The quarter's results present a mixed narrative for the Chennai-based fabrication technology specialist. Whilst revenue growth remained subdued on a sequential basis, the company demonstrated robust operational efficiency through significant margin expansion. Operating profit margin (excluding other income) reached a seven-quarter high of 19.99%, up from 18.93% in Q2 FY26 and substantially higher than the 16.37% reported in the year-ago quarter. This margin improvement reflects effective cost management and favourable product mix, offsetting the impact of muted top-line momentum.
The sharp quarter-on-quarter decline in net profit warrants context. Q2 FY26 had witnessed exceptionally strong other income of ₹2.34 crores and lower tax incidence (21.61% effective tax rate), which inflated that quarter's profitability. In Q3 FY26, other income normalised to ₹1.07 crores whilst the tax rate rose to 26.09%, closer to the company's historical average. Adjusting for these factors, the underlying operational performance remained resilient, with profit before tax (excluding other income) reaching ₹57.11 crores, representing solid growth momentum.
Financial Performance: Margin Resilience Amidst Revenue Plateau
Net sales for Q3 FY26 stood at ₹378.83 crores, declining marginally by 0.71% quarter-on-quarter from ₹381.55 crores in Q2 FY26, but registering a respectable 12.25% year-on-year increase from ₹337.49 crores in Q3 FY25. For the nine-month period (April-December 2025), the company has generated cumulative revenue of ₹1,112.40 crores, reflecting 10.48% growth over the corresponding nine-month period of the previous fiscal year.
The standout feature of Q3 FY26 was the operating profit margin expansion. Operating profit before depreciation, interest and tax (excluding other income) reached ₹75.71 crores, up from ₹72.22 crores in the previous quarter, translating to a margin of 19.99%. This represents a 106 basis points sequential improvement and a substantial 362 basis points year-on-year expansion. The company's ability to extract higher profitability from a relatively flat revenue base demonstrates strong pricing power and operational leverage within its business model.
Employee costs rose to ₹35.31 crores in Q3 FY26 from ₹33.09 crores in Q2 FY26, reflecting a 6.71% sequential increase. Whilst this represents higher personnel expenses, the company maintained tight control over other operating costs, enabling the overall margin improvement. Interest costs remained minimal at ₹0.63 crores, reflecting the company's virtually debt-free balance sheet position. Depreciation stood at ₹4.32 crores, slightly higher than the ₹4.04 crores in the previous quarter.
| Quarter | Net Sales (₹ Cr) | QoQ Growth | YoY Growth | Operating Margin | Net Profit (₹ Cr) | PAT Margin |
|---|---|---|---|---|---|---|
| Dec'25 | 378.83 | -0.71% | +12.25% | 19.99% | 43.00 | 11.35% |
| Sep'25 | 381.55 | +8.39% | +12.67% | 18.93% | 79.20 | 20.76% |
| Jun'25 | 352.02 | -4.27% | +6.80% | 16.80% | 40.94 | 11.63% |
| Mar'25 | 367.72 | +8.96% | — | 17.88% | 47.43 | 12.90% |
| Dec'24 | 337.49 | -0.34% | — | 16.37% | 40.38 | 11.96% |
| Sep'24 | 338.65 | +2.74% | — | 18.15% | 43.16 | 12.74% |
| Jun'24 | 329.61 | — | — | 18.83% | 44.45 | 13.49% |
Operational Excellence: Capital Efficiency Remains World-Class
Esab India's operational metrics underscore its position as an exceptionally well-managed enterprise. The company's return on capital employed (ROCE) stands at an outstanding 68.07% for the latest fiscal year, marginally below its five-year average of 70.65% but still amongst the highest in Indian manufacturing. This exceptional capital efficiency reflects the company's asset-light business model, minimal working capital requirements, and strong pricing power in its core welding and cutting products segment.
