CHL Ltd Q2 FY26: Steep Losses Mount as Operating Performance Collapses

The quarter's results reveal a company in acute operational distress. Whilst net sales remained relatively flat at ₹31.65 crores (up just 0.67% quarter-on-quarter), the operating profit before depreciation, interest, and tax excluding other income collapsed to a staggering loss of ₹8.45 crores, representing an operating margin of negative 26.70%. This marks the worst operating performance in at least seven quarters and signals fundamental issues in the company's core hospitality business.

The severity of the deterioration becomes evident when comparing Q2 FY26 against the previous quarter. In Q1 FY26, CHL had posted an operating profit of ₹4.73 crores with a 15.04% margin. The swing to an ₹8.45 crore operating loss represents a catastrophic reversal of ₹13.18 crores in just three months. Even more concerning, the year-on-year comparison shows a dramatic worsening from Q2 FY24's operating profit of ₹6.93 crores.

Financial Performance: A Quarter of Severe Deterioration

The quarterly financial metrics paint a troubling picture across multiple dimensions. Net sales of ₹31.65 crores, whilst marginally higher than the previous quarter's ₹31.44 crores, actually declined 7.75% on a year-on-year basis. This revenue contraction, combined with the operating loss, suggests the company is struggling to maintain pricing power or occupancy rates in its hospitality operations.

Employee costs rose to ₹10.08 crores in Q2 FY26 from ₹9.55 crores in the previous quarter, representing a 5.55% sequential increase. As a percentage of revenue, employee costs now consume 31.85% of sales, up from 30.37% in Q1 FY26. This rising cost structure, against a backdrop of stagnant revenues, has created a severe margin squeeze that the company appears unable to address.

Interest expenses remained elevated at ₹5.14 crores, marginally higher than the previous quarter's ₹5.06 crores. With the company reporting an operating loss of ₹8.45 crores before interest, the interest coverage ratio has turned deeply negative at -1.64 times, marking the lowest coverage in recent quarters. This raises serious questions about the company's ability to service its substantial debt burden, which stood at ₹242.41 crores as of March 2025.

Operational Distress: Critical Warning Signs Emerge

The company's balance sheet reveals a deeply troubling financial position that compounds the quarterly operational challenges. As of March 2025, CHL reported negative shareholder funds of ₹121.02 crores, resulting in a negative book value per share of ₹22.08. This erosion of equity capital reflects years of accumulated losses that have completely wiped out the company's net worth.

The company's debt-to-EBITDA ratio of 7.55 times (on an average basis) indicates extremely high leverage relative to operating cash generation. With FY25 EBITDA of approximately ₹45.00 crores and long-term debt exceeding ₹242 crores, the company requires more than five years of current EBITDA just to repay existing debt, assuming no further losses or working capital requirements.

Return on capital employed (ROCE) averaged just 1.19% over recent years, reflecting extremely poor capital efficiency. The latest quarter's operating loss would push ROCE into deeply negative territory. With such weak returns, the company struggles to generate sufficient cash flow to service debt, fund maintenance capital expenditure, or invest in business improvements.

The quality of earnings warrants particular scrutiny. In Q2 FY26, other income of ₹3.80 crores provided some offset to the operating loss, though this declined from ₹4.61 crores in the previous quarter. Excluding other income, the operating loss would have been even more severe. The company's reliance on non-operating income to partially mask operational underperformance is a concerning trend.

Hospitality Sector Context: Company-Specific Challenges

The broader Indian hospitality sector has shown resilience in recent quarters, with many hotel operators reporting improved occupancy rates and average room rates as domestic tourism recovered. However, CHL's Q2 FY26 performance suggests the company is unable to capitalise on these favourable industry trends, pointing to property-specific challenges or operational inefficiencies.

The company operates Hotel Surya in New Delhi's New Friends Colony area. The property's performance appears to be significantly lagging industry benchmarks, with the negative operating margin suggesting either very low occupancy rates, discounted room rates, or excessive operating costs relative to revenue generation. Without property-level disclosure, investors lack visibility into the specific operational drivers behind this underperformance.

CHL's fixed asset base of ₹269.09 crores as of March 2025 represents the bulk of its assets, comprising hotel properties and related infrastructure. However, with negative operating margins, these assets are failing to generate adequate returns. The depreciation charge of ₹3.62 crores in Q2 FY26 highlights the ongoing capital consumption, whilst the inability to generate positive operating cash flow raises questions about the sustainability of the current business model.

Peer Comparison: Significant Underperformance

The peer comparison starkly illustrates CHL's inferior financial position. Whilst all peer companies trade at positive price-to-book multiples and are profitable enough to command P/E valuations, CHL's negative book value and loss-making status place it in a distinctly weaker category. The company's negative debt-to-equity ratio of -2.65x reflects the fact that liabilities exceed assets, a technical insolvency position.

