Emami Paper Mills Q2 FY26: Profit Drops 13% as Margin Pressures Persist

The quarter's performance was characterised by subdued demand and pricing pressures across the paper segment. Net sales declined 1.99% sequentially to ₹450.61 crores and fell 8.98% year-on-year, marking the lowest quarterly revenue in recent periods. Operating profit margin (excluding other income) stood at 8.05%, down from 8.20% in Q1 FY26 but marginally improved from 7.55% in Q2 FY25, suggesting modest cost management efforts amidst revenue headwinds.

For the first half of FY26 (H1 FY26), Emami Paper Mills posted a combined net profit of ₹12.89 crores, representing a significant 36.78% decline compared to H1 FY25. This deterioration in half-yearly profitability signals structural challenges that extend beyond quarterly volatility, raising concerns about the company's ability to navigate persistent industry headwinds.

Financial Performance: Revenue Contraction and Margin Squeeze

A detailed examination of Q2 FY26 reveals a company grappling with both top-line and bottom-line pressures. Net sales of ₹450.61 crores declined 1.99% quarter-on-quarter and 8.98% year-on-year, reflecting weak demand dynamics in the paper industry. This marks the fourth consecutive quarter of year-on-year revenue decline, with sales falling from ₹495.09 crores in Q2 FY25 to the current level.

Operating profit before depreciation, interest, and tax (PBDIT), excluding other income, stood at ₹36.26 crores in Q2 FY26, down 3.76% sequentially and 3.02% year-on-year. The operating margin (excluding other income) of 8.05% showed marginal improvement from 7.55% in Q2 FY25 but remained far below the 14.45% achieved in Q4 FY24, highlighting the erosion of operational efficiency over the past year.

Net profit of ₹6.58 crores declined 4.28% quarter-on-quarter and 13.31% year-on-year. PAT margin compressed to 1.46% from 1.53% in Q2 FY25, reflecting the cumulative impact of revenue decline and elevated cost structure. Employee costs rose to ₹23.35 crores (5.18% of sales) from ₹21.41 crores (4.32% of sales) in Q2 FY25, indicating wage inflation pressures.

Interest costs rose to ₹17.33 crores in Q2 FY26 from ₹14.92 crores in Q2 FY25, reflecting higher borrowing costs and elevated debt levels. Depreciation remained stable at ₹13.77 crores. The tax rate for the quarter stood at 34.66%, higher than the 25.07% in Q2 FY25, further pressuring net profitability.

Operational Challenges: Weak Returns and Leverage Concerns

Emami Paper Mills' operational metrics paint a picture of a company struggling with capital efficiency and profitability. The average return on equity (ROE) over recent years stands at 9.23%, whilst the latest ROE for FY25 was a mere 2.88%, significantly below industry standards and indicating poor capital efficiency. Higher ROE values typically signal better profitability and effective use of shareholder capital, making this low figure a critical concern for investors.

Return on capital employed (ROCE) averaged 11.78% over the past five years, with the latest figure at 11.96%. Whilst marginally positive, this level of ROCE suggests the company generates modest returns relative to the capital deployed in its operations. For a capital-intensive paper manufacturing business, these returns are insufficient to justify significant reinvestment or expansion.

The company's balance sheet reveals increasing leverage. Long-term debt rose to ₹314.40 crores as of March 2025 from ₹230.02 crores in March 2024, a 36.68% increase. Net debt-to-equity averaged 1.13, whilst debt-to-EBITDA stood at 3.76 times, both indicating elevated financial risk. Current liabilities increased to ₹650.64 crores from ₹543.58 crores, further straining liquidity.

On a positive note, the company maintains a pledge-free promoter shareholding structure, with promoters holding a stable 74.97% stake. However, institutional participation remains minimal at 0.57%, with negligible mutual fund and insurance holdings, reflecting limited institutional confidence in the company's growth prospects.

