 to ₹50.77 crores in Q2 FY26, representing a cumulative decline of 30.27%. This erosion reflects broader industry challenges including reduced retail participation, increased competition from discount brokers, and regulatory changes affecting transaction economics.

The company's return on equity of 14.62% for the latest period, whilst positive, falls short of its five-year average of 17.75%, indicating deteriorating capital efficiency. This decline in ROE—a critical metric for evaluating how effectively management deploys shareholder capital—signals that the company is generating lower returns on the same equity base, a concerning trend for long-term value creation. The lower ROE suggests that either profitability has compressed or asset turnover has slowed, both of which warrant investor attention.

Balance sheet analysis reveals a mixed picture. Shareholder funds increased to ₹384.46 crores in FY25 from ₹322.52 crores in FY24, driven by retained earnings despite dividend payouts. The company maintains zero long-term debt, providing financial flexibility, though current liabilities of ₹414.00 crores against current assets of ₹532.80 crores indicate adequate liquidity with a current ratio of 1.29 times. Trade payables declined to ₹268.80 crores from ₹304.07 crores, suggesting improved working capital dynamics.

The company's fixed assets increased significantly to ₹28.66 crores in FY25 from ₹14.88 crores in FY24, suggesting ongoing investments in technology infrastructure and office facilities. Investments stood at ₹23.75 crores, up from ₹14.63 crores, indicating deployment of surplus funds into financial instruments. These capital allocations must translate into revenue growth to justify the expenditure and improve return metrics.

Industry Context: Navigating Volatile Capital Markets

The capital markets industry in India has experienced significant volatility, with retail participation fluctuating based on market sentiment and regulatory changes. The introduction of peak margin requirements, increased transaction costs, and heightened compliance standards have compressed brokerage economics, particularly for smaller players like Arihant Capital. Larger institutional brokers with diversified revenue streams and technology advantages have gained market share, intensifying competitive pressures.

Arihant Capital's positioning as a micro-cap player with a market capitalisation of ₹1,033.84 crores places it at a disadvantage relative to larger peers with superior technology platforms, broader product offerings, and stronger brand recognition. The company's revenue concentration in traditional brokerage services exposes it to cyclical market volatility, with limited cushioning from fee-based advisory or wealth management revenues that larger competitors increasingly rely upon.

The peer comparison reveals Arihant Capital's middling position within the capital markets segment. Its ROE of 17.75% lags behind stronger performers like Dam Capital Advisors (39.70%) and Wealth First Portfolio (34.91%), whilst its price-to-book ratio of 2.69x sits below the peer average, suggesting the market assigns lower growth expectations. The P/E ratio of 20.61x appears reasonable relative to historical earnings but elevated considering current growth challenges.

Valuation Analysis: Attractive Entry Point or Value Trap?

At the current market price of ₹99.30, Arihant Capital trades at a P/E ratio of 20.61x trailing twelve-month earnings, representing a modest discount to the capital markets industry average P/E of 24x. The price-to-book ratio of 2.69x compares favourably against the book value per share of ₹36.10, though this valuation must be contextualised against the company's deteriorating financial trends and compressed return on equity.

The stock's valuation grade has oscillated between "Attractive" and "Fair" over recent months, currently rated as "Attractive" since October 13, 2025. This assessment reflects the stock's decline from its 52-week high of ₹120.35, creating a 17.49% discount from peak levels. However, investors must weigh this apparent valuation discount against fundamental concerns including persistent revenue declines, weakening ROE, and negative cash flow trends.

The enterprise value multiples paint a mixed picture. An EV/EBITDA of 8.67x and EV/Sales of 3.21x suggest moderate valuation, though these metrics must account for the company's declining revenue trajectory. The dividend yield of 0.50% provides minimal income support, with the latest dividend of ₹0.50 per share declared with an ex-date of September 19, 2025.

Historical valuation analysis shows the stock trading 76.35% above its 52-week low of ₹56.31, indicating substantial recovery from distressed levels. However, the 17.49% discount from the 52-week high of ₹120.35 suggests the market remains cautious about near-term prospects. Fair value estimation proves challenging given the uncertain revenue outlook, though a conservative assessment might place intrinsic value around ₹95-105 per share, implying limited upside from current levels absent a fundamental turnaround.