Return on equity (ROE) of 44.09% for the latest fiscal year similarly demonstrates superior profitability, comfortably exceeding the five-year average of 42.90%. Higher ROE indicates the company's ability to generate substantial returns for shareholders from retained earnings. The combination of high ROCE and high ROE, coupled with a virtually debt-free balance sheet (net debt-to-equity of -0.17), positions Esab India as a quality compounder with strong fundamentals.
Capital Efficiency: Best-in-Class Metrics
ROCE of 68.07% and ROE of 44.09% place Esab India amongst the top quartile of Indian manufacturing companies. The company's five-year average ROCE of 70.65% demonstrates sustained operational excellence. With negligible debt and strong cash generation, the company enjoys significant financial flexibility for growth investments and shareholder returns.
The company's balance sheet strength is reflected in its negligible leverage. Debt-to-EBITDA remains immaterial, with the company maintaining a net cash position. Interest coverage, measured by EBIT-to-interest ratio, averages an impressive 100 times, indicating minimal financial risk. This conservative financial profile provides substantial cushion during economic downturns and enables management to pursue strategic opportunities without capital constraints.
Working capital management remains efficient, though the nine-month debtors turnover ratio of 5.55 times represents the lowest in recent periods, suggesting slightly elongated receivables collection. This warrants monitoring, though it may reflect typical seasonality patterns or deliberate credit extension to key customers. Overall, the company's operational efficiency metrics remain robust and support its premium valuation multiple.
Industry Context: Navigating Cyclical Headwinds in Industrial Products
Esab India operates in the "Other Industrial Products" sector, serving critical industries including shipbuilding, petrochemical, construction, transport, offshore energy, and repair and maintenance. The company's products—welding electrodes, cutting equipment, and fabrication technology—are essential inputs for infrastructure development and industrial manufacturing, making demand closely tied to capital expenditure cycles.
The broader industrial products sector has witnessed mixed performance over the past year. The sector delivered 33.01% returns over the twelve-month period ending February 2026, outpacing the Sensex's 10.33% gain. However, Esab India's stock performance of 21.48% over the same period lagged the sector by 11.53 percentage points, suggesting company-specific concerns or valuation compression despite solid operational performance.
Several macroeconomic factors influence demand for Esab's products. Government infrastructure spending, particularly in railways, roads, and urban development, drives welding consumables demand. The shipbuilding industry, a significant end-market, has witnessed moderate activity levels. Petrochemical and refinery maintenance cycles also impact quarterly revenue patterns. Management's ability to navigate these cyclical variations whilst maintaining margin discipline has been commendable.
Competitive Positioning: Market Leadership with Pricing Power
Esab India benefits from its association with the global ESAB brand, a technology leader in welding and cutting solutions. The company's extensive distribution network, technical support infrastructure, and product quality enable it to command premium pricing versus local competitors. This competitive moat translates into the superior margins and returns on capital evident in the financial results.
Peer Comparison: Premium Valuation Justified by Superior Returns
Esab India's valuation metrics reflect its quality premium relative to peers in the industrial products space. With a price-to-earnings ratio of 48.21 times trailing twelve-month earnings, the stock trades at a premium to the sector median but below certain high-growth peers. The company's price-to-book ratio of 21.26 times appears elevated in absolute terms but finds justification in its exceptional ROE of 42.90%.
| Company | P/E (TTM) | P/BV | ROE (%) | Dividend Yield | Debt/Equity |
|---|---|---|---|---|---|
| Esab India | 48.21 | 21.26 | 42.90 | 1.56% | -0.17 |
| PTC Industries | 440.98 | 19.56 | 6.05 | — | -0.08 |
| Inox India | 44.29 | 10.79 | 25.16 | 0.17% | -0.21 |
| KRN Heat Exchanger | 67.35 | 8.66 | 11.17 | — | -0.08 |
| Harsha Engineers | 27.06 | 2.74 | 10.04 | 0.25% | 0.03 |
| Kirloskar Industries | 21.94 | 0.49 | 5.68 | 0.40% | 0.17 |
Amongst its peer group, Esab India stands out for delivering the highest ROE at 42.90%, nearly double that of the second-best performer (Inox India at 25.16%). This superior profitability supports the company's elevated P/BV multiple. Using the DuPont framework, Esab's ROE advantage stems from higher asset turnover (sales-to-capital employed of 3.33 times) and superior margin profile rather than financial leverage.