Industry Context: Navigating a Challenging Paper Market

The Indian paper industry has faced significant headwinds in recent quarters, including weak demand from key end-user segments, elevated raw material costs, and intense competition from imports. Emami Paper Mills' performance must be viewed against this challenging backdrop, where many players have struggled to maintain profitability.

The company's five-year sales growth of 6.66% appears modest but masks significant volatility. More concerning is the five-year EBIT growth of -7.43%, indicating that whilst the company has managed to grow revenues, profitability has deteriorated substantially over the medium term. This negative EBIT growth trajectory suggests structural issues with pricing power and cost management.

The paper industry's cyclical nature and capital-intensive requirements mean that companies must maintain strong operational efficiency and pricing discipline to generate acceptable returns. Emami Paper's declining margins and weak return ratios suggest it is losing ground in this competitive landscape.

Peer Comparison: Valuation Premium Despite Weaker Fundamentals

A comparative analysis with industry peers reveals that Emami Paper Mills trades at a significant valuation premium despite exhibiting weaker fundamental metrics. The company's price-to-earnings (P/E) ratio of 30.57 times is substantially higher than most peers, whilst its return on equity of 9.23% lags behind several competitors.

Satia Industries, trading at a P/E of 7.77 times, delivers a superior ROE of 17.95% with significantly lower leverage (debt-to-equity of 0.16). Similarly, Pakka commands a P/E of 23.26 times whilst generating an ROE of 16.23%. Emami Paper's higher P/E multiple of 30.57 times appears unjustified given its weaker ROE of 9.23% and higher leverage profile.

The company does trade at a modest discount to book value, with a price-to-book (P/BV) ratio of 0.88 times compared to the peer average of approximately 1.0 times. However, this discount reflects the market's recognition of the company's subdued return profile rather than representing an attractive entry opportunity. The dividend yield of 1.62% is the highest amongst peers, offering some income support for long-term holders.

Valuation Analysis: Premium Multiples Despite Deteriorating Fundamentals

At the current market price of ₹98.62, Emami Paper Mills trades at a P/E ratio of 30.57 times trailing twelve-month earnings, representing a significant premium to the industry P/E of 15 times. This valuation appears stretched given the company's deteriorating financial performance and weak growth trajectory.

The price-to-book value of 0.88 times offers some comfort, trading below the company's book value per share of ₹84.52. However, this discount must be weighed against the low ROE of 2.88% (latest) and 9.23% (average), which suggests the company struggles to generate value above its book value. A low ROE combined with a P/BV below 1.0 typically indicates a value trap rather than an attractive opportunity.

The enterprise value-to-EBITDA (EV/EBITDA) multiple of 9.99 times and EV-to-EBIT of 16.17 times are elevated for a company with declining margins and negative EBIT growth over five years. The EV-to-capital employed ratio of 0.94 times appears reasonable, but when combined with a ROCE of only 11.96%, it suggests limited value creation potential.

Despite the company's proprietary valuation grade showing "Attractive" status, the fundamental metrics do not support this assessment. Fair value, based on peer multiples and growth trajectory, appears closer to ₹75-80 per share, implying 20-24% downside from current levels. Investors should exercise caution given the premium valuation relative to deteriorating fundamentals.

Shareholding Pattern: Stable Promoter Base, Negligible Institutional Interest

The shareholding pattern of Emami Paper Mills has remained remarkably stable over recent quarters, with promoter holding steady at 74.97% across the last five quarters. This unwavering promoter commitment provides some stability, though the lack of any buying or selling activity could also signal limited conviction about near-term prospects.

Foreign institutional investor (FII) holdings have declined marginally from 0.56% in September 2024 to 0.53% in September 2025, representing minimal international interest. More concerning is the complete exit of mutual funds, which held 0.58% in September 2024 but reduced their stake to zero by December 2024. This exodus of domestic institutional investors signals waning confidence in the company's growth prospects amongst professional fund managers.

Insurance companies hold no stake in the company, whilst other domestic institutional investors (DIIs) account for a negligible 0.04%. Total institutional holdings stand at just 0.57%, one of the lowest levels in the paper industry peer group. This lack of institutional participation reflects concerns about the company's financial performance, growth trajectory, and corporate governance practices.

