Disa India Q2 FY26: Margin Pressures Mount as Profitability Slips Despite Revenue Growth

The stock, currently trading at ₹13,536.00 with a market capitalisation of ₹1,968.41 crores, has declined 26.50% over the past year, substantially underperforming the Sensex which gained 3.80% during the same period. The company's shares are trading below all major moving averages, reflecting sustained bearish sentiment amongst investors as technical indicators signal continued weakness.

The September 2025 quarter results highlight a concerning trend of margin erosion despite robust top-line growth. Operating margin (excluding other income) contracted to 13.92% from 14.62% in Q1 FY26 and 13.90% in Q2 FY25, whilst PAT margin slipped to 11.76% from 12.79% in the previous quarter. This deterioration suggests rising operational costs and pricing pressures in the industrial manufacturing sector, which has seen challenging demand conditions across several end-user segments.

Financial Performance: Revenue Momentum Masks Profitability Concerns

Disa India's Q2 FY26 revenue of ₹103.70 crores represents a modest 1.70% sequential increase from ₹101.97 crores in Q1 FY26, but a more impressive 19.55% year-on-year growth from ₹86.74 crores in Q2 FY25. On a half-yearly basis (H1 FY26), the company posted revenues of ₹205.67 crores, marking a 12.71% increase from ₹182.67 crores in H1 FY25. This sustained top-line expansion reflects continued demand for foundry machinery, albeit with visible quarter-to-quarter volatility characteristic of capital equipment businesses.

However, the revenue growth narrative is significantly undermined by deteriorating profitability metrics. Operating profit (PBDIT excluding other income) stood at ₹14.43 crores in Q2 FY26, representing an operating margin of just 13.92%, down from 14.62% in the previous quarter and substantially lower than the 18.04% achieved in Q2 FY24. This 398-basis-point year-on-year margin compression suggests the company is facing either rising input costs, increased competitive pricing pressures, or unfavourable product mix shifts.

The gross profit margin declined to 17.05% in Q2 FY26 from 18.35% in Q1 FY26 and 20.86% in Q2 FY25, indicating cost pressures at the manufacturing level. Employee costs remained relatively stable at ₹11.59 crores, whilst interest expenses were negligible at ₹0.17 crores, reflecting the company's debt-free status. The tax rate stood at 25.61%, consistent with previous quarters. Net profit margin contracted to 11.76% from 12.79% in Q1 FY26, translating to a net profit of ₹12.20 crores versus ₹13.04 crores in the previous quarter.

Other income, a significant contributor to overall profitability, declined to ₹3.42 crores in Q2 FY26 from ₹3.88 crores in Q1 FY26 and ₹6.18 crores in Q2 FY25. This 44.66% year-on-year decline in other income has materially impacted overall profitability, as operating profit including other income fell to ₹17.85 crores from ₹18.24 crores in the year-ago quarter. The company's reliance on other income to supplement operating performance remains a quality concern for investors evaluating earnings sustainability.

Operational Challenges: Margin Compression Signals Structural Headwinds

The persistent margin compression across multiple quarters points to structural challenges in Disa India's business model. Whilst the company has demonstrated its ability to grow revenues at a healthy pace—posting a five-year sales CAGR of 14.88%—the inability to convert this growth into proportionate bottom-line expansion raises questions about operational leverage and pricing power. Operating margin (excluding other income) has declined from 18.04% in Q2 FY24 to 13.92% in Q2 FY26, a deterioration of over 400 basis points that cannot be dismissed as cyclical.

Return on equity (ROE) stands at 16.71% on an average basis, which is respectable for an industrial manufacturing company and places Disa India ahead of several peers in the sector. However, the five-year average return on capital employed (ROCE) of 151.02% appears extraordinarily high and warrants scrutiny. This exceptional ROCE is likely driven by the company's minimal capital base and significant cash holdings, rather than superior operational efficiency. The latest ROCE of 79.72%, whilst still robust, has moderated significantly from historical averages.

The company's working capital management appears to be deteriorating, with cash flow from operations falling to ₹31.00 crores in FY25 from ₹55.00 crores in FY24. This 43.64% decline in operating cash flow is particularly concerning given that reported net profit for FY25 was ₹50.00 crores, suggesting a significant gap between accrual-based profits and actual cash generation. Changes in working capital consumed ₹11.00 crores in FY25 compared to a positive contribution of ₹18.00 crores in FY24, indicating either inventory build-up or receivables expansion.

