The December 2025 quarter marked a significant deterioration in HP Adhesives' operational performance, with the company struggling across multiple financial parameters. Operating profit excluding other income crashed to ₹3.95 crores, the lowest in seven quarters, whilst operating margins compressed sharply to 6.04% from 9.38% in the year-ago quarter. The company's ability to generate sustainable profits has come under serious question as both revenue growth and profitability metrics have turned decidedly negative.
The results underscore mounting challenges in the speciality chemicals space, where HP Adhesives has underperformed both sectoral peers and broader market indices. The stock's 38.18% decline over the past year, compared to the Sensex's 8.85% gain, highlights the severity of investor concerns about the company's earnings trajectory and competitive positioning.
Financial Performance: Margin Collapse Drives Profit Erosion
| Quarter | Revenue (₹ Cr) | QoQ Change | Net Profit (₹ Cr) | QoQ Change | OPM % | PAT % |
|---|---|---|---|---|---|---|
| Dec'25 | 65.37 | +0.48% | 1.62 | -54.11% | 6.04% | 2.48% |
| Sep'25 | 65.06 | -1.57% | 3.53 | -15.75% | 9.78% | 5.43% |
| Jun'25 | 66.10 | -1.09% | 4.19 | -1.41% | 9.86% | 6.34% |
| Mar'25 | 66.83 | +0.27% | 4.25 | +0.95% | 8.63% | 6.36% |
| Dec'24 | 66.65 | +13.10% | 4.21 | +0.96% | 9.38% | 6.32% |
| Sep'24 | 58.93 | -2.63% | 4.17 | -25.67% | 11.08% | 7.08% |
| Jun'24 | 60.52 | — | 5.61 | — | 12.44% | 9.27% |
Revenue performance in Q3 FY26 remained essentially flat, declining 1.92% year-on-year to ₹65.37 crores from ₹66.65 crores, whilst sequential growth of just 0.48% from Q2 FY26 indicates stagnating demand. More concerning is the sharp deterioration in profitability metrics across the board. Operating profit before depreciation, interest, and tax (excluding other income) plummeted to ₹3.95 crores, representing a 36.80% year-on-year decline and marking the lowest level in seven quarters.
The operating margin compression tells a stark story of operational stress. At 6.04% in Q3 FY26, operating margins have collapsed from 9.38% in the year-ago quarter and 12.44% in June 2024, representing a deterioration of 638 basis points over six quarters. This sustained margin erosion suggests structural challenges rather than temporary headwinds, with the company apparently unable to pass on cost increases to customers or achieve operational efficiencies.
The profit after tax margin contracted dramatically to 2.48% in Q3 FY26 from 6.32% in Q3 FY25, a decline of 384 basis points. This compression reflects not only operating margin pressure but also rising employee costs, which increased to ₹10.14 crores from ₹8.96 crores year-on-year, representing a 13.17% jump even as revenues declined. The combination of stagnant topline growth and rising fixed costs has created a profitability squeeze that management appears unable to address effectively.
On a nine-month basis for FY26, the picture remains challenging. Whilst the company has not disclosed consolidated nine-month figures, the quarterly trend clearly indicates deteriorating performance through the fiscal year. The quality of earnings has also weakened, with profit before tax (excluding other income) falling to just ₹1.80 crores in Q3 FY26, the lowest in the available quarterly data series.
Operational Challenges: Cost Structure Under Pressure
HP Adhesives' operational metrics reveal fundamental challenges in the company's business model. The return on equity (ROE) stands at just 8.71%, significantly below peer averages and indicating weak capital efficiency. This modest ROE, combined with the company's average return on capital employed (ROCE) of 13.53%, suggests that HP Adhesives generates below-average returns on the capital invested in its business, a concerning signal for long-term value creation.
The balance sheet, whilst not heavily leveraged, shows signs of working capital strain. Trade payables increased to ₹23.00 crores in FY25 from ₹16.03 crores in FY24, a 43.48% jump that may indicate extended payment terms to suppliers. Current assets stood at ₹147.53 crores against current liabilities of ₹41.35 crores, providing adequate short-term liquidity, but the company's cash position remains modest at ₹3.00 crores as of March 2025.
Critical Operational Red Flags
Margin Deterioration: Operating margins have collapsed from 12.44% in Jun'24 to just 6.04% in Dec'25, a decline of 640 basis points in six quarters. This sustained compression indicates structural profitability challenges rather than temporary headwinds.
