Hindustan Adhesives Q2 FY26: Profit Surge Masks Revenue Decline Concerns

The Delhi-based manufacturer, established in April 1988, specialises in acrylic emulsion-based coatings and hot melt adhesive coatings for the packaging industry. Whilst the company demonstrated impressive bottom-line growth in Q2 FY26, the persistent revenue contraction raises questions about demand dynamics in its core markets. The 23.44% year-on-year sales decline is particularly concerning, suggesting either market share losses or broader industry headwinds affecting the plastic products sector.

Despite these revenue challenges, Hindustan Adhesives has managed to expand its operating margin to 16.02% in Q2 FY26, up from 13.04% in Q1 FY26, reflecting improved operational efficiency and cost management. The company's PAT margin also strengthened to 8.83% from 5.65% in the previous quarter, indicating better conversion of revenues into profits.

Financial Performance: Profitability Gains Amid Revenue Pressures

Hindustan Adhesives' Q2 FY26 results present a paradox: robust profitability growth against a backdrop of declining revenues. Net sales stood at ₹64.65 crores, marking a 2.62% quarter-on-quarter decline and a more significant 23.44% year-on-year drop. This revenue contraction follows a pattern established over recent quarters, with sales falling from ₹84.44 crores in Sep'24 to current levels, representing a 23.44% erosion over twelve months.

However, the company has demonstrated remarkable margin expansion. Operating profit (PBDIT excluding other income) reached ₹10.36 crores in Q2 FY26, the highest level in recent quarters, translating to a 16.02% operating margin. This represents a substantial improvement from the 11.87% margin recorded in Sep'24 and the 7.93% in Jun'24. The margin expansion reflects disciplined cost management, with employee costs remaining relatively stable at ₹5.75 crores despite revenue volatility.

Net profit surged to ₹5.71 crores in Q2 FY26, up 52.27% from ₹3.75 crores in Q1 FY26 and 6.33% higher year-on-year. The PAT margin expanded to 8.83%, up from 5.65% in the previous quarter, indicating improved operational efficiency and better conversion of top-line revenues into bottom-line profits. This profitability improvement occurred despite a 23.35% increase in interest costs on a half-yearly basis, which rose to ₹5.23 crores for H1 FY26.

Operational Challenges: Revenue Erosion Demands Attention

The persistent revenue decline represents the most significant operational challenge facing Hindustan Adhesives. Net sales have fallen 9.90% compared to the previous four-quarter average, indicating a structural issue rather than a temporary blip. The company's full-year FY25 sales stood at ₹284.00 crores, down 6.60% from ₹304.00 crores in FY24, continuing a multi-year trend of declining revenues from the peak of ₹321.00 crores in FY23.

On a more positive note, the company's return on equity stands at a healthy 15.58%, demonstrating efficient capital utilisation despite revenue challenges. This ROE figure, which measures how effectively the company generates profits from shareholder equity, compares favourably to many peers in the plastic products sector and indicates that management has maintained profitability discipline even as top-line growth has stalled.

The company's balance sheet shows mixed signals. Shareholder funds strengthened to ₹91.10 crores in FY25 from ₹75.69 crores in FY24, reflecting retained earnings accumulation. However, long-term debt increased significantly to ₹39.77 crores from ₹17.48 crores, suggesting the company has taken on additional leverage, possibly to fund capacity expansion or working capital requirements. The debt-to-EBITDA ratio of 2.76 times indicates moderate leverage, whilst the net debt-to-equity ratio of 1.12 reflects relatively high gearing for a company of this size.

Margin Dynamics: The Silver Lining

Whilst revenue growth remains elusive, Hindustan Adhesives has demonstrated impressive margin management capabilities. The operating margin (excluding other income) expanded to 16.02% in Q2 FY26, the highest level recorded in recent quarters and substantially above the 11.87% achieved in Sep'24. This 414-basis-point year-on-year improvement reflects successful cost optimisation efforts and potentially favourable raw material price trends.

