Arvind Fashions Q2 FY26: Strong Revival Masks Underlying Profitability Concerns

The stock responded positively to the results, surging 8.59% on November 3, 2025, to close at ₹545.50, reflecting investor optimism about the company's operational recovery. With a market capitalisation of ₹6,881 crores, the small-cap apparel player is navigating a challenging environment whilst attempting to balance growth ambitions with margin improvement imperatives.

The September quarter results reveal a company in transition, benefiting from festive season demand and operational efficiencies, yet grappling with high interest costs and structural margin pressures that continue to weigh on bottom-line performance. The company's operating profit (PBDIT excluding other income) reached ₹187.30 crores in Q2 FY26, marking the highest quarterly figure in recent history, whilst net sales also hit a record ₹1,417.51 crores.

Financial Performance: Topline Momentum Outpaces Bottom-Line Gains

Arvind Fashions demonstrated robust topline momentum in Q2 FY26, with net sales surging 28.01% sequentially to ₹1,417.51 crores, driven by festive season demand and improved retail traction across its brand portfolio. On a year-on-year basis, revenue growth moderated to 11.34%, reflecting a challenging prior-year comparison. The sequential revenue acceleration from ₹1,107.31 crores in Q1 FY26 represents the strongest quarterly performance in the company's recent history.

Operating profit excluding other income climbed to ₹187.30 crores in Q2 FY26, up from ₹133.36 crores in the previous quarter, translating to an operating margin of 13.21%—a 117 basis point sequential improvement. Year-on-year, the operating margin expanded by 46 basis points from 12.75% in Q2 FY25, suggesting gradual operational efficiencies and better cost management. The gross profit margin stood at 11.20%, up from 9.69% in Q1 FY26, indicating improved pricing power or favourable product mix shifts.

However, the company's profitability remains constrained by elevated interest costs of ₹41.60 crores in Q2 FY26, marginally higher than ₹40.56 crores in the previous quarter. Depreciation expenses also increased to ₹71.29 crores from ₹68.51 crores sequentially, reflecting ongoing capital investments. The net profit (standalone) reached ₹56.61 crores in Q2 FY26, whilst the consolidated net profit stood at ₹37.46 crores—the divergence highlighting minority interests and subsidiary performance variations.

The quality of earnings remains a concern, with the PAT margin at 3.99% in Q2 FY26 significantly lagging behind operating margins. This compression is primarily attributable to interest expenses consuming approximately 2.93% of sales, whilst depreciation accounts for another 5.03%. The company's tax rate of 35.24% in Q2 FY26 was relatively stable, though the FY25 full-year tax rate of 80.97% (influenced by the exceptional loss in Q4 FY25) distorts the historical picture.

Return Ratios: Weak Capital Efficiency Despite Recent Improvement

Arvind Fashions' capital efficiency metrics present a mixed picture. The latest return on capital employed (ROCE) stands at 17.77%, a substantial improvement from the average ROCE of 3.48% over recent years. This suggests that recent operational improvements are beginning to translate into better returns on invested capital. However, the return on equity (ROE) tells a more sobering story—the latest ROE of -3.60% (impacted by the Q4 FY25 loss) compares unfavourably to the average ROE of 2.22%, indicating that the company has historically struggled to generate adequate returns for shareholders.

The company's balance sheet reveals a shareholder equity base of ₹957.12 crores as of March 2025, down from ₹1,003.29 crores a year earlier, primarily due to the exceptional loss in Q4 FY25. Long-term debt has been progressively reduced to ₹8.33 crores from ₹10.58 crores, indicating deleveraging efforts. However, working capital dynamics remain stretched, with trade payables of ₹1,171.98 crores significantly exceeding the previous year's ₹936.31 crores, suggesting extended payment cycles to suppliers.

The Debt Dynamics: Deleveraging Progress Amidst Working Capital Pressures

Arvind Fashions has made commendable progress in reducing its debt burden, with long-term debt declining to ₹8.33 crores as of March 2025 from ₹30.59 crores in March 2023 and ₹71.71 crores in March 2022. This deleveraging has been a strategic priority, helping reduce financial risk and interest costs over time. The company's interest coverage ratio, measured by EBIT to interest, averaged 1.09 times over recent years—a weak level that indicates limited cushion to service debt obligations.

