H P Cotton Textile Mills Q2 FY26: Margin Compression Weighs on Profitability Despite Revenue Stability

The quarter's performance reflects a company struggling to maintain profitability momentum despite a modest revenue increase on a year-on-year basis. Net sales of ₹34.45 crores in Q2 FY26 declined 4.07% sequentially from ₹35.91 crores in Q1 FY26, whilst showing a marginal 2.10% improvement over the ₹33.74 crores recorded in Q2 FY25. The more concerning development lies in the deteriorating margin profile, with operating margins contracting sharply to 8.27% from 10.22% in the previous quarter and 11.97% in the year-ago period.

The stock has experienced significant volatility, currently trading at ₹100.05, down 1.86% on the day and approximately 29.49% below its 52-week high of ₹141.90. Year-to-date performance remains deeply negative at -23.86%, substantially underperforming the Sensex's 6.91% gain during the same period, resulting in a negative alpha of -30.77 percentage points.

Financial Performance: Margin Erosion Undermines Top-Line Stability

The detailed financial analysis for Q2 FY26 reveals a company grappling with cost pressures that are outpacing revenue growth. Net sales of ₹34.45 crores represented a modest 2.10% year-on-year increase but a concerning 4.07% sequential decline. More troubling is the operating profit (PBDIT excluding other income) of ₹2.85 crores, which translates to an operating margin of just 8.27%, down sharply from 10.22% in Q1 FY26 and 11.97% in Q2 FY25.

Employee costs rose to ₹8.34 crores in Q2 FY26 from ₹8.16 crores in the previous quarter, representing a 2.21% increase despite the 4.07% decline in sales. This inverse relationship between costs and revenues signals deteriorating operational leverage. Interest expenses remained elevated at ₹1.65 crores, marginally lower than the ₹1.76 crores in Q1 FY26 but reflecting the company's continued reliance on debt financing.

The tax rate during the quarter stood at 26.85%, significantly lower than the anomalous 44.08% in Q1 FY26 and the 53.63% in Q2 FY25, providing some relief to bottom-line profitability. However, this normalisation of the tax rate was insufficient to offset the operational headwinds. The PAT margin compressed to 2.29% in Q2 FY26 from 2.37% in Q1 FY26 and 2.46% in Q2 FY25, underscoring the persistent margin pressure.

Operational Challenges: High Leverage Constrains Financial Flexibility

The company's balance sheet reveals significant structural challenges that limit its ability to navigate the current difficult operating environment. As of March 2025, shareholder funds stood at ₹16.24 crores, supported by share capital of ₹3.92 crores and reserves of ₹12.32 crores. However, long-term debt of ₹8.88 crores and current liabilities of ₹60.72 crores create a highly leveraged capital structure with a debt-to-equity ratio averaging 2.39 times over recent periods.

The company's return on equity (ROE) of 15.83% in the latest quarter appears reasonable on the surface, reflecting efficient use of shareholder capital. However, the average ROE of 11.15% over longer periods and a negative average return on capital employed (ROCE) of -3.79% paint a more concerning picture of capital productivity. The negative ROCE indicates that the company has historically struggled to generate returns above its cost of capital, raising questions about the sustainability of current profitability levels.

Industry Context: Textile Sector Headwinds Persist

The garments and apparels sector in India continues to face challenging conditions characterised by weak global demand, intense competition, and rising input costs. H P Cotton Textile Mills' performance must be viewed against this broader sectoral backdrop, where many players are struggling to maintain margins and market share. The company's 23.83% five-year sales compound annual growth rate (CAGR) demonstrates historical resilience, though recent quarterly trends suggest this momentum may be waning.

The company's product portfolio—comprising cotton sewing thread, hosiery yarn, and industrial yarn for various applications including carpets, canvas belting, filter cloth, and tarpaulins—provides some diversification benefits. However, exposure to cyclical end-markets and commoditised product categories limits pricing power. The promotional literature emphasises the company's joint venture origins with Haryana State Industrial Development Corporation and its presence in both domestic and export markets, though specific revenue breakdowns by geography or product segment are not disclosed in the available financial data.

Peer Comparison: Valuation Appears Reasonable but Quality Concerns Persist

Within its peer group, H P Cotton Textile Mills demonstrates mixed relative positioning. The company's price-to-earnings ratio of 13.30 times appears reasonable compared to the sector average, particularly given that several peers are loss-making. The ROE of 11.15% exceeds most comparable companies, with only Swasti Vinayaka showing similar profitability metrics at 10.34%.

However, the critical differentiator lies in leverage profiles. H P Cotton Textile Mills' debt-to-equity ratio of 2.39 times stands significantly higher than peers like Swasti Vinayaka (0.20 times) and STL Global (0.56 times), indicating greater financial risk. The price-to-book value of 2.42 times suggests the market is pricing in expectations of sustained profitability, though recent margin trends challenge this optimism. With a market capitalisation of just ₹40.00 crores, the company ranks sixth amongst its peer group, reflecting its micro-cap status and limited institutional following.