The company's gross profit margin followed a similar trajectory, improving to 15.62% in Q2 FY26 from 11.14% in Sep'24. This 448-basis-point expansion suggests that Hindustan Adhesives has successfully managed input costs or improved its product mix towards higher-margin offerings. The PAT margin of 8.83% in Q2 FY26 represents a significant improvement from the 3.33% recorded in Jun'24, indicating that operational efficiencies are flowing through to the bottom line.

Industry Context: Navigating Plastic Products Sector Headwinds

The plastic products – industrial sector has faced significant headwinds over the past year, with the industry delivering a negative 13.26% return. Hindustan Adhesives has underperformed this already weak sector benchmark by 7.48 percentage points, with its stock declining 20.74% over the past twelve months. This underperformance suggests company-specific challenges beyond broader industry trends.

The company's competitive positioning within the adhesives and coatings space appears challenged. Whilst Hindustan Adhesives pioneered speciality adhesive coating technology in India's packaging industry in 1988, the market has become increasingly competitive. The company's revenue decline suggests it may be losing market share to larger, better-capitalised competitors or facing pricing pressures that have forced it to sacrifice volume to maintain margins.

From a technical perspective, the stock remains in a "mildly bearish" trend, having changed from a bearish stance on November 17, 2025. The stock trades below all key moving averages (5-day, 20-day, 50-day, 100-day, and 200-day), indicating persistent selling pressure. However, the recent 11.94% one-week gain suggests some short-term momentum building, possibly driven by the better-than-expected Q2 profitability.

Peer Comparison: Valuation Discount Reflects Concerns

Hindustan Adhesives trades at a significant valuation discount to many peers in the plastic products sector, reflecting market concerns about its revenue trajectory and growth prospects. The company's price-to-earnings ratio of 9.91 times compares favourably to peers like Captain Pipes (54.16x), Tainwala Chemicals (24.71x), and National Plastic (17.57x), suggesting the market has priced in considerable caution.

Interestingly, Hindustan Adhesives demonstrates a higher return on equity (15.58%) than most peers, including Captain Pipes (13.90%), Ecoplast (11.45%), and Bright Brothers (5.34%). This suggests the company generates superior returns on shareholder capital despite its revenue challenges. The price-to-book ratio of 1.70 times is also modest compared to peers like Captain Pipes (4.67x) and National Plastic (2.96x), indicating the market values the company's assets conservatively.

However, the company's debt-to-equity ratio of 1.12 is higher than most peers except National Plastic (1.03), reflecting the increased leverage undertaken in recent years. This higher debt burden, combined with rising interest costs, poses a risk if revenue trends do not stabilise, as it constrains financial flexibility and increases the break-even point for operations.

Valuation Analysis: Attractive Entry Point or Value Trap?

Hindustan Adhesives currently trades at what appears to be an attractive valuation on traditional metrics. The P/E ratio of 9.91 times represents a significant discount to both the industry average of 40 times and most direct peers. The EV/EBITDA multiple of 7.15 times is also reasonable for a company in the industrial products space, suggesting the market has factored in considerable pessimism about future prospects.

The company's proprietary Mojo Score stands at 48 out of 100, placing it in the "SELL" category. This rating reflects the tension between attractive valuation metrics and concerning operational trends. Whilst the valuation grade is marked as "ATTRACTIVE", the overall score is dragged down by the stock's bearish technical trend and significant underperformance relative to the broader market over the past year.

The stock's 52-week range of ₹281.25 to ₹474.40 indicates substantial volatility, with the current price of ₹336.00 sitting 29.17% below the high and 19.47% above the low. This positioning suggests the market remains uncertain about the company's trajectory, with neither bulls nor bears in full control. The lack of dividend payments (last dividend of ₹1.00 per share was paid in November 2016) further reduces the investment case for income-focused investors.

Shareholding Pattern: Stable Promoter Base, No Institutional Interest

Hindustan Adhesives' shareholding structure reveals a tightly held company with minimal institutional participation. Promoter holding stood at 68.48% as of September 2025, marginally down from 68.58% in the previous two quarters. This minor 0.10 percentage point reduction in Q2 FY26 is insignificant and suggests stable promoter commitment to the business.