The company's dividend yield of 1.56% exceeds most peers, reflecting a generous dividend payout ratio of 81.21%. Whilst this high payout limits retained earnings for growth, it signals management confidence in sustainable profitability and provides income-oriented investors with attractive cash returns. The most recent dividend of ₹25 per share (ex-date November 14, 2025) represents substantial cash distribution to shareholders.
Compared to the sector average, Esab India's valuation appears reasonable when adjusted for quality. The stock's P/E of 48 times sits above the industry P/E of 38 times, representing a 26% premium. However, given the company's 42.90% ROE versus the peer average of approximately 12%, the valuation premium appears justified. The PEG ratio of 5.89, whilst elevated, reflects the market's recognition of earnings quality and capital efficiency rather than just growth rates.
Valuation Analysis: Premium Justified but Limited Upside at Current Levels
Esab India's current valuation reflects full recognition of its quality attributes. Trading at ₹5,636.35 with a market capitalisation of ₹8,676.04 crores, the stock commands premium multiples across various metrics. The P/E ratio of 48 times trailing earnings sits well above the company's historical median, whilst the EV/EBITDA multiple of 34.82 times similarly indicates rich valuation.
The stock's price-to-book ratio of 21.26 times appears demanding in absolute terms but aligns with the company's ROE profile. Using a simplified valuation framework, a company generating 44% ROE theoretically justifies a P/BV multiple of approximately 22 times (assuming cost of equity around 12-13%). By this metric, current valuation appears fair to slightly expensive rather than egregiously overvalued.
The proprietary valuation assessment categorises Esab India as "VERY EXPENSIVE," a grade the stock has carried since late 2020. This classification reflects the stock's premium valuation relative to historical norms and peer comparisons. The valuation grade history shows the stock has oscillated between "Expensive" and "Very Expensive" categories over the past five years, rarely offering value-buying opportunities.
The stock currently trades approximately 12.26% below its 52-week high of ₹6,423.95 and 36.48% above its 52-week low of ₹4,129.75. This positioning in the upper half of its trading range, combined with premium valuation multiples, suggests limited near-term upside potential absent a significant positive catalyst or earnings upgrade cycle.
Fair value estimation for Esab India proves challenging given its premium quality profile. Applying a target P/E multiple of 40-42 times (representing a modest quality discount from current levels) to estimated FY27 earnings suggests a fair value range of ₹5,200-5,500, implying marginal downside from current levels. However, the stock's quality attributes and track record of consistent performance could support current multiples if earnings growth accelerates.
Shareholding Pattern: Stable Promoter Base with Modest Institutional Presence
Esab India's shareholding structure has remained remarkably stable over recent quarters, reflecting confidence amongst existing investors. Promoter holding stands at 73.72% as of December 2025, unchanged over the past five quarters. The promoter group comprises Esab Holdings Limited (37.31%) and Exelvia Group India BV (36.41%), both entities associated with the global ESAB corporation. This substantial and stable promoter holding provides governance comfort and strategic continuity.
| Shareholder Category | Dec'25 | Sep'25 | Jun'25 | Mar'25 | QoQ Change |
|---|---|---|---|---|---|
| Promoter | 73.72% | 73.72% | 73.72% | 73.72% | 0.00% |
| Foreign Institutional | 1.51% | 1.53% | 1.56% | 1.79% | -0.02% |
| Mutual Funds | 12.74% | 12.57% | 12.62% | 12.63% | +0.17% |
| Other DII | 0.20% | 0.21% | 0.21% | 0.25% | -0.01% |
| Non-Institutional | 11.83% | 11.97% | 11.89% | 11.61% | -0.14% |
Mutual fund holding increased marginally to 12.74% in Q3 FY26 from 12.57% in the previous quarter, suggesting continued institutional confidence despite premium valuation. Eight mutual fund schemes hold positions in the company, providing reasonable liquidity and institutional oversight. The modest increase of 17 basis points quarter-on-quarter indicates stable rather than aggressive accumulation by domestic institutions.
