The Guna and Baddi-based textile manufacturer has struggled with profitability for years, and whilst the September quarter showed a return to the black, the underlying fundamentals remain concerning. The stock has plummeted 28.95% over the past year, significantly underperforming both the Sensex (+6.44%) and its garments and apparels sector peers (-5.53%). Trading at ₹125.40 as of February 05, 2026, the shares remain 30.33% below their 52-week high of ₹180.00, reflecting persistent investor scepticism.
Financial Performance: Marginal Recovery Amid Structural Challenges
Deepak Spinners' Q2 FY26 results reveal a company attempting to stabilise after consecutive quarters of losses. Net sales reached ₹139.47 crores, representing modest sequential growth of 0.50% from Q1 FY26's ₹138.77 crores and year-on-year expansion of 6.26% from ₹131.25 crores in Q2 FY25. However, this top-line growth has been uneven throughout the year, with Q1 FY26 witnessing a strong 14.21% quarter-on-quarter jump from the preceding March quarter's ₹121.50 crores.
The company's operating profit before depreciation, interest, tax and other income (PBDIT excl OI) improved significantly to ₹6.84 crores in Q2 FY26 from just ₹1.97 crores a year earlier, translating to an operating margin of 4.90% compared to 1.50% in Q2 FY25. This margin expansion, whilst encouraging, remains anaemic by industry standards and reflects the highly competitive nature of the synthetic yarn business where pricing power is limited.
| Quarter | Net Sales (₹ Cr) | QoQ Growth | Operating Margin (Excl OI) | Net Profit (₹ Cr) | PAT Margin |
|---|---|---|---|---|---|
| Sep'25 (Q2) | 139.47 | +0.50% | 4.90% | 1.97 | 1.41% |
| Jun'25 (Q1) | 138.77 | +14.21% | -0.14% | -3.61 | -2.60% |
| Mar'25 (Q4) | 121.50 | -7.93% | 0.04% | -0.65 | -0.53% |
| Dec'24 (Q3) | 131.96 | +0.54% | 2.85% | -0.45 | -0.34% |
| Sep'24 (Q2) | 131.25 | -5.82% | 1.50% | -3.47 | -2.64% |
| Jun'24 (Q1) | 139.36 | +28.23% | -0.52% | -5.62 | -4.03% |
The path to profitability in Q2 FY26 was aided by other income of ₹0.97 crores, which represented a substantial 42.26% of the company's profit before tax of ₹2.63 crores. This heavy reliance on non-operating income to achieve profitability is a red flag, suggesting that the core business remains fragile. After accounting for interest costs of ₹0.79 crores and depreciation of ₹4.39 crores, the company posted a pre-tax profit of ₹2.63 crores, converting to a net profit of ₹1.97 crores after tax expenses of ₹0.66 crores.
Employee costs have remained relatively stable at ₹18.40 crores in Q2 FY26, marginally lower than the ₹18.69 crores reported in the corresponding quarter last year. This cost discipline is one of the few bright spots in an otherwise challenging operating environment characterised by volatile raw material prices and intense competition in the textile sector.
Operational Challenges: Deteriorating Returns on Capital
Beneath the surface-level profit recovery lies a more troubling picture of capital efficiency. Deepak Spinners' return on equity (ROE) has collapsed to negative 1.23% in the latest period, down sharply from an already modest average of 10.04% over the longer term. This negative ROE indicates that the company is destroying shareholder value rather than creating it, a critical concern for any equity investor.
Similarly, the return on capital employed (ROCE) has deteriorated to negative 2.81%, well below the five-year average of 8.38%. Whilst the average ROCE of 8.38% itself is weak and suggests poor capital allocation historically, the current negative figure underscores the severe operational stress the business is experiencing. For context, quality manufacturing businesses typically generate ROCEs in excess of 15-20%, highlighting the substantial gap between Deepak Spinners' performance and industry best practices.
⚠ Critical Concern: Capital Efficiency Collapse
The company's negative ROE (-1.23%) and ROCE (-2.81%) signal severe operational distress. Despite achieving quarterly profitability, the business is failing to generate adequate returns on the capital invested, raising serious questions about long-term viability. The five-year EBIT growth of -199.04% indicates a sustained deterioration in operating performance that a single profitable quarter cannot offset.