The complete absence of foreign institutional investors (FIIs), mutual funds, and insurance companies reflects the company's micro-cap status and limited liquidity. With zero institutional holdings, the stock lacks the research coverage and buying support that typically accompanies institutional participation. The 31.52% non-institutional holding represents primarily retail investors and smaller investment entities.

Positively, there is no promoter pledging, eliminating concerns about forced selling or financial stress at the promoter level. The promoter group, led by Madhusudan Bagla (15.90%) and Anju Bagla (11.70%), along with various family members and related entities, maintains a controlling stake that ensures management continuity and alignment with long-term shareholder interests.

Stock Performance: Significant Underperformance Despite Recent Rally

Hindustan Adhesives has delivered disappointing returns across most timeframes, significantly underperforming the Sensex benchmark. Over the past year, the stock has declined 20.74% compared to the Sensex's 9.48% gain, resulting in a negative alpha of 30.22 percentage points. The year-to-date performance is even more concerning, with the stock down 18.23% versus the Sensex's 8.36% gain.

However, recent momentum has improved markedly. The stock has gained 11.94% over the past week and 6.33% over the past month, outperforming the Sensex by 10.98 and 5.47 percentage points respectively. This short-term rally likely reflects positive investor reaction to the Q2 FY26 profit surge and improved margin performance, suggesting some market participants are willing to look past the revenue concerns.

The longer-term picture is more nuanced. Over five years, the stock has delivered exceptional returns of 236.67%, vastly outperforming the Sensex's 91.65% gain with an alpha of 145.02 percentage points. This indicates that patient long-term investors who bought at much lower valuations have been well rewarded, though recent performance suggests the growth phase may have stalled.

The stock's high beta of 1.50 indicates significantly higher volatility than the broader market, with an annualised volatility of 38.36% compared to the Sensex's 12.26%. This high-risk profile, combined with negative risk-adjusted returns over the past year, places the stock in the "HIGH RISK LOW RETURN" category, making it unsuitable for risk-averse investors.

Investment Thesis: Mixed Signals Across Parameters

Hindustan Adhesives presents a complex investment case characterised by conflicting signals across key parameters. The company's Mojo 4 Dots analysis reveals this tension clearly: whilst valuation appears attractive and short-term financial trends are positive, technical indicators remain bearish and quality metrics are merely average.

The quality assessment reveals an "AVERAGE" grade, reflecting the company's long-term financial performance. Whilst the 15.58% ROE is commendable and demonstrates efficient capital deployment, this is offset by weak interest coverage (3.17 times), moderate debt levels (debt-to-EBITDA of 2.76), and concerning negative sales growth (-4.38% over five years). The absence of promoter pledging and institutional holdings of 0.00% further characterise this as a tightly held, under-researched micro-cap.

The short-term financial trend is marked as "POSITIVE", driven by Q2 FY26's impressive profit performance and highest-ever operating profit-to-interest coverage of 7.24 times. However, this positive trend exists against a backdrop of persistent revenue decline, with net sales falling 9.90% compared to the previous four-quarter average and interest costs rising 23.35% on a half-yearly basis.

Key Strengths & Risk Factors

Outlook: What Lies Ahead

The outlook for Hindustan Adhesives hinges critically on management's ability to arrest the revenue decline and demonstrate sustainable demand recovery. Whilst the margin expansion story is impressive, it cannot continue indefinitely without top-line growth. The company needs to either regain lost market share, expand into new product categories, or demonstrate that recent revenue weakness is cyclical rather than structural.

The company's cash flow statement reveals concerning trends. Operating cash flow stood at ₹18.00 crores in FY25, down from ₹26.00 crores in FY23, despite similar profitability levels. This suggests working capital pressures or quality-of-earnings issues that warrant close monitoring. The negative ₹14.00 crores change in working capital in FY25 indicates the company is tying up more cash in operations, potentially reflecting slower receivables collection or inventory build-up.

From a sector perspective, the plastic products industry faces headwinds from volatile raw material prices, environmental regulations favouring sustainable alternatives, and intense competition. Hindustan Adhesives' specialisation in packaging adhesives exposes it to the health of the FMCG and consumer goods sectors, which have shown mixed performance. Any sustained weakness in these end-user industries could further pressure the company's revenue trajectory.