However, working capital management presents ongoing challenges. Current liabilities stood at ₹1,893.66 crores as of March 2025, with trade payables accounting for ₹1,171.98 crores. The increase in payables from ₹936.31 crores in the previous year suggests the company is relying more heavily on vendor credit to manage cash flows. Current assets of ₹2,429.27 crores provide some comfort, though the net working capital position requires careful monitoring to ensure liquidity remains adequate during seasonal demand fluctuations.

The company's cash flow from operations reached ₹529.00 crores in FY25, up from ₹434.00 crores in FY24, demonstrating improved cash generation capabilities. However, cash flow from financing activities was negative at ₹456.00 crores in FY25, reflecting debt repayments and dividend distributions. The closing cash balance of ₹150.00 crores provides limited buffer, necessitating continued focus on working capital optimisation and cash conversion efficiency.

Peer Comparison: Valuation Premium Despite Weaker Returns

When benchmarked against peers in the garments and apparels sector, Arvind Fashions presents a mixed competitive profile. The company's ROE of 2.22% lags significantly behind sector leaders like Garware Technical Fibres (17.80%) and Arvind Ltd (7.69%), whilst V2 Retail posts 6.18%. This underperformance in capital efficiency reflects the company's ongoing profitability challenges and lower margin structure compared to more established players.

Despite weaker return metrics, Arvind Fashions trades at a price-to-book value (P/BV) multiple of 7.01x, substantially higher than Arvind Ltd's 2.22x and Garware Technical Fibres' 6.12x. The elevated valuation multiple appears to reflect market expectations of future growth potential and brand value, though it also suggests limited margin of safety at current levels. The company's dividend yield of 0.32% is modest compared to Arvind Ltd's 1.15%, indicating limited income appeal for investors.

The company's debt-to-equity ratio of 1.04 is moderate compared to V2 Retail's 2.43 but higher than Arvind Ltd's 0.38, reflecting the company's historical leverage which has been gradually reduced. The inability to display a meaningful P/E ratio due to historical losses underscores the profitability challenges that continue to weigh on the investment case. Investors are essentially paying a premium for brand value and growth potential rather than current earnings power.

Valuation Analysis: Attractive Entry Point or Value Trap?

Arvind Fashions currently trades at an EV/EBITDA multiple of 12.43x and EV/Sales of 1.61x, with the stock priced at ₹545.50 as of November 3, 2025. The company's valuation grade has fluctuated between "Very Attractive" and "Attractive" in recent months, currently sitting at "Very Attractive" as of October 7, 2025. This assessment appears to factor in the company's improved operational performance and margin expansion trajectory, though it may not fully account for persistent profitability constraints.

The price-to-book value of 7.01x is elevated relative to the company's modest book value per share of ₹71.80, suggesting the market is ascribing significant value to intangible assets such as brand equity and distribution networks. The stock has recovered 61.39% from its 52-week low of ₹338.00 but remains 8.98% below its 52-week high of ₹599.30, indicating some consolidation after a strong rally. The current market capitalisation of ₹6,881 crores reflects small-cap status, implying higher volatility and liquidity constraints.

The company's dividend yield of 0.32% (based on a ₹1.60 per share dividend) provides minimal income support, with the dividend payout ratio at 20.61% suggesting management is retaining most earnings for growth investments. The absence of a meaningful P/E ratio due to historical losses complicates traditional valuation comparisons, forcing investors to rely on forward-looking assumptions about profitability normalisation. The EV/Capital Employed ratio of 3.95x, combined with the latest ROCE of 17.77%, implies the market expects sustained improvement in capital efficiency.

Shareholding Pattern: Institutional Confidence Building

The shareholding pattern reveals encouraging trends in institutional participation, with mutual fund holdings increasing to 17.62% in June 2025 from 16.81% in March 2025, representing an 81 basis point sequential increase. This sustained accumulation by domestic mutual funds suggests growing confidence in the company's turnaround story and long-term growth prospects. Over the past year, mutual fund holdings have expanded significantly from 10.02% in June 2024, indicating a near-doubling of institutional interest.

Insurance company holdings also witnessed a substantial increase to 4.14% in June 2025 from 3.25% in the previous quarter, adding 89 basis points sequentially. This marks a dramatic rise from just 0.09% in June 2024, suggesting that insurance investors are increasingly viewing Arvind Fashions as a viable long-term investment. The combined domestic institutional investor (DII) holdings, including mutual funds, insurance companies, and other DIIs, now stand at approximately 23.62%, providing a stable ownership base.