The company's debt position, whilst not alarming, adds to the operational burden. With an average debt-to-EBITDA ratio of 2.68 times and net debt-to-equity of 0.13, leverage is moderate but not negligible. The average EBIT-to-interest coverage ratio of 6.46 times provides some cushion, though this metric has likely weakened given recent operating performance. Interest costs of ₹0.79 crores in Q2 FY26, whilst lower than the ₹1.06 crores in Q2 FY25, still consume a meaningful portion of operating profits.
The Margin Conundrum: Structural Weakness Persists
Deepak Spinners' margin profile reveals the fundamental challenge facing the business. The company's PAT margin of 1.41% in Q2 FY26, whilst positive compared to the negative 2.64% a year earlier, remains extraordinarily thin. Even modest adverse movements in raw material costs, energy prices, or competitive intensity could easily push the company back into loss-making territory.
Looking at the historical trend, the company achieved its best operating margin (excl OI) of 4.90% in the most recent quarter, but this pales in comparison to the 12.20% margin achieved in FY2012, over a decade ago. This secular margin compression reflects both industry-wide pressures and company-specific execution challenges. The gross profit margin of 5.03% in Q2 FY26 provides minimal buffer for operating expenses and financial costs.
Margin Dynamics: A Decade of Deterioration
Deepak Spinners' operating margins have compressed dramatically over the past decade, from 12.20% in FY2012 to just 4.90% in Q2 FY26. This erosion reflects the commoditisation of the synthetic yarn business, where differentiation is limited and pricing power is virtually non-existent. The company's inability to maintain historical margin levels despite stable employee costs suggests fundamental competitive disadvantages that may be difficult to overcome.
The tax rate volatility adds another layer of complexity to earnings predictability. In Q2 FY26, the effective tax rate stood at 25.10%, a normalised level. However, previous quarters have seen wildly fluctuating tax rates, including 85.33% in Q4 FY25 and negative 10.51% in Q2 FY25, reflecting the impact of losses carried forward and tax adjustments. This inconsistency makes forward earnings forecasting particularly challenging.
Peer Comparison: Lagging Industry Standards
When benchmarked against peers in the garments and apparels sector, Deepak Spinners' competitive positioning appears weak. The company's average ROE of 10.04% is higher than some peers like SEL Manufacturing (0.0%) and Pioneer Embroideries (5.94%), but this comparison provides little comfort given that most of these companies are themselves struggling with profitability challenges.
| Company | P/E (TTM) | P/BV | ROE % | Debt/Equity |
|---|---|---|---|---|
| Deepak Spinners | NA (Loss Making) | 0.40 | 10.04% | 0.13 |
| Vippy Spinpro | 6.88 | 0.95 | 14.54% | 0.37 |
| Shanti Spintex | 8.78 | 0.89 | 10.54% | -0.05 |
| SPL Industries | 21.58 | 0.41 | 8.21% | -0.38 |
| Pioneer Embroideries | NA (Loss Making) | 0.57 | 5.94% | 0.58 |
Vippy Spinpro, with an ROE of 14.54% and a P/E ratio of 6.88, represents a more attractive investment proposition within the peer group, commanding a price-to-book ratio of 0.95 compared to Deepak Spinners' 0.40. The fact that Deepak Spinners trades at such a deep discount to book value reflects market scepticism about the company's ability to generate sustainable returns on its asset base.
The company's market capitalisation of ₹90.00 crores places it fourth among its peer group, highlighting its micro-cap status and the associated liquidity and volatility risks. With negligible institutional holdings of just 0.01%, the stock lacks the research coverage and investor attention that might catalyse operational improvements or strategic changes.
Valuation Analysis: Deep Discount Reflects Fundamental Weakness
Deepak Spinners' valuation metrics paint a picture of a deeply distressed asset. Trading at a price-to-book value of 0.40, the stock is priced at a 60% discount to its stated book value, suggesting that the market believes the company's assets are either overvalued on the balance sheet or incapable of generating adequate returns. The enterprise value-to-EBITDA multiple of 11.37 appears reasonable on the surface but becomes less attractive when considering the quality and sustainability of earnings.
