Arvind Ltd Q3 FY26: Margin Expansion Drives Steady Performance Despite Volume Pressures

The December 2025 quarter results present a nuanced picture for Arvind Ltd. Whilst revenue growth remained virtually flat on a sequential basis at just 0.06%, the company achieved its highest quarterly net sales of ₹2,372.64 crores, demonstrating sustained demand momentum. More importantly, operating profit excluding other income surged to ₹273.85 crores, marking the highest quarterly PBDIT in recent periods and translating to an operating margin of 11.54%—the strongest in at least seven quarters.

The nine-month performance for FY2026 (April-December 2025) reveals consolidated net profit of ₹254.23 crores, representing growth of 28.80% compared to ₹197.36 crores in the corresponding period of FY2025. This substantial improvement underscores the company's ability to enhance profitability despite a challenging operating environment characterised by volatile raw material prices and subdued global demand in textile markets.

Financial Performance: Margin Expansion Amidst Flattish Revenue

Arvind Ltd's Q3 FY26 financial performance showcased the company's operational efficiency even as top-line growth decelerated. Net sales of ₹2,372.64 crores in Q3 FY26 represented a marginal 0.06% quarter-on-quarter increase from ₹2,371.14 crores in Q2 FY26, suggesting demand stabilisation rather than acceleration. However, on a year-on-year basis, revenue grew by a healthy 13.57% compared to ₹2,089.21 crores in Q3 FY25, reflecting the company's ability to capture market share in a competitive textile landscape.

The standout feature of the quarter was the robust margin performance. Operating profit excluding other income surged to ₹273.85 crores, translating to an operating margin of 11.54%—a significant improvement of 112 basis points quarter-on-quarter from 10.42% and 19 basis points year-on-year from 11.35%. This margin expansion occurred despite relatively stable revenue, indicating improved operational leverage, better product mix, and effective cost management across manufacturing facilities.

Employee costs rose to ₹291.86 crores in Q3 FY26 from ₹315.79 crores in Q2 FY26, declining by 7.57% sequentially but increasing 6.34% year-on-year from ₹274.44 crores. As a percentage of sales, employee costs stood at 12.30% in the latest quarter, down from 13.31% in the previous quarter, suggesting improved labour productivity and operational efficiency.

Interest costs remained relatively stable at ₹41.87 crores in Q3 FY26 compared to ₹41.21 crores in Q2 FY26, reflecting the company's disciplined approach to debt management. Depreciation stood at ₹71.83 crores, marginally lower than ₹71.94 crores in the preceding quarter. The profit before tax of ₹147.33 crores, whilst down 0.89% quarter-on-quarter, represented a healthy 1.29% increase year-on-year, demonstrating underlying earnings stability.

Tax expenses increased to ₹46.36 crores in Q3 FY26 from ₹41.91 crores in Q2 FY26, with the effective tax rate rising to 31.47% from 28.19%. This higher tax incidence impacted bottom-line growth, with consolidated net profit declining to ₹97.59 crores from ₹103.40 crores in the previous quarter. Nevertheless, the PAT margin of 4.26% remained robust, though down from 4.50% in Q2 FY26.

Operational Excellence: Capital Efficiency Reaches New Heights

Arvind Ltd's operational metrics in Q3 FY26 and the first half of FY2026 demonstrate significant improvements in capital efficiency and return ratios. The company's Return on Capital Employed (ROCE) for the half-year period reached 12.99%—the highest level in recent periods—indicating more productive deployment of capital across manufacturing assets and working capital. This represents a substantial improvement from the five-year average ROCE of 10.53%, reflecting the benefits of operational restructuring and asset optimisation initiatives undertaken in recent years.

The Return on Equity (ROE) for the latest available period stood at 10.71%, above the five-year average of 9.14%. Whilst this remains moderate compared to industry leaders, the upward trajectory is encouraging. Higher ROE indicates that Arvind is generating better returns for shareholders from the capital employed in the business, a critical metric for assessing management's effectiveness in deploying retained earnings and shareholder funds.