Conversely, foreign institutional investor (FII) holdings have declined to 9.39% in June 2025 from 15.59% in June 2024, representing a 620 basis point reduction over the year. This FII exodus may reflect concerns about profitability sustainability, elevated valuations, or broader portfolio reallocation away from small-cap stocks. The promoter holding remains stable at 8.31%, with 8.31% of shares pledged, which warrants monitoring as it could indicate financial stress at the promoter level.

Stock Performance: Volatile Journey With Long-Term Gains

Arvind Fashions' stock has delivered a volatile performance across different timeframes, reflecting the company's operational challenges and recovery phases. Over the past five years, the stock has generated an exceptional 336.40% return, massively outperforming the Sensex's 108.58% gain by 227.82 percentage points. This long-term alpha reflects the market's recognition of the company's brand portfolio value and recovery potential from the COVID-19 pandemic disruption.

However, shorter-term performance has been more challenging. Over the past one year, the stock has declined 6.42%, underperforming the Sensex's 5.34% gain by 11.76 percentage points. This underperformance has been particularly pronounced over the past three months, with the stock falling 2.55% against the Sensex's 4.19% rise, resulting in a negative alpha of 6.74 percentage points. The six-month performance tells a different story, with the stock surging 38.14% compared to the Sensex's 4.32%, generating a strong 33.82 percentage point alpha.

The stock's beta of 1.35 indicates high volatility relative to the broader market, classifying it as a high-beta stock. With an annualised volatility of 37.66%, significantly higher than the Sensex's 12.50%, the stock exhibits substantial price swings that may not suit risk-averse investors. The risk-adjusted return of -0.17 over the past year, compared to the Sensex's 0.43, places the stock in the "HIGH RISK LOW RETURN" category, suggesting that recent returns have not adequately compensated for the elevated volatility.

Investment Thesis: Quality Concerns Amid Growth Potential

The investment case for Arvind Fashions rests on a foundation of strong brand equity, improving operational metrics, and attractive valuation grades, balanced against persistent profitability challenges and weak historical returns. The company's quality assessment stands at "Average," upgraded from "Below Average" prior to August 2024, reflecting gradual improvements in financial performance. However, the average ROCE of 3.48% and average ROE of 2.22% remain materially below acceptable thresholds for a consumer discretionary company.

The financial trend analysis shows a "Positive" trajectory as of September 2025, with several metrics hitting record levels including net sales (₹1,417.51 crores), operating profit (₹187.30 crores), and operating profit to interest coverage (4.50 times). These improvements suggest that management's operational initiatives are gaining traction, though sustainability remains to be proven. The technical trend has shifted to "Sideways" as of October 31, 2025, from "Mildly Bullish," indicating near-term consolidation after recent gains.

The company's proprietary Mojo score of 57/100 places it in the "HOLD" category, with the recommendation stating "Not recommended for fresh buy. You can continue to hold." This assessment reflects the balanced risk-reward profile—attractive valuation (Very Attractive grade) and improving trends are offset by average quality and structural profitability constraints. Key strengths include high institutional holdings at 33% and an attractive EV/Capital Employed ratio of 3.95x with ROCE improving to 17.77%.

Key Strengths & Risk Factors

Outlook: What Lies Ahead

Arvind Fashions stands at a critical juncture, having demonstrated operational improvements in Q2 FY26 whilst grappling with structural profitability constraints that have plagued the company for years. The path forward will be determined by management's ability to sustain margin expansion, convert topline growth into meaningful bottom-line improvements, and address the capital efficiency challenges reflected in weak historical ROE and ROCE metrics.

The festive season demand that boosted Q2 FY26 results may not be fully sustainable, with Q3 FY26 likely to test whether the revenue momentum can persist through the winter season. Investors should monitor quarterly margin trends closely—any reversal in the operating margin expansion trajectory would be a red flag indicating that recent improvements are cyclical rather than structural. The company's ability to maintain operating margins above 13% whilst simultaneously improving PAT margins towards mid-single digits will be critical.

The shareholding pattern trends suggest a divergence in investor confidence, with domestic institutions accumulating whilst foreign investors exit. This dichotomy may reflect differing views on valuation sustainability and profitability normalisation timelines. The stock's technical shift to "Sideways" from "Mildly Bullish" indicates near-term consolidation, with immediate support at the 52-week low of ₹338.00 and resistance around the recent high of ₹599.30.