Esab India Q2 FY26: Stellar Profit Surge Masks Valuation Concerns

The September quarter results showcased Esab India's operational prowess, with net sales climbing 8.39% sequentially to ₹381.55 crores, marking the highest quarterly revenue in recent periods. Year-on-year revenue growth of 12.67% demonstrated the company's ability to capitalise on robust demand across its key end-user industries including shipbuilding, petrochemicals, construction, and energy sectors. The operating profit margin expansion to 18.93% reflected improved pricing power and operational efficiencies, whilst the company maintained its position as a quality player in the industrial products segment.

Yet beneath the surface of these impressive quarterly numbers lies a more nuanced investment story. The stock's year-to-date performance tells a sobering tale, with shares down 9.47% compared to the Sensex's 6.46% gain. Over the past year, Esab India has underperformed the broader market by 16.72 percentage points, raising concerns about whether the current valuation premium of 43x earnings can be justified in an environment where growth expectations may be moderating.

Financial Performance: Margin Expansion Drives Profitability Surge

Esab India's Q2 FY26 financial performance represented a significant inflection point, with net profit nearly doubling from the previous quarter's ₹40.94 crores. This dramatic improvement stemmed from multiple factors converging favourably. Operating profit (PBDIT excluding other income) jumped 22.09% quarter-on-quarter to ₹72.22 crores, whilst the operating margin expanded by 213 basis points to 18.93%, reaching its highest level in seven quarters.

The margin expansion story deserves particular attention. Whilst revenue grew 8.39% sequentially, operating profit grew at nearly triple that pace, demonstrating impressive operating leverage. Employee costs remained well-controlled at ₹33.09 crores, declining 4.94% from the previous quarter despite higher business volumes. This suggests improved productivity and efficient workforce management during a period of revenue growth.

The profit before tax (PBT) figure of ₹101.03 crores in Q2 FY26 requires careful interpretation. This includes a significant one-time or exceptional item, as the PBT substantially exceeds the sum of operating profit and other income. Excluding this exceptional gain, the normalised PBT would be approximately ₹67.78 crores, still representing robust growth but providing a more sustainable baseline for future projections.

On a year-on-year basis, the performance remains commendable. Net sales grew 12.67% compared to September 2024, whilst net profit surged 83.49%. This dramatic profit growth significantly outpacing revenue expansion indicates structural improvements in the business model, though investors should exercise caution in extrapolating such exceptional margin gains into perpetuity.

Operational Excellence: Capital Efficiency Remains Best-in-Class

Esab India's operational metrics underscore why the company commands a premium valuation despite current concerns. The latest return on equity (ROE) of 47.59% places it firmly in the top echelon of Indian manufacturing companies. This exceptional ROE reflects not merely accounting profits but genuine capital efficiency—the company generates nearly 48 paise of profit for every rupee of shareholder equity deployed.

The five-year average ROE of 42.27% demonstrates this isn't a fleeting phenomenon but a sustained competitive advantage. Such consistently high returns on equity typically stem from strong pricing power, operational excellence, or both. In Esab India's case, the company's established market position in welding and cutting products, combined with technical expertise and customer relationships built over decades, creates meaningful barriers to entry.

Return on capital employed (ROCE) metrics paint an even more impressive picture. The latest ROCE of 78.69% and five-year average of 48.03% indicate the company extracts extraordinary returns from its operating assets. The ROCE calculation, which adjusts for cash and current investments, reveals that the core business generates returns that would be the envy of most capital-intensive manufacturers.

The balance sheet strength becomes particularly relevant when evaluating downside protection. In an economic downturn or industry-specific challenges, Esab India's cash position and absence of debt provide a cushion that leveraged competitors lack. This financial flexibility allows management to maintain operational continuity, invest counter-cyclically, or return capital to shareholders even during challenging periods.

However, one must question whether such extraordinary returns are sustainable. ROE and ROCE at these levels often attract competition or face margin pressure as the market matures. The company's ability to maintain double-digit revenue growth alongside 40%+ ROE will be the litmus test for justifying premium valuations going forward.