Shareholding Pattern: Stable Promoter Base, Minimal Institutional Interest

Arihant Capital's shareholding structure reflects a tightly held promoter base with minimal institutional participation. Promoter holding has remained rock-solid at 69.81% across the last five quarters, with the Jain family led by Ashok Kumar Jain (32.21%) and Kiran Jain (22.71%) demonstrating unwavering commitment. This stable promoter holding provides governance continuity, though the lack of shareholding dilution also means limited fresh capital infusion for growth initiatives.

Foreign institutional investor (FII) holding increased to 0.22% in September 2025 from 0.03% in June 2025, though the absolute holding remains negligible with just five FII entities participating. The absence of mutual fund holdings (0.00%) and insurance company participation signals limited institutional conviction in the stock's prospects. This institutional apathy likely stems from the company's micro-cap status, limited liquidity, and uncertain growth trajectory.

The non-institutional shareholding of 29.97% comprises primarily retail investors, whose participation has remained relatively stable. The absence of promoter pledging provides comfort regarding financial stress at the promoter level, though the lack of institutional interest limits potential catalysts for re-rating. For the stock to attract meaningful institutional flows, the company must demonstrate sustained revenue growth and margin expansion over multiple quarters.

Stock Performance: Volatile Returns Reflect Uncertain Fundamentals

Arihant Capital's stock performance has exhibited extreme volatility, with returns varying dramatically across different timeframes. The stock delivered spectacular long-term returns of 2,327.87% over ten years and 670.36% over five years, vastly outperforming the Sensex returns of 215.27% and 97.66% respectively. These extraordinary historical returns reflect the stock's journey from obscurity to relative prominence, though recent performance raises questions about sustainability.

Recent performance tells a more sobering story. The stock declined 9.97% over the past year, underperforming the Sensex by 14.07 percentage points and the capital markets sector return of 18.04% by 28.01 percentage points. This underperformance accelerated over the past month, with the stock falling 13.46% whilst the Sensex gained 1.07%, generating negative alpha of 14.53%. The one-week decline of 3.40% versus the Sensex's 1.35% fall suggests continued selling pressure.

The six-month return of 52.04% represents the bright spot, vastly outperforming the Sensex's 2.55% gain with positive alpha of 49.49%. This surge likely reflects recovery from oversold levels around the 52-week low of ₹56.31, though the subsequent retracement suggests profit-taking and renewed fundamental concerns. The stock's high beta of 1.50 indicates amplified volatility relative to the broader market, with the stock moving 50% more than the Sensex in either direction.

Technical analysis shows a "Mildly Bullish" trend since October 14, 2025, though the stock trades below all key moving averages including the 5-day MA (₹101.60), 20-day MA (₹105.14), and 50-day MA (₹108.21). This positioning below moving averages suggests technical weakness despite the mildly bullish classification. The risk-adjusted return of -0.17 over one year with volatility of 58.77% places the stock in the "High Risk Low Return" category, an unattractive combination for risk-averse investors.

Investment Thesis: Hold Recommendation Amid Mixed Signals

The investment case for Arihant Capital presents a complex mosaic of conflicting signals. The company's Mojo Score of 50/100 and "HOLD" rating reflect this ambiguity, with attractive valuation offset by deteriorating financial trends and operational challenges. The quality grade of "Average" acknowledges decent long-term fundamentals (21.16% sales CAGR, 22.24% EBIT CAGR over five years) whilst recognising recent performance deterioration.

The negative financial trend represents the primary concern, with net sales declining 27.78% over the latest six months and PAT falling 33.47%. This deterioration, coupled with the company's shift from "Very Positive" trend in June 2024 to "Negative" currently, signals fundamental weakness requiring correction. The mildly bullish technical trend provides limited comfort given the stock's position below key moving averages and high volatility profile.

Key Strengths & Risk Factors

Outlook: What Lies Ahead

The outlook for Arihant Capital hinges on the company's ability to arrest revenue declines and restore growth momentum. The capital markets industry's inherent cyclicality means improved market sentiment and higher trading volumes could provide tailwinds, though structural challenges from increased competition and regulatory pressures persist. Management's ability to diversify revenue streams beyond traditional brokerage and invest in technology platforms will prove critical for long-term sustainability.

Key monitoring points include quarterly revenue trends, operating margin sustainability, cash flow generation, and any signs of institutional interest. The company must demonstrate at least two consecutive quarters of revenue growth to signal genuine turnaround, whilst maintaining operating margins above 35% to preserve profitability. Return on equity improvement back towards the 17-18% range would validate management's capital allocation decisions and support current valuation multiples.