Balance sheet quality has shown marked improvement. The debt-to-equity ratio for the half-year period stood at just 0.40 times—the lowest in recent quarters—compared to the five-year average of 0.37 times. Long-term debt declined to ₹292.30 crores as of March 2025 from ₹378.30 crores in March 2023, demonstrating the company's commitment to deleveraging. The debt-to-EBITDA ratio of 2.31 times (five-year average) indicates manageable leverage, though there remains scope for further reduction.

Cash flow generation remained robust, with operating cash flow reaching ₹762.00 crores in FY2025, the highest annual operating cash flow in recent years. This strong cash generation enabled the company to reduce debt whilst maintaining capital expenditure of ₹493.00 crores for growth and modernisation. The company's ability to generate positive operating cash flow consistently demonstrates the underlying health of its business model and provides financial flexibility for strategic investments.

Working capital management showed mixed signals. Changes in working capital resulted in a cash outflow of ₹50.00 crores in FY2025, compared to an outflow of ₹94.00 crores in FY2024, suggesting some improvement. However, trade payables increased to ₹1,655.20 crores as of March 2025 from ₹1,375.29 crores in March 2024, indicating the company is taking longer to pay suppliers—a common strategy to preserve cash but one that requires careful monitoring to maintain supplier relationships.

Margin Dynamics: Navigating Raw Material Volatility

The textile industry operates in a challenging environment characterised by volatile cotton prices, fluctuating energy costs, and intense competition from both domestic and international players. Arvind Ltd's ability to expand operating margins in this context deserves particular attention. The operating margin excluding other income of 11.54% in Q3 FY26 represents a 112 basis point quarter-on-quarter improvement, driven by a combination of factors including better product realisation, improved capacity utilisation, and cost optimisation initiatives.

Gross profit margin stood at 9.29% in Q3 FY26, broadly stable compared to 9.31% in Q2 FY26 but down from 9.95% in Q3 FY25. This marginal compression on a year-on-year basis reflects the challenges of passing on raw material cost increases to customers in a competitive market. However, the company's ability to maintain margins above 9% demonstrates pricing power and brand strength, particularly in its branded garments and premium denim segments.

The PAT margin of 4.26% in Q3 FY26, whilst down from 5.09% in Q3 FY25, remains healthy for a textile manufacturer. The compression primarily stems from higher tax incidence rather than operational deterioration. Looking at the nine-month period, PAT margins have improved sequentially, suggesting that the company is successfully navigating cost pressures whilst protecting profitability.

The company's five-year EBIT growth of 35.42% significantly outpaces its sales growth of 9.92%, indicating successful margin expansion and operational leverage over the medium term. This divergence between top-line and bottom-line growth rates suggests that Arvind has been able to improve its business mix towards higher-margin products and enhance operational efficiency across its manufacturing footprint.

Industry Leadership: How Arvind Ltd Compares to Peers

Arvind Ltd operates in the highly competitive garments and apparels sector, competing with both pure-play textile manufacturers and integrated garment companies. A peer comparison reveals Arvind's relative positioning in terms of valuation, profitability, and financial leverage.

Arvind Ltd trades at a P/E ratio of 18.99x, below the peer average of approximately 27x (excluding loss-making Aditya Birla Fashion), suggesting a valuation discount. This discount appears justified given Arvind's ROE of 9.14%, which lags peers like Trident (12.31%), Welspun Living (12.02%), and significantly trails Vedant Fashions' exceptional 30.19%. The lower ROE reflects Arvind's capital-intensive manufacturing model compared to asset-light branded garment players.

However, Arvind's price-to-book ratio of 2.03x is reasonable, positioned between Vardhman Textiles' 1.17x and Welspun Living's 2.45x. The company's debt-to-equity ratio of 0.37x is moderate, lower than Welspun Living (0.39x) but higher than Trident (0.22x) and Vardhman (0.03x), indicating room for further deleveraging. Arvind's dividend yield of 1.24% is competitive, matching Vardhman and close to Welspun's 1.38%.

The valuation discount relative to peers appears partly warranted due to lower return ratios, but also presents potential upside if Arvind can continue improving its ROCE and ROE towards peer levels. The company's integrated business model—spanning fabric manufacturing to branded garments—provides diversification benefits but also results in lower margins compared to pure-play branded apparel companies like Vedant Fashions.