The Valuation Conundrum: Premium Pricing Meets Growth Questions

Herein lies the central investment dilemma facing Esab India shareholders. The company trades at 43x trailing twelve-month earnings, a substantial premium to the broader market and even to its industry peer group average. The price-to-book value ratio of 20.67x reflects market recognition of the company's exceptional return profile, but also embeds high expectations for future performance.

The PEG ratio of 10.47 proves particularly revealing. This metric, which divides the P/E ratio by the earnings growth rate, suggests the stock is expensive relative to its growth trajectory. A PEG ratio above 2.0 typically indicates overvaluation, and Esab India's reading of 10.47 raises red flags about the sustainability of current price levels.

Enterprise value multiples tell a similar story. The EV/EBITDA ratio of 30.49x and EV/EBIT of 32.63x both trade well above historical norms for industrial product manufacturers. Whilst the company's quality metrics justify some premium, the magnitude of the current valuation gap creates limited margin of safety for new investors.

The dividend yield of 1.85% provides modest income support but unlikely to compensate for valuation-driven price corrections. The company's dividend payout ratio of 81.21% indicates management returns most profits to shareholders rather than retaining capital for aggressive expansion, which may limit future growth acceleration.

Market consensus, as reflected in the "Very Expensive" valuation grade, suggests institutional investors share these concerns. The stock has traded in expensive-to-very-expensive territory since late 2020, with brief periods of reprieve. This persistent premium valuation creates vulnerability to multiple compression if growth disappoints or broader market sentiment shifts.

Industry Positioning: Leading Player in Niche Market

Esab India operates in the specialised welding and cutting products segment, serving critical industries including shipbuilding, petrochemicals, construction, transport, offshore, energy, and repair and maintenance. This diversified end-user base provides some insulation from sector-specific downturns, though the company remains ultimately tied to broader capital expenditure cycles.

The company's long-standing presence in the Indian market, technical expertise, and established distribution network create meaningful competitive advantages. In welding consumables and equipment, brand reputation and technical support capabilities often matter as much as price, allowing established players like Esab India to maintain pricing power.

The five-year sales CAGR of 16.84% and EBIT CAGR of 26.87% demonstrate the company's ability to grow faster than nominal GDP whilst expanding profitability. This suggests market share gains, product mix improvements, or both. However, the law of large numbers suggests maintaining such growth rates becomes progressively more challenging as the revenue base expands.

Peer Comparison: Premium Valuation Versus Sector

Comparing Esab India to other industrial product manufacturers reveals the extent of its valuation premium. The company's P/E ratio of 43.45x, whilst lower than some peers, remains elevated in absolute terms. The industry P/E average of 37x suggests Esab India trades at a modest premium to sector peers, though this comparison requires context given the heterogeneous nature of the "Other Industrial Products" category.

The price-to-book value comparison proves more striking. Esab India's P/BV of 20.67x towers above most peers, reflecting the market's recognition of its superior return on equity. Companies generating 40%+ ROE naturally command higher P/BV multiples than those earning mid-single-digit returns. However, the magnitude of Esab India's P/BV premium creates vulnerability if ROE moderates towards more sustainable levels.

The dividend yield comparison shows Esab India offering better income than most peers at 1.85%, though this remains modest in absolute terms. For income-focused investors, the yield provides limited attraction, particularly when adjusted for the valuation risk premium embedded in the current share price.

Shareholding Dynamics: Stable Promoter Base, Modest Institutional Interest

Esab India's shareholding pattern reveals a stable ownership structure with promoters—Esab Holdings Limited and Exelvia Group India BV—maintaining a consistent 73.72% stake across recent quarters. This unwavering promoter commitment provides governance comfort and signals confidence in the business outlook, though it also limits free float availability for institutional investors.

Mutual fund holdings have declined marginally from 12.80% in September 2024 to 12.57% in September 2025, a modest reduction of 23 basis points. This gradual trimming by domestic institutional investors may reflect profit-booking at elevated valuations rather than fundamental concerns, though it bears monitoring.