Foreign institutional investor (FII) holding declined slightly to 1.51% from 1.53% in the previous quarter, continuing a gradual downward trend from 1.85% in December 2024. This 34 basis points decline over four quarters suggests FIIs have been trimming positions, possibly due to valuation concerns or portfolio rebalancing. With 69 FII entities holding stakes, the foreign institutional presence remains diversified though modest in absolute terms.
Non-institutional shareholding, comprising retail and high-net-worth individuals, stands at 11.83%, down marginally from 11.97% in the previous quarter. The absence of pledged promoter shares provides additional comfort regarding corporate governance and financial stability. Overall, the shareholding pattern reflects a stable investor base with no significant red flags, though limited institutional participation constrains liquidity for larger investors.
Stock Performance: Strong Long-Term Wealth Creation Despite Recent Underperformance
Esab India's stock has delivered exceptional wealth creation over extended time horizons whilst experiencing near-term volatility. Over the past decade, the stock has generated remarkable returns of 1,087.85%, vastly outperforming the Sensex's 266.76% gain by over 821 percentage points. This extraordinary alpha generation reflects the company's consistent operational performance and margin expansion over the long term.
| Period | Stock Return | Sensex Return | Alpha | Outperformance |
|---|---|---|---|---|
| 1 Week | -2.10% | 0.43% | -2.53% | Underperformed |
| 1 Month | -0.28% | 0.72% | -1.00% | Underperformed |
| 3 Months | 7.28% | 0.37% | +6.91% | Outperformed |
| 6 Months | 9.36% | 4.43% | +4.93% | Outperformed |
| Year-to-Date | -7.60% | -1.22% | -6.38% | Underperformed |
| 1 Year | 21.48% | 10.33% | +11.15% | Outperformed |
| 3 Years | 45.12% | 38.72% | +6.40% | Outperformed |
| 5 Years | 202.71% | 63.35% | +139.36% | Outperformed |
| 10 Years | 1,087.85% | 266.76% | +821.09% | Massively Outperformed |
However, near-term performance has been more challenging. Year-to-date (through February 11, 2026), the stock has declined 7.60% compared to the Sensex's 1.22% decline, underperforming by 6.38 percentage points. This recent weakness reflects broader market volatility and possibly profit-booking following the stock's strong multi-year run. Over the past week and month, the stock has similarly underperformed the benchmark.
The stock's risk-adjusted returns remain attractive over longer periods. With one-year volatility of 27.52% and absolute return of 21.48%, the risk-adjusted return stands at 0.78, indicating positive returns per unit of risk taken. The stock's beta of 1.35 classifies it as a high-beta security, meaning it tends to amplify market movements in both directions. This higher volatility profile suits investors with longer investment horizons who can withstand short-term fluctuations.
Notably, Esab India has underperformed its immediate sector over the past year, with the "Other Industrial Products" sector delivering 33.01% returns versus the stock's 21.48%, an underperformance of 11.53 percentage points. This sector-relative weakness suggests either company-specific concerns or valuation compression as the stock approached premium multiples. The divergence between strong operational performance and stock price underperformance creates an interesting dynamic for investors.
Technical Analysis: Mildly Bullish Trend with Key Support Levels
From a technical perspective, Esab India's stock exhibits a "MILDLY BULLISH" trend as of February 11, 2026, having transitioned from a "Bullish" classification on January 19, 2026, at ₹5,750. The stock currently trades below all major moving averages—5-day (₹5,716.83), 20-day (₹5,622.97), 50-day (₹5,854.05), 100-day (₹5,480.21), and 200-day (₹5,314.78)—suggesting near-term technical weakness despite the mildly bullish classification.