Valuation Analysis: Attractive Multiples Offset by Fundamental Concerns

From a pure valuation perspective, H P Cotton Textile Mills trades at compelling multiples that warrant attention. The P/E ratio of 13.30 times sits well below the industry average of 23 times, suggesting a valuation discount of approximately 42%. The EV/EBITDA multiple of 5.60 times and EV/Sales ratio of 0.56 times further reinforce the case for attractive entry valuations. The PEG ratio of 0.48 indicates the stock may be undervalued relative to its growth potential, assuming historical growth rates can be sustained.

The company's valuation grade has evolved meaningfully over recent months, transitioning from "Expensive" to "Fair" to "Attractive" and currently standing at "Very Attractive" as of August 11, 2025. This progression reflects both the stock's price decline—currently trading 29.49% below its 52-week high of ₹141.90—and the compression of valuation multiples. At the current price of ₹100.05, the stock trades at 2.42 times book value against a book value per share of ₹41.42.

However, attractive valuation multiples alone do not constitute an investment thesis. The company's "Below Average" quality grade, negative average ROCE of -3.79%, and high leverage create significant risks that must be weighed against valuation appeal. The absence of dividend payments (dividend yield: NA) means investors rely entirely on capital appreciation, which appears challenged given recent price trends and deteriorating operational metrics.

Shareholding Pattern: Stable Promoter Base but Zero Institutional Interest

The shareholding pattern reveals a completely static structure with promoter holding steady at 64.90% across all reported quarters. Led by Kailash Kumar Agarwal (30.19%) and supported by various group entities including Jainish Products Limited (6.19%) and Achhar Investments Limited (5.91%), the promoter group maintains strong control. Positively, there is zero promoter pledging, indicating confidence in the business and absence of immediate financial stress requiring share collateralisation.

The concerning aspect lies in the complete absence of institutional participation. Foreign institutional investors (FIIs), mutual funds, and insurance companies collectively hold 0.00% of the equity, whilst other domestic institutional investors (DIIs) are similarly absent. This lack of institutional interest reflects the company's micro-cap status, limited liquidity (average daily volume of just 143 shares on November 10, 2025), and below-average quality metrics. The 35.10% non-institutional holding comprises retail investors and potentially high-net-worth individuals, though this segment has shown no change in holdings across recent quarters.

Stock Performance: Significant Underperformance Across All Timeframes

The stock's performance across multiple timeframes paints a consistently negative picture. Over the past year, H P Cotton Textile Mills has declined 21.99%, substantially underperforming the Sensex's 5.09% gain and generating negative alpha of -27.08 percentage points. The two-year and three-year returns of -24.46% and -15.03% respectively contrast sharply with the Sensex's robust gains of 28.70% and 37.82%, highlighting persistent underperformance.

The technical picture reinforces the bearish fundamental outlook. The stock currently trades below all key moving averages—5-day (₹101.12), 20-day (₹102.58), 50-day (₹103.43), 100-day (₹105.06), and 200-day (₹104.25)—indicating broad-based selling pressure. The overall technical trend is classified as "Bearish," having deteriorated from "Mildly Bearish" on October 28, 2025. Multiple technical indicators including MACD, Bollinger Bands, and KST all signal bearish conditions across weekly and monthly timeframes.

Risk-adjusted metrics further underscore the unfavourable risk-reward profile. With a volatility of 48.87%—nearly four times the Sensex's 12.35%—and a negative risk-adjusted return of -0.45, the stock falls into the "HIGH RISK LOW RETURN" category. The beta of 1.50 indicates the stock is 50% more volatile than the broader market, amplifying downside risk during market corrections whilst offering limited upside participation during rallies.

Investment Thesis: Value Trap or Turnaround Opportunity?

The investment case for H P Cotton Textile Mills presents a classic value investing dilemma: attractive valuation multiples set against deteriorating fundamentals and concerning quality metrics. The proprietary Mojo Score of 32 out of 100 places the company firmly in "SELL" territory, down from a "STRONG SELL" rating of 23 in November 2024. This modest improvement reflects the stock's price decline rather than fundamental improvement, as operational metrics continue to deteriorate.

The Mojo 4 Dots analysis reveals mixed signals. Whilst the financial trend is classified as "Positive" based on nine-month sales growth of 36.68%, this masks the recent sequential revenue decline and margin compression. The "Very Attractive" valuation provides some downside protection, but the "Below Average" quality grade and "Bearish" technical trend suggest caution is warranted. The combination of high leverage (debt-to-equity of 2.39 times), weak interest coverage (EBIT-to-interest averaging -0.18 times), and negative average ROCE of -3.79% creates a fragile financial structure vulnerable to further operational deterioration.

Outlook: What to Watch

The near-term outlook hinges critically on the company's ability to reverse margin compression whilst maintaining revenue momentum. The positive financial trend classification based on nine-month performance provides some optimism, but sequential quarterly deterioration raises questions about sustainability. Management's ability to navigate input cost pressures, improve operational efficiency, and reduce leverage will determine whether the current valuation discount represents opportunity or reflects appropriate risk pricing.

For existing shareholders, the lack of positive catalysts and continued technical weakness suggest limited near-term upside potential. The absence of dividend income means investors must rely entirely on capital appreciation, which appears challenged given current momentum. Fresh investors should await clear evidence of margin stabilisation and debt reduction before considering entry, as the current risk-reward profile remains unfavourable despite attractive headline valuation multiples.