Choksi Laboratories Q2 FY26: Profit Plunges 38% Despite Revenue Growth – Margin Pressures Mount

The results reveal mounting operational pressures as the company struggles to translate top-line growth into bottom-line performance. Operating margins contracted to 26.35% from 30.70% in Q4 FY25, whilst PAT margins collapsed to just 2.16% from 3.47% in the previous quarter. Following the results announcement, the stock has witnessed significant weakness, trading at ₹139.90 as of November 14, 2025, down 40.90% from its 52-week high of ₹236.70 achieved earlier this year.

The quarter's performance underscores the fragile profitability profile of this analytical services provider, which operates testing laboratories and consultancy services across pharmaceuticals, food, agriculture, construction materials, and environmental monitoring segments. With a current Mojo Score of 47 out of 100 and a "SELL" rating, the company faces significant headwinds despite its impressive long-term stock performance of 125.06% over the past year.

Financial Performance: Profitability Under Siege

Choksi Laboratories' Q2 FY26 results paint a picture of a company grappling with operational efficiency challenges despite maintaining reasonable revenue momentum. Net sales of ₹11.12 crores represented a marginal 1.07% sequential decline from Q1 FY26's ₹11.24 crores, though the year-on-year comparison showed a healthy 20.09% increase from ₹9.26 crores in Q2 FY25. This dichotomy highlights the company's ability to grow its top line annually whilst struggling with quarter-to-quarter consistency.

The more concerning narrative emerges from the profitability metrics. Net profit for Q2 FY26 stood at ₹0.24 crores, representing a steep 38.46% quarter-on-quarter decline from ₹0.39 crores in Q1 FY26. Whilst the year-on-year comparison shows a 200% improvement from the paltry ₹0.08 crores in Q2 FY25, this growth comes off an extremely low base and fails to inspire confidence given the sequential deterioration. The company's PAT margin compressed dramatically to 2.16% in Q2 FY26 from 3.47% in the previous quarter, signalling mounting cost pressures.

Operating margins also contracted, falling to 26.35% in Q2 FY26 from 25.80% in Q1 FY26, though this represents a recovery from the 24.47% recorded in Q4 FY24. The operating profit (PBDIT excluding other income) of ₹2.93 crores in Q2 FY26 remained relatively flat compared to Q1 FY26's ₹2.90 crores, but this stability at the operating level failed to translate into bottom-line resilience due to elevated interest costs and depreciation charges.

A particularly troubling aspect of Q2 FY26 was the tax rate, which surged to an extraordinary 57.14% from 38.10% in Q1 FY26. This abnormally high tax incidence of ₹0.32 crores on a pre-tax profit of just ₹0.56 crores significantly eroded the bottom line. For context, the company's historical tax rates have been far more moderate, with Q4 FY25 recording 26.98% and the full-year FY25 showing a negligible 0.0% tax rate. This spike warrants close monitoring and explanation from management, as it represents a major headwind to profitability.

Operational Challenges: Cost Structure Under Strain

The deterioration in profitability metrics reveals deeper operational challenges within Choksi Laboratories' cost structure. Employee costs remained elevated at ₹4.57 crores in Q2 FY26, virtually unchanged from Q1 FY26's ₹4.59 crores but representing 41.08% of net sales. This high employee cost ratio reflects the labour-intensive nature of analytical testing services, but it also limits the company's ability to achieve operating leverage as revenues grow.

Interest expenses continued to burden the company, rising 15% quarter-on-quarter to ₹0.69 crores in Q2 FY26 from ₹0.60 crores in Q1 FY26. This increase reflects the company's elevated debt levels, with long-term debt standing at ₹15.23 crores as of March 2025, down from ₹18.00 crores in March 2024. The debt-to-EBITDA ratio of 5.72 times remains concerningly high, indicating that the company carries approximately 5.7 years' worth of EBITDA in debt obligations. This leverage constrains financial flexibility and diverts cash flow towards debt servicing rather than growth investments.

Depreciation charges of ₹1.69 crores in Q2 FY26 remained consistent with prior quarters, reflecting the company's capital-intensive laboratory operations. Fixed assets stood at ₹46.83 crores as of March 2025, up from ₹42.21 crores in March 2024, indicating continued capital expenditure despite the challenging profitability environment. Whilst this investment in infrastructure is necessary for maintaining testing capabilities and regulatory compliance, it adds to the depreciation burden and pressures cash flows.

The company's sales-to-capital-employed ratio of 0.61 times suggests inefficient asset utilisation, with the business generating just ₹0.61 of revenue for every rupee of capital employed. This metric, combined with the weak ROCE, indicates that Choksi Laboratories struggles to extract adequate returns from its invested capital base, a fundamental weakness that constrains long-term value creation potential.

Balance Sheet Quality: Leverage Remains Elevated

Choksi Laboratories' balance sheet reflects the capital-intensive nature of its analytical testing business, with fixed assets of ₹46.83 crores comprising the bulk of total assets as of March 2025. The company's shareholder funds stood at ₹23.60 crores, modestly improved from ₹22.21 crores in March 2024, driven by retained earnings despite the weak profitability profile. The book value per share of ₹33.89 provides some downside support, though the current market price of ₹139.90 implies a price-to-book ratio of 4.13 times, a premium that appears difficult to justify given the company's operational challenges.