Foreign institutional investor (FII) holdings remain minimal at 1.53%, down from 1.85% in December 2024. The limited FII interest likely stems from the company's small-cap classification and restricted free float rather than quality concerns. For global investors seeking exposure to Indian industrials, larger, more liquid alternatives typically prove more attractive.

The absence of insurance company holdings (0.00%) and minimal other DII participation (0.21%) suggests institutional investors maintain cautious positioning despite the company's strong fundamentals. This limited institutional ownership creates both opportunity and risk—opportunity if institutions increase allocations as the company scales, risk if the concentrated retail investor base proves less patient during market volatility.

Stock Performance: Short-Term Strength Masks Longer-Term Struggles

Esab India's stock performance presents a tale of two timeframes. Recent momentum has been impressive, with the stock delivering 9.42% returns over the past week and 8.73% over one month, both significantly outperforming the Sensex. The 10.35% surge on November 11 following the Q2 results reflects market enthusiasm for the strong quarterly performance.

However, extending the lens reveals concerning trends. Year-to-date, the stock has declined 9.47% whilst the Sensex gained 6.46%, resulting in negative alpha of 15.93 percentage points. The one-year return of -12.07% versus Sensex's +4.65% translates to underperformance of 16.72 percentage points, suggesting investors who bought a year ago are nursing losses despite the company's operational excellence.

The two-year performance proves even more challenging, with Esab India down 16.35% compared to the Sensex's 28.17% gain—a staggering 44.52 percentage point underperformance. This extended period of weakness reflects the market's reassessment of valuation premiums for small-cap industrial companies as interest rates rose and growth expectations moderated.

Longer-term holders fare better, with three-year returns of 53.24% and five-year returns of 290.90% demonstrating the wealth-creation potential for patient investors who bought at more reasonable valuations. The stock's 10-year return of 851.76% places it amongst the top performers in the industrial space, though past performance provides limited guidance for future returns from current elevated levels.

Technical indicators paint a mixed picture. The stock currently trades above all key moving averages (5-day, 20-day, 50-day, 100-day, and 200-day), suggesting short-term momentum remains positive. However, the overall technical trend remains "Mildly Bearish" according to composite indicators, with MACD and KST showing bearish signals on weekly and monthly timeframes.

Investment Thesis: Quality Company, Questionable Entry Point

Esab India's investment thesis rests on three pillars: exceptional operational quality, strong competitive positioning, and robust financial health. The company's 47.59% ROE, 78.69% ROCE, and net cash balance sheet represent genuine competitive advantages that justify premium valuation—to a point.

The proprietary Mojo Score of 55/100 reflects this nuanced reality. The "HOLD" rating acknowledges the company's quality whilst recognising valuation constraints and technical weakness. The score breakdown reveals:

For existing shareholders, the recent rally provides an opportunity to reassess position sizing. Those with substantial gains may consider partial profit-booking to lock in returns, particularly given the valuation stretch and technical uncertainty. Long-term holders confident in the company's competitive moat might maintain positions but should avoid adding at current levels.

Fresh investors face a more challenging decision. The company's quality is undeniable, but the price-to-perfection valuation leaves minimal room for disappointment. A fair value estimate of approximately ₹4,200-4,400 per share (based on 35-37x normalised earnings) suggests current prices around ₹5,270 embed 20-25% downside risk before accounting for any growth premium.

Key Strengths & Risk Factors

Outlook: What Lies Ahead

The path forward for Esab India depends critically on its ability to sustain exceptional profitability whilst navigating valuation headwinds. Management's commentary on order books, pricing environment, and capacity utilisation will provide crucial signals about near-term trajectory.

The industrial capex cycle in India, government infrastructure spending, and manufacturing sector growth will influence Esab India's medium-term prospects. Favourable trends in these areas could support continued revenue growth, though translating revenue gains into proportional profit growth at current margin levels may prove challenging.

Investors should monitor quarterly results closely for signs of margin sustainability. If the company can maintain operating margins above 18% whilst growing revenue in double digits, the current valuation may prove justified over time. However, any margin compression or growth disappointment could trigger significant multiple contraction given the elevated starting point.