The company's P/E ratio is not applicable given the loss-making track record over the trailing twelve months. The stock's 52-week range of ₹99.95 to ₹180.00 indicates extreme volatility, with the current price of ₹125.40 sitting 30.33% below the peak but 25.46% above the trough. This volatility, combined with a beta of 1.50, makes the stock unsuitable for risk-averse investors.
Valuation Dashboard: Risky Territory
P/E Ratio (TTM): NA (Loss Making)
Price to Book Value: 0.40x (60% discount)
EV/EBITDA: 11.37x
Dividend Yield: NA
Valuation Grade: RISKY
The company's valuation grade has been classified as "RISKY" since August 2024, following a downgrade from "Very Attractive." This deterioration in valuation assessment reflects the market's growing concerns about the sustainability of the business model. With no dividend yield and zero dividend payout ratio, income-focused investors have no reason to consider the stock.
Shareholding Pattern: Stable but Uninspiring
The shareholding structure of Deepak Spinners has remained remarkably stable over recent quarters, with promoter holding steady at 45.95% across the last five quarters through December 2025. This stability, whilst providing some governance comfort, also suggests a lack of conviction from promoters to increase their stake during the period of share price weakness.
| Quarter | Promoter % | FII % | Mutual Fund % | Non-Institutional % |
|---|---|---|---|---|
| Dec'25 | 45.95% | 0.00% | 0.01% | 54.04% |
| Sep'25 | 45.95% | 0.00% | 0.01% | 54.04% |
| Jun'25 | 45.95% | 0.00% | 0.01% | 54.04% |
| Mar'25 | 45.95% | 0.00% | 0.01% | 54.04% |
| Dec'24 | 45.95% | 0.00% | 0.01% | 54.04% |
The complete absence of foreign institutional investor (FII) interest and negligible mutual fund holding of just 0.01% highlights the stock's lack of institutional appeal. The non-institutional shareholding of 54.04%, comprising largely retail investors, suggests a shareholder base that may be less sophisticated and more prone to volatility during periods of operational stress.
Positively, there is no promoter pledging, which eliminates one potential risk factor. The promoter group is led by Yashwant Kumar Daga (13.88%) and Mangalam Engineering Projects Ltd. (12.09%), with several other family members and related entities holding smaller stakes. This fragmented promoter structure may limit strategic decision-making agility.
Stock Performance: Severe Underperformance Across All Timeframes
Deepak Spinners' stock price performance has been dismal across virtually all measurement periods, with particularly severe underperformance versus both the Sensex and sector benchmarks. Over the past year, the stock has declined 28.95% whilst the Sensex gained 6.44%, resulting in a negative alpha of 35.39 percentage points. This underperformance extends across longer timeframes as well.
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | +8.52% | +0.91% | +7.61% |
| 1 Month | +1.54% | -2.49% | +4.03% |
| 3 Months | -4.20% | -0.17% | -4.03% |
| 6 Months | -12.83% | +3.23% | -16.06% |
| 1 Year | -28.95% | +6.44% | -35.39% |
| 2 Years | -53.54% | +16.15% | -69.69% |
| 3 Years | -45.02% | +36.94% | -81.96% |
The two-year return of negative 53.54% and three-year return of negative 45.02% demonstrate sustained value destruction for shareholders. Even the five-year return of 29.55%, whilst positive, significantly lags the Sensex's 64.22% gain over the same period. The stock's high beta of 1.50 means it experiences amplified volatility in both directions, making it unsuitable for conservative portfolios.
Recent technical momentum has been slightly more favourable, with the stock gaining 8.52% over the past week and 1.54% over the past month. However, this short-term bounce should be viewed in the context of the stock trading 30.33% below its 52-week high and the overall bearish technical trend that persists. The stock currently trades below all major moving averages (5-day, 20-day, 50-day, 100-day, and 200-day), a classic sign of technical weakness.