Weak Capital Efficiency: ROE of 8.71% and ROCE of 13.53% place HP Adhesives in the bottom quartile of speciality chemical companies, suggesting poor returns on invested capital and limited competitive advantages.
Rising Fixed Costs: Employee costs surged 13.17% YoY whilst revenues declined 1.92%, indicating negative operating leverage and inability to align cost structure with business performance.
The company's fixed asset base expanded to ₹71.13 crores in FY25 from ₹49.71 crores in FY24, a 43.04% increase that suggests recent capacity additions. However, the inability to translate this capital expenditure into revenue growth or margin improvement raises questions about the returns on these investments. With sales to capital employed averaging just 1.34x, asset utilisation appears suboptimal.
Cash flow metrics tell a sobering story. Operating cash flow declined sharply to ₹9.00 crores in FY25 from ₹21.00 crores in FY24, a 57.14% drop that reflects deteriorating working capital management and weaker operational performance. The company generated profit before tax of ₹23.00 crores but converted only ₹9.00 crores into operating cash flow, highlighting significant cash leakage through working capital.
Industry Context: Underperforming in a Resilient Sector
The speciality chemicals sector in India has demonstrated resilience, with the industry delivering 13.46% returns over the past year. HP Adhesives' 38.18% decline during the same period represents a massive 51.64 percentage point underperformance versus the sector, indicating company-specific challenges rather than broader industry headwinds. This divergence suggests that whilst the sector benefits from favourable demand trends and import substitution opportunities, HP Adhesives has failed to capitalise on these tailwinds.
The adhesives segment within speciality chemicals typically benefits from steady demand across construction, packaging, and industrial applications. However, HP Adhesives' stagnant revenue growth and margin compression indicate either market share losses to larger competitors or concentration in lower-margin product segments. The company's micro-cap status (market capitalisation of ₹352.98 crores) limits its ability to compete with better-capitalised peers on pricing and innovation.
Competitive Disadvantage Widens
HP Adhesives has significantly underperformed the speciality chemicals sector, posting a negative 38.18% return over the past year compared to the sector's positive 13.46% return. This 51.64 percentage point underperformance, combined with deteriorating margins and weak ROE, suggests the company is losing competitive ground to better-positioned peers with stronger brands, broader product portfolios, and superior operational efficiency.
Peer Comparison: Lagging on Profitability and Returns
| Company | P/E (TTM) | P/BV | ROE % | Div Yield | Debt/Equity |
|---|---|---|---|---|---|
| HP Adhesives | 23.13 | 2.01 | 8.71% | 0.97% | -0.21 |
| Black Rose Industries | 22.78 | 2.98 | 17.11% | 0.72% | -0.07 |
| Kronox Lab | 18.26 | 5.23 | 30.23% | 0.39% | -0.09 |
| Chembond Chemicals | 14.46 | 2.43 | 17.82% | 0.75% | -0.35 |
| Plastiblends (I) | 12.85 | 0.96 | 8.87% | 1.56% | -0.02 |
| Vipul Organics | 76.99 | 4.78 | 8.52% | 0.35% | 0.52 |
HP Adhesives' peer comparison reveals significant competitive weaknesses. The company's ROE of 8.71% trails considerably behind peers like Kronox Lab (30.23%), Black Rose Industries (17.11%), and Chembond Chemicals (17.82%). Only Plastiblends and Vipul Organics post comparable ROE figures, but even these companies demonstrate different value propositions—Plastiblends trades at a steep discount to book value (P/BV of 0.96x) reflecting its weak returns, whilst Vipul Organics commands a premium multiple (P/E of 76.99x) suggesting growth expectations.
At a P/E ratio of 23.13x, HP Adhesives trades at a premium to higher-quality peers like Chembond Chemicals (14.46x) and Kronox Lab (18.26x), despite delivering materially inferior returns on equity. This valuation anomaly suggests the market has yet to fully price in the deteriorating fundamentals. The company's price-to-book ratio of 2.01x appears reasonable on the surface but seems expensive given the weak ROE generation—investors are paying twice book value for a business that generates less than 9% returns on equity.
The debt-free balance sheet (net debt to equity of -0.21) represents one of HP Adhesives' few competitive advantages, providing financial flexibility that many peers lack. However, this conservative capital structure has not translated into superior returns, suggesting the company may be underleveraged and missing opportunities to deploy capital more aggressively for growth.