Profitability metrics further highlight the performance gap. CHL's average return on equity of 0.0% compares unfavourably to peers like Sayaji Hotels Pune (23.54% ROE) and Sayaji Indore (15.37% ROE). Even the weaker peers in the comparison set maintain positive profitability, whereas CHL continues to generate losses that erode shareholder value.

Valuation Analysis: Price Reflects Fundamental Distress

At the current price of ₹35.39, CHL trades at a market capitalisation of ₹206.00 crores, representing a micro-cap valuation that reflects the company's precarious financial position. The stock's valuation metrics are largely meaningless given the negative book value and loss-making status. The price-to-book ratio of -2.53x simply indicates the stock trades at a premium to a negative net worth.

The company's EV/EBITDA multiple of 13.48x appears deceptively reasonable until one considers the quality and sustainability of that EBITDA. With Q2 FY26 showing a massive operating loss, the trailing twelve-month EBITDA is likely to deteriorate significantly, rendering historical valuation multiples unreliable guides to current value.

The valuation assessment is classified as "RISKY" by fundamental screening metrics, reflecting the company's negative book value, inconsistent profitability, and weak financial trends. The stock has changed its valuation grade multiple times between "Risky" and "Does Not Qualify" over the past two years, indicating persistent fundamental challenges that prevent it from meeting basic quality thresholds.

Shareholding Pattern: Promoter Dominance with Zero Institutional Interest

The shareholding pattern reveals a completely stagnant ownership structure with promoters holding 72.84% and retail/non-institutional investors holding the remaining 27.16%. Critically, there is zero institutional participation—no foreign institutional investors, no mutual funds, no insurance companies, and no other domestic institutional investors hold any stake in CHL.

This complete absence of institutional interest speaks volumes about the company's investment quality. Professional fund managers, who conduct rigorous due diligence, have universally avoided this stock. The lack of any institutional buying despite the company being listed for decades suggests fundamental concerns that make it unsuitable for institutional portfolios.

The dominant promoter holding of 72.84%, primarily through Malbros Investments Inc (58.9%), has remained unchanged for multiple quarters. Whilst the absence of promoter pledging (0% pledged shares) is a minor positive, it does little to offset the broader concerns about operational performance and financial viability. The promoters have not increased their stake despite the depressed valuation, which might otherwise signal confidence in a turnaround.

Stock Performance: Long-Term Volatility with Recent Weakness

The stock's price performance presents a picture of extreme volatility with recent significant weakness. Over the past three months, CHL has declined 11.50%, underperforming the Sensex by 16.11 percentage points. The year-to-date performance of -16.83% compares unfavourably to the Sensex's +6.91% gain, resulting in negative alpha of -23.74%.

The technical picture has deteriorated meaningfully. The stock currently trades in a "SIDEWAYS" trend as of November 7, 2025, having shifted from "Mildly Bullish" just days earlier. The price of ₹35.39 sits below all key moving averages—the 5-day, 20-day, 50-day, 100-day, and 200-day moving averages—indicating sustained selling pressure and lack of support.

The stock's beta of 1.50 indicates high volatility relative to the broader market, with a risk-adjusted return of -0.06 over the past year. The volatility of 65.51% is more than five times the Sensex's 12.35% volatility, classifying CHL as a "HIGH RISK LOW RETURN" investment. This combination of elevated risk without commensurate returns makes the stock particularly unattractive from a risk-reward perspective.

Investment Thesis: Multiple Red Flags Outweigh Limited Positives

The investment thesis for CHL is overwhelmingly negative across all fundamental parameters. The company's quality grade of "BELOW AVERAGE" reflects weak long-term financial performance, with 5-year sales growth of 17.54% unable to translate into profitability. The average ROCE of just 1.19% and average ROE of 0.0% indicate extremely poor capital efficiency and value destruction.

The financial trend classification of "NEGATIVE" captures the deteriorating quarterly performance, with Q2 FY26 marking new lows across multiple metrics. The company's inability to generate positive operating profits, combined with high interest costs and mounting losses, creates a downward spiral that threatens the business's viability.

From a valuation perspective, the "RISKY" classification is appropriate given the negative book value and inconsistent profitability. The company fails to meet basic quality thresholds that would make it suitable for value or growth investors. The technical trend of "SIDEWAYS" offers no support to the fundamental case, with the stock showing sustained weakness and trading below all key moving averages.

Key Strengths & Risk Factors

Outlook: Critical Monitoring Points

The path forward for CHL requires immediate and dramatic action. The company must restore positive operating margins as the highest priority, which likely necessitates significant cost restructuring, potential property repositioning, or exploring strategic alternatives. Without a credible turnaround plan backed by concrete actions, the current trajectory points towards continued value destruction and potential insolvency proceedings.

Investors should closely monitor the Q3 FY26 results for any signs of stabilisation. A return to positive operating profitability, even at modest margins, would be the minimum requirement to suggest the Q2 FY26 disaster was an aberration rather than a new normal. However, given the severity of the balance sheet distress and the persistent nature of the operational challenges, scepticism is warranted regarding the company's ability to execute a meaningful turnaround.