Industry Context: Foundry Machinery Sector Faces Cyclical Headwinds

The foundry machinery and equipment manufacturing sector operates in a highly cyclical environment, closely tied to capital expenditure trends in automotive, industrial manufacturing, and engineering sectors. The sector has witnessed subdued demand conditions over the past year as end-user industries grappled with inventory corrections, cautious capex spending, and global macroeconomic uncertainties. Disa India's margin compression mirrors broader industry trends, with many capital goods manufacturers reporting similar profitability pressures.

Competition in the foundry equipment space remains intense, with both domestic players and international manufacturers vying for market share. As part of the Denmark-based Norican Global group, Disa India benefits from access to global technology and engineering expertise, but also faces pricing pressures from lower-cost competitors. The company's ability to differentiate through technology, after-sales service, and customer relationships will be critical to defending margins in an increasingly competitive landscape.

Peer Comparison: Valuation Premium Appears Unjustified

Relative to its peer group in the industrial manufacturing sector, Disa India trades at a P/E ratio of 37.62x, broadly in line with peers such as Jash Engineering (36.49x) and below Honda India Power Products (35.90x). However, when considering the company's modest growth trajectory and deteriorating margins, this valuation multiple appears stretched. The company's price-to-book ratio of 7.37x is significantly higher than Honda India's 3.05x and marginally above Jash Engineering's 6.92x.

Disa India's ROE of 16.71% is competitive, ranking third amongst the peer group behind Jash Engineering (19.54%) and Kilburn Engineering (18.63%). The company's debt-free status (negative net debt to equity of -0.79) provides financial flexibility, though this advantage is shared by most peers in the group. The dividend yield of 1.48% is modest, with the company paying ₹100 per share as its latest dividend in August 2025, representing a payout ratio of 57.52%.

What stands out in the peer comparison is that Disa India does not offer a compelling valuation advantage despite its recent underperformance. Trading at 37.62x earnings with declining margins and flat financial trends, the stock appears fully valued, if not expensive, relative to peers with similar or superior operational metrics. The PEG ratio of 2.12 suggests the stock is pricing in growth expectations that current operational trends do not support.

Valuation Analysis: Premium Valuation Lacks Fundamental Support

At the current market price of ₹13,536.00, Disa India commands a market capitalisation of ₹1,968.41 crores, placing it in the small-cap segment. The stock's valuation metrics paint a picture of an expensive company trading at elevated multiples across various parameters. The P/E ratio of 37.62x is substantially higher than the long-term historical average for industrial manufacturing companies, whilst the P/BV of 7.37x suggests investors are paying a significant premium over the company's book value of ₹1,838.97 per share.

Enterprise value-based metrics reinforce the expensive valuation thesis. EV/EBITDA of 30.46x and EV/EBIT of 33.22x are both elevated for a company experiencing margin compression and flat earnings growth. The EV/Sales ratio of 4.42x appears particularly stretched for a manufacturing business with sub-15% operating margins. These valuation multiples would be more justified for a high-growth, high-margin business, which Disa India currently is not.

The proprietary Mojo Score of 37 out of 100 places Disa India firmly in "SELL" territory, reflecting the combination of expensive valuation, deteriorating financial trends, and bearish technical outlook. The company's valuation grade has been marked "Very Expensive" since late 2022, with brief periods of "Expensive" classification. The stock's 52-week range of ₹13,100.05 to ₹18,995.00 shows it currently trades just 3.33% above its yearly low and 28.74% below its yearly high, indicating sustained downward pressure.

Based on current earnings trajectory and peer valuations, a fair value estimate for Disa India would be in the range of ₹11,500-12,500 per share, implying 10-15% downside from current levels. This estimate assumes a more reasonable P/E multiple of 30-33x applied to normalised earnings, factoring in margin pressures and modest growth prospects. For the stock to justify its current valuation, the company would need to demonstrate sustained margin recovery and accelerated earnings growth, neither of which appears imminent based on recent trends.