Long-term debt decreased to ₹15.23 crores in March 2025 from ₹18.00 crores in March 2024, representing a ₹2.77 crore reduction that demonstrates some progress in deleveraging. However, the absolute debt level remains substantial relative to the company's equity base, resulting in a net debt-to-equity ratio of 1.16 times. Current liabilities surged to ₹23.88 crores from ₹18.85 crores, driven by increases in both trade payables (₹5.43 crores from ₹3.93 crores) and other current liabilities (₹5.33 crores from ₹3.64 crores), raising questions about working capital management and supplier payment terms.

Peer Comparison: Underperformance Across Key Metrics

Choksi Laboratories' positioning within the healthcare services sector reveals significant competitive disadvantages across critical financial metrics. The company's return on equity of 3.68% lags substantially behind peers such as Aspira Pathlab (18.89%), Shree Pacetronix (17.84%), and Royal Sense (16.74%). This ROE underperformance indicates that Choksi Laboratories generates far lower returns on shareholder capital compared to industry peers, a fundamental weakness that undermines its investment appeal.

The valuation comparison proves equally unfavourable. Choksi Laboratories trades at a P/E ratio of 64.96 times trailing twelve-month earnings, substantially higher than Royal Sense (18.64x), Aspira Pathlab (18.25x), and even Shree Pacetronix (41.87x). This elevated multiple appears unjustified given the company's inferior profitability and return metrics. The price-to-book ratio of 4.13 times aligns roughly with the peer average of approximately 4.1 times, but this valuation fails to account for the material differences in underlying business quality.

Perhaps most concerning is Choksi Laboratories' debt-to-equity ratio of 1.16 times, which stands out as the highest in the peer group. Competitors such as Aspira Pathlab (0.09x), Shree Pacetronix (0.24x), and Royal Sense (negative, indicating net cash) operate with far lower leverage, providing them with greater financial flexibility and lower interest burdens. This leverage disadvantage directly impacts Choksi Laboratories' profitability, as evidenced by the ₹0.69 crore quarterly interest expense that consumes a significant portion of operating profits.

Valuation Analysis: Premium Difficult to Justify

Choksi Laboratories' current valuation metrics present a paradox: the stock trades at elevated multiples despite weak underlying fundamentals. At ₹139.90, the company commands a market capitalisation of ₹97.00 crores, implying a P/E ratio of 64.96 times trailing twelve-month earnings. This multiple sits near the industry average of 66 times but appears rich given the company's inferior profitability profile and operational challenges. For context, higher-quality peers with superior ROE metrics trade at significantly lower P/E multiples, suggesting that Choksi Laboratories' valuation incorporates overly optimistic growth expectations.

The price-to-book ratio of 4.13 times represents a substantial premium to the company's book value of ₹33.89 per share. Whilst this multiple aligns with certain peers, it appears difficult to justify for a business generating a meagre 6.35% return on equity. Typically, companies trading at 4-5 times book value demonstrate strong competitive advantages, robust growth prospects, and double-digit ROE metrics – characteristics largely absent from Choksi Laboratories' profile.

Enterprise value-based metrics further highlight valuation concerns. The EV-to-EBITDA multiple of 11.09 times and EV-to-sales ratio of 2.96 times incorporate the company's debt burden, providing a more comprehensive valuation picture. The EV-to-EBIT multiple of 27.11 times appears particularly elevated, reflecting the thin operating margins and high interest costs that characterise the business. The PEG ratio of 2.30 suggests that investors are paying ₹2.30 for every unit of earnings growth, a premium that seems unwarranted given the execution risks and competitive pressures facing the company.

The Mojo platform's "Very Attractive" valuation grade, which changed from "Attractive" on October 15, 2025, appears to reflect the stock's 40.90% decline from its 52-week high rather than fundamental value. Whilst the price correction has improved the valuation on a relative basis, the absolute metrics remain stretched given the company's financial performance. The absence of dividend yield eliminates any income component to total returns, placing the entire investment case on uncertain capital appreciation potential.

Shareholding Pattern: FII Interest Provides Limited Comfort

Choksi Laboratories' shareholding structure reveals a relatively stable promoter base alongside gradually increasing foreign institutional interest. Promoter holding remained unchanged at 31.48% across the last five quarters through September 2025, indicating commitment from the founding shareholders. This moderate promoter stake, whilst not exceptionally high, provides some governance comfort, particularly given the complete absence of pledged shares – a positive indicator of financial health and confidence.

The most notable trend in shareholding patterns is the steady accumulation by foreign institutional investors. FII holding increased from 0.00% in December 2024 to 5.69% in September 2025, with sequential quarterly increases of 1.94%, 2.37%, and 1.38%. This progressive buying by sophisticated international investors provides some validation of the stock's long-term potential, though the absolute holding of 5.69% remains modest and represents just one FII participant.