The promoter group is led by Diwakar Finvest Private Limited (27.03%), Suraj Finvest Private Limited (24.01%), and Emami Limited (13.13%), representing the Goenka family's control. Importantly, there is no promoter pledging, which eliminates one potential risk factor for equity holders.

Stock Performance: Persistent Underperformance Across Timeframes

Emami Paper Mills' stock performance has been disappointing across virtually all meaningful timeframes, with the company underperforming both the broader market and its sector peers. The stock has declined 7.44% over the past year, compared to the Sensex's gain of 5.73%, resulting in negative alpha of 13.17 percentage points.

The medium-to-long-term picture is even more concerning. Over two years, the stock has declined 25.60% whilst the Sensex gained 31.41%, resulting in a staggering negative alpha of 57.01 percentage points. The three-year performance shows a 44.31% decline compared to the Sensex's 38.18% gain, translating to negative alpha of 82.49 percentage points.

Year-to-date, Emami Paper has fallen 11.79% compared to the Sensex's 7.42% gain, underperforming by 19.21 percentage points. The stock also trails its sector, with the Paper, Forest & Jute Products index declining 1.50% over the past year compared to Emami Paper's 7.44% drop, indicating underperformance of 5.94 percentage points versus industry peers.

The stock's beta of 1.50 indicates high volatility relative to the market, with annualised volatility of 45.17% compared to the Sensex's 12.50%. This high volatility combined with negative returns places the stock in the "High Risk, Low Return" category, an unfavourable risk-reward profile for investors.

Currently trading at ₹98.62, the stock sits 23.01% below its 52-week high of ₹128.10 and 26.44% above its 52-week low of ₹78.00. The stock trades below all key moving averages (5-day, 20-day, 50-day, 100-day, and 200-day), indicating persistent technical weakness.

Investment Thesis: Limited Upside Potential Amidst Structural Challenges

Emami Paper Mills presents a challenging investment proposition characterised by deteriorating fundamentals, elevated leverage, and limited growth visibility. The company's proprietary Mojo score of 58 out of 100 places it in the "HOLD" category, though even this rating appears generous given the trajectory of key metrics.

The investment case rests primarily on the company's "Attractive" valuation grade, driven by a low enterprise value-to-capital employed ratio of 0.94 times. However, this metric alone cannot compensate for the fundamental weaknesses evident across profitability, growth, and leverage parameters.

The "Average" quality grade masks significant concerns. Whilst the company maintains no promoter pledging and has a stable shareholding structure, its return ratios tell a different story. Average ROE of 9.23% and latest ROE of just 2.88% indicate severe capital efficiency issues. Remember, higher ROE values are a hallmark of quality companies, and Emami Paper's low figures place it well below acceptable standards for long-term wealth creation.

The "Flat" financial trend classification understates the severity of recent performance deterioration. H1 FY26 profit declined 36.78% year-on-year, whilst quarterly revenues have contracted for four consecutive quarters on a year-on-year basis. The five-year EBIT growth of -7.43% signals structural profitability challenges that extend beyond cyclical factors.

Technical indicators show a "Mildly Bullish" trend, but this must be viewed with scepticism given the stock's position below all major moving averages and its persistent underperformance versus both the market and sector peers. The high beta of 1.50 and elevated volatility of 45.17% add to the risk profile.

Key Strengths and Risk Factors

Outlook: What Lies Ahead for Emami Paper Mills

The outlook for Emami Paper Mills remains clouded by persistent operational challenges and limited near-term catalysts for improvement. The company must navigate weak industry demand, margin pressures, and elevated leverage whilst attempting to restore profitability and investor confidence.

For the company to merit a rating upgrade, investors should look for sustained quarter-on-quarter improvement in revenue growth, operating margin expansion above 10%, reduction in debt levels, and improvement in ROE above 12-15%. Until these metrics show consistent improvement, the risk-reward profile remains unfavourable.