Shareholding Pattern: Stable Promoter Base, Limited Institutional Interest

The shareholding structure of Disa India has remained remarkably stable over the past five quarters, with promoter holding steady at 74.82%. The promoters—Disa Holdings AG of Switzerland (54.10%) and Disa Holdings A/S of Denmark (20.73%)—have maintained their stake without any buying or selling activity, reflecting long-term commitment to the business. The absence of promoter pledging (0.0%) is a positive indicator of financial health and confidence in the company's prospects.

Institutional participation remains notably low, with mutual fund holdings at 8.23% (unchanged over the past four quarters) and FII holdings negligible at 0.02%. The absence of insurance company holdings and minimal other DII participation (0.04%) suggests limited institutional conviction in the stock. Only two mutual funds hold positions in Disa India, and just three FIIs have exposure, indicating the stock remains largely off the radar of major institutional investors.

The stability in shareholding pattern, whilst indicating no panic selling, also reflects a lack of fresh institutional interest despite the stock's 26.50% decline over the past year. Non-institutional holdings have marginally declined from 17.11% in September 2024 to 16.89% in September 2025, suggesting some retail investor exits. The absence of institutional buying during the price correction is telling—sophisticated investors appear unconvinced about near-term recovery prospects given the company's operational challenges.

Stock Performance: Sustained Underperformance Reflects Fundamental Weakness

Disa India's stock price performance has been decidedly negative across most timeframes, with the shares declining 26.50% over the past year compared to a 3.80% gain in the Sensex, resulting in a negative alpha of 30.30 percentage points. The stock has also underperformed its sectoral peers, with the industrial manufacturing sector declining 25.66% over the same period, marginally better than Disa India's 26.50% fall. The year-to-date performance is particularly concerning, with the stock down 18.95% whilst the Sensex has gained 6.77%.

The technical picture is decidedly bearish, with the stock trading below all key moving averages—5-day (₹13,618.75), 20-day (₹13,677.52), 50-day (₹13,758.18), 100-day (₹13,935.14), and 200-day (₹14,184.35). The overall technical trend classification is "Bearish," having deteriorated from "Mildly Bearish" on November 3, 2025. Key technical indicators including MACD, Bollinger Bands, KST, and Dow Theory all point to continued weakness, with no bullish signals emerging on weekly or monthly timeframes.

The stock's beta of 1.35 indicates it is 35% more volatile than the broader market, amplifying both gains and losses relative to the Sensex. With a risk-adjusted return of -1.04 over the past year and volatility of 25.43%, Disa India falls into the "Medium Risk Low Return" category—an unfavourable combination for investors. The shares currently trade just 3.33% above their 52-week low of ₹13,100.05, suggesting limited downside cushion, but 28.74% below their 52-week high of ₹18,995.00, indicating substantial ground lost.

Investment Thesis: Deteriorating Fundamentals Outweigh Balance Sheet Strength

The investment case for Disa India rests on several pillars: a debt-free balance sheet with substantial cash reserves, stable promoter holding with no pledging, membership in the global Norican Group providing technology access, and a track record of consistent profitability with reasonable ROE. The company operates in a specialised niche—foundry machinery manufacturing—with established customer relationships and after-sales service capabilities that provide some competitive moat.

However, these positives are increasingly overshadowed by concerning fundamental trends. Operating margins have compressed by over 400 basis points year-on-year, net profit growth has turned negative, operating cash flows have declined sharply, and working capital management has deteriorated significantly. The company's financial trend has been classified as "Flat" by proprietary analysis, with key negative triggers including the lowest operating cash flow in recent years and deteriorating debtors turnover ratio.

The valuation appears unjustifiably expensive given the operational challenges. Trading at 37.62x earnings with declining margins and flat earnings growth, the stock offers no margin of safety. The PEG ratio of 2.12 suggests investors are paying a premium for growth that is not materialising. The combination of expensive valuation, deteriorating financial trends, and bearish technical setup creates an unfavourable risk-reward proposition for investors at current levels.

Key Strengths & Risk Factors

Outlook: What to Watch in Coming Quarters

The path forward for Disa India hinges on the company's ability to arrest margin compression and demonstrate sustainable earnings growth. Management commentary on order book trends, pricing environment, and raw material cost outlook will be critical in assessing near-term prospects. Investors should closely monitor quarterly margin trends, operating cash flow generation, and working capital metrics to gauge whether the current challenges are cyclical or structural in nature.