Valuation Analysis: Attractive Multiples Mask Deteriorating Fundamentals
HP Adhesives' valuation metrics present a paradox—attractive multiples that belie concerning fundamental trends. At a P/E ratio of 23.13x versus the industry average of 39x, the stock trades at a 40.69% discount to sector multiples. The EV/EBITDA ratio of 13.68x and EV/Sales of 1.29x also appear reasonable for a speciality chemicals business. However, these seemingly attractive valuations must be viewed through the lens of rapidly deteriorating earnings quality.
The proprietary valuation assessment grades HP Adhesives as "Very Attractive" at the current price of ₹38.42, having been upgraded from "Attractive" in October 2025. However, this valuation grade reflects historical earnings power rather than forward prospects. With net profit having collapsed 61.52% year-on-year in Q3 FY26 and margins at multi-quarter lows, the earnings base used for valuation calculations has materially deteriorated.
The stock's 52-week range of ₹35.01 to ₹63.90 illustrates the dramatic re-rating that has occurred. Trading just 9.74% above its 52-week low and 39.87% below its high, the stock price reflects growing investor recognition of the company's challenges. The dividend yield of 0.97% provides minimal income support, whilst the modest 20.60% payout ratio offers limited room for dividend increases given the weak earnings trajectory.
Shareholding Pattern: Institutional Exodus Signals Concern
| Category | Dec'25 | Sep'25 | Jun'25 | Mar'25 | QoQ Change |
|---|---|---|---|---|---|
| Promoter | 71.35% | 71.35% | 71.35% | 71.35% | 0.00% |
| FII | 0.01% | 0.02% | 0.04% | 0.16% | -0.01% |
| Mutual Funds | 0.00% | 0.00% | 1.34% | 2.82% | 0.00% |
| Insurance | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| Non-Institutional | 28.64% | 28.63% | 27.28% | 25.67% | +0.01% |
The shareholding pattern reveals a troubling exodus of institutional investors. Mutual fund holdings have completely evaporated, declining from 2.82% in March 2025 to 0.00% by December 2025. This represents a complete exit by institutional fund managers who presumably recognised the deteriorating fundamentals ahead of the broader market. Foreign institutional investor (FII) holdings have similarly collapsed from 0.16% to just 0.01%, a 93.75% reduction that signals international investors have abandoned the stock.
The promoter holding remains stable at 71.35% with no pledging, providing some comfort regarding governance and alignment. Key promoters include Anjana Haresh Motwani (31.24%), Karan Haresh Motwani (29.22%), and Nidhi Haresh Motwani (10.88%). However, the absence of institutional investors—with total institutional holdings at a negligible 0.01%—means the stock lacks the support of sophisticated, long-term capital. The non-institutional shareholding has increased to 28.64%, likely reflecting retail investors who may lack the resources to conduct deep fundamental analysis.
Stock Performance: Severe Underperformance Across All Timeframes
| Period | HP Adhesives Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | -3.97% | -0.84% | -3.13% |
| 1 Month | -3.27% | -0.90% | -2.37% |
| 3 Month | -20.49% | -1.90% | -18.59% |
| 6 Month | -16.22% | +2.90% | -19.12% |
| YTD | -6.72% | -2.75% | -3.97% |
| 1 Year | -38.18% | +8.85% | -47.03% |
| 2 Years | -65.17% | +15.82% | -80.99% |
| 3 Years | -44.81% | +37.14% | -81.95% |
HP Adhesives' stock performance has been catastrophic across all measured timeframes, with negative alpha versus the Sensex in every single period. The one-year decline of 38.18% compares to the Sensex's 8.85% gain, representing 47.03 percentage points of underperformance. Over two years, the stock has lost 65.17% whilst the Sensex gained 15.82%—an 80.99 percentage point deficit that reflects sustained fundamental deterioration.
The technical picture remains decidedly bearish. The stock trades below all key moving averages—5-day (₹41.04), 20-day (₹39.05), 50-day (₹40.92), 100-day (₹44.32), and 200-day (₹47.14)—indicating sustained selling pressure and lack of buying interest. The current trend is classified as "Mildly Bearish" after briefly turning from "Bearish" on February 12, 2026, but this provides little comfort given the weak fundamental backdrop.