Investment Thesis: Weak Fundamentals Override Tactical Recovery
The investment case for Deepak Spinners is severely compromised by multiple structural weaknesses that a single quarter of profitability cannot overcome. The company's proprietary Mojo Score of 26 out of 100 places it firmly in "STRONG SELL" territory, reflecting the confluence of poor valuation quality, below-average business quality, and bearish technical trends.
Mojo Investment Parameters
Overall Score: 26/100 (STRONG SELL)
Valuation: RISKY
Quality Grade: BELOW AVERAGE
Financial Trend: POSITIVE (Short-term only)
Technical Trend: MILDLY BEARISH
The quality assessment of "BELOW AVERAGE" is based on the company's weak long-term financial performance, including a five-year EBIT growth rate of negative 199.04%, indicating a sustained deterioration in operating performance. Whilst the company benefits from no promoter pledging and a moderate debt profile, these positives are overwhelmed by poor capital efficiency metrics and anaemic profitability.
The short-term financial trend has improved to "POSITIVE" based on Q2 FY26 results, but this must be weighed against the longer-term trajectory of margin compression and return deterioration. The technical picture remains "MILDLY BEARISH," with the stock trading below all major moving averages despite the recent bounce.
Key Strengths & Risk Factors
✓ KEY STRENGTHS
- Return to Profitability: Q2 FY26 net profit of ₹1.97 crores after multiple quarters of losses
- Margin Improvement: Operating margin expanded to 4.90% from 1.50% year-on-year
- Zero Promoter Pledging: No encumbrance on promoter holdings reduces governance risk
- Moderate Leverage: Debt-to-equity of 0.13 provides financial flexibility
- Stable Shareholding: Promoter holding steady at 45.95% indicates commitment
- Cost Discipline: Employee costs well-controlled despite revenue volatility
- Deep Value: Trading at 0.40x book value offers asymmetric upside if turnaround succeeds
⚠ KEY CONCERNS
- Negative Capital Returns: ROE of -1.23% and ROCE of -2.81% indicate value destruction
- Margin Fragility: PAT margin of just 1.41% leaves minimal buffer for adverse conditions
- Operating Profit Reliance on Other Income: Non-operating income comprises 42.26% of PBT
- Secular Margin Decline: Operating margins compressed from 12.20% (FY12) to 4.90% (Q2 FY26)
- Severe Stock Underperformance: Down 28.95% over one year vs Sensex +6.44%
- Zero Institutional Interest: No FII holdings and negligible mutual fund presence
- High Volatility: Beta of 1.50 and 43.50% volatility unsuitable for conservative investors
Outlook: What to Watch
Positive Catalysts
- Sustained margin expansion above 5% for three consecutive quarters
- Return on equity turning positive and trending towards 10%+
- Revenue growth accelerating to double-digits sustainably
- Institutional investor interest emerging (FII/MF accumulation)
- Capacity utilisation improvements driving operating leverage
Red Flags to Monitor
- Relapse into quarterly losses in upcoming results
- Further deterioration in ROE/ROCE metrics
- Increased reliance on other income to achieve profitability
- Working capital deterioration (debtors turnover already at lows)
- Stock breaking below ₹100 (52-week low support)
The Verdict: Avoid This Value Trap
Score: 26/100
For Fresh Investors: Avoid entirely. The Q2 FY26 profit represents a tactical bounce in a structurally challenged business. With negative ROE, razor-thin margins, and a decade-long trend of operating deterioration, the risks far outweigh any potential rewards. The deep discount to book value reflects fundamental weakness rather than opportunity.
For Existing Holders: Use any price strength to exit positions. The stock's 8.52% gain over the past week provides a window to reduce exposure. With the stock down 28.95% over one year and trading in a bearish technical trend, holding onto hopes of a sustainable recovery is likely to result in further capital erosion.
Fair Value Estimate: ₹90-100 (20-28% downside from current levels) based on continued operational challenges and sector headwinds.
Note- ROCE= (EBIT - Other income)/(Capital Employed - Cash - Current Investments)
⚠️ Investment Disclaimer
This article is for educational and informational purposes only and should not be construed as financial advice. Investors should conduct their own due diligence, consider their risk tolerance and investment objectives, and consult with a qualified financial advisor before making any investment decisions.