Valuation Analysis: Attractive Entry Point for Patient Investors

Arvind Ltd's current valuation presents an interesting proposition for long-term investors seeking exposure to India's textile and apparel sector. Trading at a P/E ratio of 18.99x based on trailing twelve-month earnings, the stock commands a modest premium to its historical averages but remains below the broader market and sector valuations.

The price-to-book ratio of 2.03x appears reasonable given the company's improving ROE trajectory. With ROE currently at 10.71% (latest period) and trending upwards from the five-year average of 9.14%, the P/BV multiple suggests the market is pricing in moderate growth expectations. For context, a company with 10-11% ROE trading at 2x book value implies the market expects ROE to stabilise or improve modestly, which appears achievable given recent operational trends.

The EV/EBITDA multiple of 10.19x is attractive for a company with improving margins and strong cash flow generation. Compared to the EV/Sales ratio of 1.06x, this suggests the market is valuing Arvind's profitability rather than just revenue scale—a positive indicator. The EV/Capital Employed ratio of 1.75x, whilst above book value, is justified by the improving ROCE of 12.05% (latest period), which exceeds the cost of capital.

The PEG ratio of 0.46x stands out as particularly attractive, suggesting the stock is undervalued relative to its growth potential. A PEG ratio below 1.0 typically indicates that the stock price has not kept pace with earnings growth expectations. Given Arvind's five-year EBIT growth of 35.42%, even accounting for moderation in future growth rates, the current valuation appears compelling for growth-oriented investors.

The dividend yield of 1.24% with a conservative payout ratio of 27.78% provides downside support whilst leaving ample room for dividend growth as profitability improves. The low payout ratio also ensures the company retains sufficient capital for debt reduction and growth investments.

Shareholding: Institutional Confidence Building Gradually

The shareholding pattern of Arvind Ltd reveals a stable promoter base with gradually increasing institutional participation, particularly from domestic mutual funds. Promoter holding has remained steady at 39.53% in Q3 FY26, showing minimal dilution of 0.06 percentage points over the past year. This stable promoter stake provides governance comfort and alignment of interests with minority shareholders.

Foreign Institutional Investor (FII) holding declined to 16.51% in Q3 FY26 from 18.72% in Q1 FY25, representing a reduction of 2.21 percentage points over three quarters. This consistent reduction suggests some profit-booking by foreign investors, possibly due to portfolio rebalancing or concerns about near-term growth visibility in the textile sector. The sequential decline of 0.31% in Q3 FY26 continues this trend.

In contrast, domestic mutual fund holdings increased to 18.94% in Q3 FY26 from 17.83% in Q1 FY25, gaining 1.11 percentage points. The quarter-on-quarter increase of 0.60% in Q3 FY26 marks the second consecutive quarter of mutual fund accumulation, indicating growing domestic institutional confidence in Arvind's operational turnaround story. With 18 mutual funds holding the stock, there is reasonable diversification of domestic institutional ownership.

Total institutional holding (FII + Mutual Funds + Insurance + Other DII) stands at 35.82%, providing significant float and liquidity. The rising mutual fund stake compensating for declining FII holding suggests a shift in the investor base from foreign to domestic institutions, which can provide greater stability given domestic investors' typically longer investment horizons in mid-cap stocks.

Promoter pledging at 7.24% of total shares warrants monitoring. Whilst not alarmingly high, any increase in pledged shares could be a red flag for governance concerns. Investors should watch for changes in this metric in future quarters. The non-institutional shareholding of 24.65% provides adequate retail participation and liquidity for investors.

Stock Performance: Underperformance Masks Long-Term Gains

Arvind Ltd's stock price performance presents a tale of two timelines. Whilst the stock has delivered exceptional returns over the longer term, recent performance has been lacklustre, with the stock underperforming broader market indices across most short to medium-term timeframes.