Key technical indicators present mixed signals. On a weekly timeframe, the MACD indicator shows "Mildly Bearish" signals whilst Bollinger Bands indicate "Bullish" positioning. The RSI shows no clear directional signal, suggesting the stock is neither overbought nor oversold. Monthly indicators appear more constructive, with MACD turning "Bullish" and Bollinger Bands remaining positive. The KST (Know Sure Thing) indicator registers "Bullish" on weekly charts and "Mildly Bullish" monthly, providing some technical support.
Immediate support for the stock exists at the 52-week low of ₹4,129.75, approximately 27% below current levels. More meaningful resistance appears at the 20-day moving average zone around ₹5,622.97, followed by the 50-day moving average at ₹5,854.05. The 52-week high of ₹6,423.95 represents a distant resistance level, requiring approximately 14% appreciation from current levels to test that threshold.
Delivery volumes show interesting patterns. One-month delivery percentage increased 40.3% compared to the previous month, suggesting accumulation by longer-term investors. Recent delivery volume of 4.58 thousand shares (59.75% of total volume) exceeds the five-day average of 2.09 thousand shares by 119.54%, indicating increased conviction-based buying. This delivery volume surge provides some technical support despite near-term price weakness.
Investment Thesis: Quality Company at Full Valuation
Esab India's investment thesis rests on four pillars: exceptional operational quality, consistent financial performance, capital efficiency, and competitive positioning. The company's quality grade of "EXCELLENT" reflects sustained strong performance across multiple parameters. With average ROE of 42.90%, average ROCE of 70.65%, and five-year sales CAGR of 17.79%, the company demonstrates best-in-class operational metrics.
The company's virtually debt-free balance sheet (net debt-to-equity of -0.17) and exceptional interest coverage (100 times) provide financial flexibility and resilience. Zero promoter pledging and stable shareholding pattern offer governance comfort. The company's consistent dividend policy (81.21% payout ratio) rewards shareholders whilst maintaining adequate capital for organic growth.
However, the investment case faces headwinds from valuation and near-term growth concerns. The "VERY EXPENSIVE" valuation grade reflects premium multiples across all metrics—P/E of 48 times, P/BV of 21.26 times, and EV/EBITDA of 34.82 times. The PEG ratio of 5.89 suggests the stock price has run ahead of earnings growth prospects. The flat financial trend in Q3 FY26 raises questions about near-term momentum, though margin expansion provides some offset.
The proprietary investment score of 65 out of 100 places Esab India in "HOLD" territory, down from a "BUY" rating in August 2025. This downgrade reflects the combination of premium valuation and moderating growth momentum. For investors, the stock represents a classic quality-at-a-price dilemma—exceptional business fundamentals offset by full valuation that limits near-term upside potential.
KEY STRENGTHS ✓
- Exceptional Capital Efficiency: ROE of 44.09% and ROCE of 68.07% rank amongst India's best manufacturing companies
- Debt-Free Balance Sheet: Net cash position with debt-to-equity of -0.17 provides financial flexibility
- Consistent Profitability: Operating margins expanding to seven-quarter high of 19.99% in Q3 FY26
- Strong Growth Track Record: Five-year sales CAGR of 17.79% and EBIT CAGR of 27.84% demonstrate consistent execution
- Market Leadership: Association with global ESAB brand and technical expertise provide competitive moat
- Shareholder-Friendly: Dividend payout ratio of 81.21% with recent ₹25 per share dividend
- Zero Pledging: No promoter share pledging indicates strong governance and financial health
KEY CONCERNS ⚠
- Premium Valuation: P/E of 48x and P/BV of 21.26x leave limited margin of safety
- Revenue Momentum Slowing: Q3 FY26 revenue declined 0.71% QoQ, suggesting demand softness
- High PEG Ratio: PEG of 5.89 indicates stock price ahead of earnings growth trajectory
- Sector Underperformance: Stock lagged "Other Industrial Products" sector by 11.53% over past year
- Limited Institutional Holding: Only 14.45% institutional ownership constrains liquidity
- Cyclical End-Markets: Exposure to shipbuilding, petrochemical, and construction creates revenue volatility
- Working Capital Pressure: Debtors turnover ratio declined to 5.55 times, the lowest in recent periods
Outlook: What to Watch in Coming Quarters
The investment outlook for Esab India hinges on several key factors that will determine whether the stock can justify its premium valuation or faces further multiple compression. Revenue momentum remains the primary near-term concern, with Q3 FY26's sequential decline raising questions about demand sustainability. Management commentary on order book trends, particularly from infrastructure and industrial capex segments, will be critical for assessing FY27 growth prospects.
