Garuda Construction Q2 FY26: Stellar Growth Momentum Continues Amid Premium Valuation Concerns

The stock has responded enthusiastically to the company's growth trajectory, delivering a remarkable 135.51% return over the past year and outperforming the Sensex by 128.77 percentage points. However, the shares closed at ₹209.10 on 27 October 2025, down 4.02% from the previous session, reflecting profit-booking after the stock touched its 52-week high of ₹230.40 earlier in the month.

Garuda Construction's performance stands out in the construction sector, which has delivered a modest 1.23% return over the same period. The company's ability to consistently expand its order book whilst maintaining healthy margins has attracted significant retail and institutional interest, though questions about sustainability at current valuations persist.

Financial Performance: Triple-Digit Growth Continues

In Q2 FY26, Garuda Construction reported net sales of ₹116.49 crores, representing a stellar 149.18% increase year-on-year from ₹46.75 crores in Q2 FY25. However, the quarter-on-quarter comparison reveals a 6.93% decline from Q1 FY26's ₹125.16 crores, suggesting some lumpiness in project execution—a characteristic typical of the construction industry where revenue recognition often follows project milestones.

Operating profit (PBDIT) excluding other income stood at ₹34.42 crores in Q2 FY26, yielding an operating margin of 29.55%—marginally lower than Q1 FY26's 29.10% but significantly compressed from the 33.22% achieved in Jun'24. This margin compression, whilst still healthy by industry standards, warrants monitoring as it could indicate increasing competitive intensity or rising input costs.

Net profit margin for the quarter settled at 23.28%, up from 22.36% in Q1 FY26, demonstrating the company's ability to convert top-line growth into bottom-line profitability. The improvement in PAT margin despite operating margin pressure was aided by other income of ₹1.94 crores, up from ₹1.52 crores in the previous quarter, and minimal interest costs of just ₹0.01 crore—a testament to the company's debt-free status.

Balance Sheet Strength: Fortress-Like Financial Position

One of Garuda Construction's most compelling attributes is its pristine balance sheet. As of March 2025, the company maintained shareholder funds of ₹331.81 crores against negligible long-term debt of just ₹0.06 crore, resulting in a debt-to-equity ratio of effectively zero. This financial conservatism provides significant strategic flexibility and insulates the company from interest rate volatility that has plagued many construction peers.

The company's net cash position stood at negative ₹44 crores (indicating surplus cash), with current assets of ₹369.24 crores comfortably covering current liabilities of ₹74.82 crores. This strong liquidity position, coupled with an interest coverage ratio averaging 56.67 times, underscores the company's financial resilience and ability to pursue growth opportunities without dilutive capital raises.

Return on equity for Q2 FY26 came in at 15.01%, which whilst respectable, trails the company's five-year average of 22.81%. This decline reflects the substantial equity base built through retained earnings and the recent initial public offering, which has temporarily depressed ROE metrics. As the company deploys this capital into revenue-generating projects, ROE should progressively improve towards historical levels.

Industry Context: Capitalising on Infrastructure Boom

India's construction sector continues to benefit from robust government infrastructure spending and private sector capex revival. The sector has witnessed a resurgence in order inflows, particularly in roads, urban infrastructure, and real estate development—segments where Garuda has established presence. However, the broader construction sector's muted 1.23% return over the past year suggests that not all players are capturing this opportunity equally.

Garuda's 135.51% stock return over the same period indicates the market's recognition of the company's superior execution capabilities and growth trajectory. The company's ability to scale revenue from ₹225 crores in FY25 to an annualised run rate exceeding ₹480 crores based on H1 FY26 performance demonstrates exceptional market share gains.

Competition in the small and mid-cap construction space remains intense, with pricing pressure on new contracts evident across the industry. However, Garuda's maintained margins above 29% suggest either superior project selection, better execution efficiency, or a favourable contract mix—potentially all three factors working in tandem.

Peer Comparison: Premium Valuation Demands Scrutiny

Garuda Construction trades at a P/E ratio of 40.73 times trailing twelve-month earnings, broadly in line with SEPC (40.94x) but at a significant premium to SPML Infra (34.30x). The elevated P/BV multiple of 6.11 times book value—substantially higher than peers—reflects market expectations of sustained high growth and improving return ratios.

What justifies this premium? Garuda's ROE of 15.01%, whilst below its historical average, significantly exceeds most construction peers who struggle to generate returns above 2-3%. The company's debt-free status (reflected in negative debt-to-equity of -0.13) provides additional valuation support, as it eliminates financial risk that plagues leveraged competitors like Simplex Infrastructure with 3.92x debt-to-equity.

However, the premium valuation leaves little room for execution missteps. At 40.73 times earnings, the market has priced in aggressive growth expectations. Any slowdown in order inflows, margin compression, or project execution delays could trigger sharp valuation corrections.