Risk-adjusted returns paint an even grimmer picture. With a volatility of 41.40% and a negative Sharpe ratio, HP Adhesives falls into the "High Risk Low Return" category—the worst possible combination for investors. The stock's beta of 1.03 indicates it moves in line with the market, but has consistently delivered returns far below market levels, suggesting systematic underperformance rather than just high volatility.
Investment Thesis: Value Trap Masquerading as Opportunity
The investment thesis for HP Adhesives centres on a classic value trap scenario. Whilst valuation metrics appear attractive on the surface—trading at 23.13x trailing earnings with a "Very Attractive" valuation grade—the rapidly deteriorating earnings base renders these multiples misleading. The company's average quality grade reflects weak return metrics (ROE of 8.71%, ROCE of 13.53%) that place it in the bottom quartile of speciality chemical companies.
The negative financial trend designation stems from multiple deteriorating factors: quarterly PAT down 61.52% year-on-year, operating margins at multi-quarter lows of 6.04%, and profit before tax (excluding other income) at the lowest level in seven quarters. These are not temporary setbacks but rather indicators of structural challenges in the business model. The mildly bearish technical trend, with the stock trading below all major moving averages, confirms that market participants are voting with their feet.
Key Strengths & Risk Factors
KEY STRENGTHS
- Debt-free balance sheet with net cash position (net debt to equity of -0.21) provides financial flexibility
- Zero promoter pledging indicates confidence and proper governance practices
- Stable promoter holding at 71.35% ensures management continuity and alignment with shareholders
- Attractive valuation multiples at 23.13x P/E versus industry average of 39x, trading at 40.69% discount
- Dividend payout of 20.60% provides some income support to long-term holders
KEY CONCERNS
- Net profit collapsed 61.52% YoY to ₹1.62 crores in Q3 FY26, indicating severe earnings deterioration
- Operating margins compressed to 6.04%, down from 12.44% just six quarters ago—a 640 bps decline
- Weak ROE of 8.71% and ROCE of 13.53% indicate poor capital efficiency and limited competitive advantages
- Complete institutional exodus with mutual fund holdings falling from 2.82% to 0.00% and FII from 0.16% to 0.01%
- Stock down 38.18% over one year versus Sensex gain of 8.85%, representing 47.03 percentage points of underperformance
- Rising employee costs (+13.17% YoY) whilst revenue declined 1.92%, showing negative operating leverage
- Operating cash flow declined 57.14% to ₹9.00 crores in FY25, indicating working capital stress
Outlook: What to Watch in Coming Quarters
POSITIVE CATALYSTS
- Margin stabilisation above 8% would signal cost pressures easing
- Return to double-digit revenue growth indicating market share gains
- Return of institutional investors (FII/MF) would validate improving fundamentals
- Improvement in ROE towards 12-15% demonstrating better capital efficiency
RED FLAGS TO MONITOR
- Further margin compression below 6% would indicate unsustainable business model
- Continued revenue stagnation or decline suggesting market share losses
- Any reduction in promoter holding or introduction of pledging
- Operating cash flow turning negative indicating severe working capital stress
- Dividend cut would signal management's lack of confidence in earnings recovery
The outlook for HP Adhesives remains challenging with limited near-term catalysts for improvement. The company needs to demonstrate margin stabilisation and return to revenue growth to rebuild investor confidence. Management commentary on cost control initiatives and demand outlook will be critical in the Q4 FY26 results. Until concrete evidence emerges of operational turnaround, the stock is likely to remain under pressure.
The Verdict: Clear Sell on Deteriorating Fundamentals
Score: 34/100
For Fresh Investors: Avoid initiating positions in HP Adhesives. Despite seemingly attractive valuation multiples, the company faces severe operational challenges with margins at multi-quarter lows, collapsing profitability, and complete institutional abandonment. The negative financial trend and weak return metrics (ROE 8.71%) indicate structural issues rather than temporary headwinds.
For Existing Holders: Consider exiting positions on any relief rallies. The 61.52% year-on-year profit decline in Q3 FY26, combined with sustained margin compression and institutional exodus, suggests further downside risk. With the stock already down 38.18% over one year, cutting losses now may prevent deeper capital erosion.
Fair Value Estimate: ₹32-35 (16-21% downside from current levels), reflecting deteriorating earnings power and weak competitive positioning in the speciality chemicals space.
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 is not indicative of future results, and all investments carry risk of loss.