However, the complete absence of domestic institutional participation raises concerns about the stock's attractiveness to professional investors. Mutual fund holding stands at 0.00%, as do insurance company holdings and other domestic institutional investor (DII) positions. This lack of domestic institutional interest suggests that Indian fund managers, who typically conduct rigorous fundamental analysis, have not found the risk-reward profile compelling enough to warrant investment. The non-institutional category, comprising retail and high-net-worth individuals, accounts for 62.83% of the shareholding, indicating a predominantly retail-dominated shareholder base.

Stock Performance: Spectacular Long-Term Gains Mask Recent Weakness

Choksi Laboratories' stock performance presents a tale of two narratives: extraordinary long-term wealth creation overshadowed by recent sharp corrections. Over the past year, the stock has delivered a remarkable 125.06% return, vastly outperforming the Sensex's 9.00% gain and generating an alpha of 116.06 percentage points. This outperformance extends across multiple timeframes, with the stock posting a 97.43% return over two years (Sensex: 30.23%), 246.29% over three years (Sensex: 37.22%), and an astonishing 1,371.08% over five years (Sensex: 93.78%).

However, recent performance tells a starkly different story. The stock has plummeted 34.52% over the past three months and 22.15% over the past month, dramatically underperforming the Sensex's positive returns during these periods. The one-week return of -1.41% and one-day return of -0.04% indicate continued selling pressure. Trading at ₹139.90, the stock sits 40.90% below its 52-week high of ₹236.70, though it remains 136.32% above its 52-week low of ₹59.20.

This sharp reversal from the 52-week high reflects a fundamental reassessment of the company's prospects as investors digest the weak Q2 FY26 results and broader operational challenges. The stock's high beta of 1.50 indicates volatility 50% greater than the broader market, classifying it as a "high beta" stock prone to exaggerated moves in both directions. The risk-adjusted return of 2.08 over one year, whilst positive, comes with substantial volatility of 60.05%, placing the stock firmly in the "HIGH RISK HIGH RETURN" category.

Technical indicators paint a mixed picture. The stock trades below all key moving averages – 5-day (₹134.93), 20-day (₹146.92), 50-day (₹176.26), 100-day (₹185.49), and 200-day (₹156.31) – indicating sustained downward momentum. The overall technical trend classification of "MILDLY BULLISH" appears optimistic given this price action, with weekly indicators showing "Mildly Bearish" signals for MACD and Dow Theory. The immediate resistance at ₹146.92 (20-day moving average) represents a key hurdle for any recovery attempt, whilst support at the 52-week low of ₹59.20 remains distant.

Investment Thesis: Quality Concerns Outweigh Valuation Appeal

The investment case for Choksi Laboratories rests on a precarious foundation of mixed signals across critical parameters. The Mojo Score of 47 out of 100, resulting in a "SELL" rating, reflects fundamental concerns that outweigh any valuation appeal from the recent price correction. The four-pillar Mojo analysis reveals significant weaknesses that prospective investors must carefully consider.

The "Very Attractive" valuation grade stems primarily from the stock's steep 40.90% decline from its 52-week high, rather than compelling fundamental value. Whilst the P/E ratio of 64.96 times and price-to-book of 4.13 times have moderated from peak levels, these multiples remain elevated for a company with a "Below Average" quality grade. The quality assessment reflects weak long-term fundamental strength, with an average ROCE of just 4.39% and average ROE of 3.68% – metrics that fall well short of the double-digit returns typically expected from quality businesses.

The "Flat" financial trend classification for Q2 FY26 indicates stagnant performance, a concerning development for a company that needs robust growth to justify its valuation. The "Mildly Bullish" technical trend provides limited comfort given the stock's position below all major moving averages and recent sharp declines. This combination of below-average quality, flat financial momentum, and elevated valuation multiples creates an unfavourable risk-reward profile.

Outlook: What Lies Ahead for Choksi Laboratories

The forward outlook for Choksi Laboratories hinges on management's ability to address fundamental operational weaknesses whilst navigating an increasingly competitive analytical services landscape. The company's ability to maintain revenue growth momentum of 20.09% YoY provides a foundation, but converting this top-line expansion into sustainable bottom-line profitability remains the critical challenge. Investors should monitor several key indicators that will determine whether the recent weakness represents a temporary setback or the beginning of a more prolonged underperformance period.

The company's "Flat" financial trend classification suggests that near-term performance is unlikely to provide significant positive surprises. Management commentary on the abnormal 57.14% tax rate in Q2 FY26 will be crucial – if this represents a one-time adjustment, profitability could recover in subsequent quarters. However, if elevated tax rates persist, the already-thin margins will face additional pressure. The path to improved returns on capital employed requires either significant margin expansion or more efficient asset utilisation, neither of which appears imminent given current trends.

For the stock to sustainably recover from its 40.90% decline from the 52-week high, Choksi Laboratories must demonstrate tangible improvements in operational efficiency, margin management, and return metrics. The current Mojo Score of 47 and "SELL" rating reflect the market's scepticism about near-term improvement prospects. Investors considering entry at current levels must weigh the "Very Attractive" valuation grade against the "Below Average" quality grade and "Flat" financial trend – a combination that typically favours patience over premature accumulation.