Margin sustainability represents another crucial monitoring point. Whilst Q3 FY26's 19.99% operating margin reached a seven-quarter high, investors should assess whether this level is sustainable or represents peak margins. Raw material cost trends, particularly for steel and other inputs, along with competitive pricing dynamics, will influence margin trajectory. The company's ability to maintain margins above 18-19% would support premium valuation.
POSITIVE CATALYSTS
- Infrastructure Spending: Government's continued focus on infrastructure could drive welding consumables demand
- Margin Expansion: Further operating leverage from fixed cost absorption if volumes recover
- Market Share Gains: Competitive advantages enabling share capture in fragmented market
- Working Capital Improvement: Normalisation of debtors turnover would enhance cash generation
- Dividend Sustainability: Strong cash flows support continued generous dividend payouts
RED FLAGS TO MONITOR
- Revenue Stagnation: Continued sequential revenue declines would signal demand weakness
- Margin Compression: Any decline below 18% operating margins would disappoint expectations
- Working Capital Deterioration: Further elongation of receivables days indicating collection stress
- Valuation Compression: De-rating towards P/E of 35-40x would cause significant price correction
- Institutional Selling: Continued FII reduction or mutual fund exits would pressure stock price
Shareholding pattern changes deserve close attention. The gradual decline in FII holding from 1.85% to 1.51% over four quarters suggests foreign investors are trimming positions, possibly due to valuation concerns. Any acceleration of this trend or reduction in mutual fund holding (currently 12.74%) would signal institutional confidence waning. Conversely, increased institutional accumulation would provide price support.
Valuation remains the overarching consideration. At current multiples, the stock offers limited upside unless earnings growth accelerates meaningfully or the market re-rates quality companies higher. Any disappointment in quarterly results or guidance could trigger valuation compression towards P/E of 35-40 times, implying potential downside of 15-20%. Conversely, if the company delivers 15-20% earnings CAGR over the next two years, current valuation could prove justified.
The Verdict: Quality Company, Fully Valued
Score: 65/100
For Fresh Investors: Avoid initiating positions at current valuations. Whilst Esab India represents an excellent business with superior returns on capital, the stock trades at premium multiples (P/E 48x, P/BV 21.26x) that offer limited margin of safety. Wait for a meaningful correction of 15-20% or evidence of accelerating revenue growth before considering entry. Target accumulation zone: ₹4,700-5,000.
For Existing Holders: Continue holding given the company's exceptional quality metrics (ROE 44%, ROCE 68%) and debt-free balance sheet. The 1.56% dividend yield provides some income whilst holding. However, consider booking partial profits if the stock approaches ₹6,000-6,200 levels or if quarterly results disappoint. Maintain holdings only if investment horizon exceeds three years.
Fair Value Estimate: ₹5,200-5,400 (representing 7-9% downside from current levels based on target P/E of 40-42x FY27 estimated earnings)
Rationale: Esab India's operational excellence and capital efficiency justify a quality premium, but current valuation fully discounts these strengths. The combination of flat near-term financial trend, premium multiples, and slowing revenue momentum warrants a cautious stance. The stock suits patient, long-term investors who can withstand volatility, but offers limited near-term upside potential for fresh investors.
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. Past performance does not guarantee future results. Investments in equity markets are subject to market risks, and investors may lose their entire capital.