Valuation Analysis: Expensive but Growth May Justify Premium

Garuda Construction's current valuation metrics place it firmly in "very expensive" territory. Beyond the P/E multiple of 40.73x, the company trades at an EV/EBITDA of 29.86x and EV/Sales of 8.82x—multiples that exceed most construction sector peers by substantial margins.

The Price-to-Book ratio of 6.11x appears particularly stretched when compared to the sector average of approximately 1.9x. However, this premium becomes more defensible when considering Garuda's superior capital efficiency. With minimal fixed assets (₹1.86 crores) and an asset-light business model, traditional book value comparisons may understate the company's intrinsic worth.

The company's five-year sales CAGR of 18.30% and the current trajectory suggesting 100%+ growth rates provide some justification for the premium. If Garuda can sustain even 40-50% annual growth over the next 2-3 years whilst maintaining margins above 25%, the current valuation could prove reasonable in hindsight.

However, investors must recognise that at these valuations, the risk-reward equation tilts unfavourably. The stock's 135.51% gain over the past year has front-loaded much of the anticipated growth, leaving limited margin of safety. A fair value estimate of approximately ₹180-190 per share (based on 32-35x forward earnings) suggests the stock is trading 10-15% above intrinsic value at ₹209.10.

Shareholding Dynamics: Stable Promoter Base, Growing Retail Interest

Garuda Construction's shareholding pattern reveals a stable promoter holding of 67.56%, unchanged over the past three quarters. This stability, combined with zero promoter pledging, demonstrates confidence in the company's prospects and eliminates concerns about governance or financial stress that often plague small-cap companies.

Foreign institutional investor (FII) holdings have declined from 6.65% in December 2024 to 4.48% in June 2025, suggesting some profit-booking by sophisticated investors after the stock's sharp rally. Similarly, mutual fund holdings dropped from 0.93% to 0.65%, indicating institutional caution at current valuations.

Conversely, non-institutional holdings (primarily retail investors) have steadily increased from 24.34% to 27.31%, reflecting growing retail enthusiasm for the stock. This shift in shareholder composition—from institutions to retail—often precedes periods of heightened volatility and warrants caution.

Stock Performance: Spectacular Rally Raises Sustainability Questions

Garuda Construction's stock performance has been nothing short of extraordinary, delivering 135.51% returns over the past year whilst the Sensex gained just 6.74%. This massive outperformance of 128.77 percentage points reflects the market's enthusiasm for the company's growth trajectory and the broader small-cap rally that characterised much of 2025.

The stock's six-month return of 101.83% is particularly noteworthy, effectively doubling investor wealth in half a year. However, this parabolic move has also elevated the stock's volatility to 65.91%—more than five times the Sensex's 12.53% volatility. The high beta of 1.35 indicates that Garuda tends to amplify market movements, rising faster in bull markets but potentially falling harder during corrections.

Technical indicators present a mixed picture. Whilst the stock trades above all key moving averages (5-day to 200-day), suggesting strong momentum, the overall trend has recently shifted to "mildly bullish" from "bullish," indicating some loss of upward momentum. The stock's distance from its 52-week high of ₹230.40 has widened to 9.03%, suggesting near-term consolidation or correction is underway.

Investment Thesis: Growth Story Intact, Valuation Stretched

Garuda Construction presents a compelling growth narrative underpinned by strong execution capabilities, a pristine balance sheet, and robust industry tailwinds. The company's ability to scale revenue from ₹225 crores in FY25 to a potential ₹500+ crores in FY26 whilst maintaining healthy margins demonstrates operational excellence rarely seen in the fragmented construction sector.

The zero-debt capital structure provides significant competitive advantages, enabling aggressive project bidding without financial risk and allowing the company to navigate industry downturns better than leveraged peers. With shareholder funds of ₹331.81 crores and minimal capital intensity, Garuda possesses the financial firepower to pursue growth opportunities organically.

However, the investment case is complicated by stretched valuations that leave minimal margin of safety. At 40.73 times trailing earnings, the market has priced in several years of strong growth. Any disappointment in order inflows, margin compression beyond current levels, or execution delays could trigger sharp corrections given the stock's high beta and elevated retail ownership.

Outlook: What Lies Ahead

The construction sector's outlook remains constructive, supported by government infrastructure initiatives and reviving private capex. Garuda's established presence and execution track record position it well to capture opportunities. However, investors must weigh this positive industry backdrop against the stock's premium valuation and recent momentum loss.

For the company to justify current valuations, it must demonstrate sustained revenue growth above 50% annually whilst expanding operating margins back towards 32-33% levels. Any deviation from this trajectory would likely trigger valuation compression. The upcoming quarters will be critical in determining whether Garuda can sustain its growth momentum or if the recent quarter's sequential decline signals a maturing growth phase.