The stock declined 7.12% over the past year, significantly underperforming the Sensex's 7.11% gain, resulting in negative alpha of 14.23 percentage points. This underperformance extended to the six-month period (-5.97% vs Sensex +0.91%) and three-month period (-3.61% vs Sensex -2.59%), reflecting investor caution about near-term growth prospects and margin sustainability in a challenging textile environment.

However, zooming out reveals a dramatically different picture. Over three years, Arvind delivered stellar returns of 265.96% compared to the Sensex's 38.18%—a remarkable outperformance of 227.78 percentage points. The five-year returns are even more impressive at 484.51% versus the Sensex's 77.64%, representing nearly 407 percentage points of alpha generation. This long-term outperformance reflects the successful operational turnaround, debt reduction, and margin improvement initiatives implemented over the past half-decade.

The stock currently trades at ₹311.30, approximately 23.13% below its 52-week high of ₹404.95 and 14.64% above its 52-week low of ₹271.55. This positioning suggests the stock is in a consolidation phase after the sharp run-up seen in previous years. The recent one-day gain of 4.60% following Q3 results indicates positive market reception to the margin expansion story, though sustained momentum will require continued operational improvement.

Technical indicators paint a mixed picture. The stock trades below all major moving averages (5-day, 20-day, 50-day, 100-day, and 200-day), indicating weak short-term momentum. The overall technical trend is classified as "Mildly Bearish," though this recently improved from "Bearish" on January 27, 2026. With a high beta of 1.35, the stock exhibits greater volatility than the broader market, making it suitable primarily for risk-tolerant investors.

Investment Thesis: Quality Improving, Valuation Attractive, Momentum Weak

The investment case for Arvind Ltd rests on three pillars: improving fundamental quality, attractive valuation, and a challenging near-term technical setup. The company's quality grade has improved to "Good" from "Below Average" in prior periods, reflecting sustained improvements in operational metrics, cash flow generation, and capital efficiency. The five-year sales CAGR of 9.92% coupled with EBIT growth of 35.42% demonstrates successful margin expansion and operational leverage.

Key quality indicators include healthy institutional holdings of 35.82%, conservative dividend payout of 27.78% (leaving room for growth), and improving ROCE reaching 12.99% in the latest half-year period. The company's ability to generate operating cash flow of ₹762.88 crores in FY2025—the highest in recent years—provides financial flexibility for debt reduction and growth investments. Debt metrics have improved markedly, with the debt-to-equity ratio declining to 0.40 times and the EBIT-to-interest coverage reaching a robust 6.54 times in Q3 FY26.

The valuation appears compelling with the stock rated as "Very Attractive" based on proprietary metrics. Trading at a P/E of 18.99x with a PEG ratio of just 0.46x, the stock offers value for patient investors willing to look past near-term volatility. The EV/EBITDA of 10.19x and EV/Capital Employed of 1.75x are reasonable given the improving ROCE trajectory. The financial trend is classified as "Positive" for Q3 FY26, supported by highest-ever quarterly sales, operating profit, and operating margins.

However, the technical picture remains weak with the stock in a "Mildly Bearish" trend and trading below all key moving averages. The one-year underperformance of 14.23 percentage points versus the Sensex reflects market scepticism about near-term growth visibility. This creates a classic value versus momentum dilemma—strong fundamentals and attractive valuation offset by weak price momentum and negative sentiment.

Key Strengths & Risk Factors

Outlook: What to Watch in Coming Quarters

The forward outlook for Arvind Ltd depends critically on the company's ability to sustain margin improvements whilst reigniting revenue growth. Management commentary on demand trends, order book visibility, and raw material cost outlook will be key inputs for assessing the sustainability of Q3's strong margin performance. The textile sector's cyclical nature means investors should prepare for quarterly volatility, but the underlying operational improvements provide a solid foundation.

Key monitoring points include the trajectory of ROCE and ROE—continued improvement towards 13-15% ROCE would justify a valuation re-rating. Debt reduction progress should continue, with the target of reducing debt-to-equity below 0.30x within the next 12-18 months. Any reversal in the deleveraging trend would be concerning. Shareholding patterns merit close attention, particularly whether domestic mutual funds continue accumulating and whether FII selling stabilises.