HPL Electric Q3 FY26: Profit Growth Masks Margin Pressures and Technical Weakness

The December 2025 quarter presented a paradox for HPL Electric: robust topline expansion coupled with margin compression and profit deterioration. Net sales climbed to ₹473.92 crores, marking the company's highest quarterly revenue and representing healthy growth momentum. However, the inability to translate this revenue growth into proportionate bottom-line expansion signals operational challenges that investors cannot ignore.

The stock's technical posture remains decidedly bearish, with shares trading below all key moving averages—5-day, 20-day, 50-day, 100-day, and 200-day. The stock has underperformed the broader market significantly, declining 30.43% over the past year whilst the Sensex advanced 6.44%, resulting in a negative alpha of 36.87 percentage points. This underperformance extends across most timeframes, with the stock down 45.23% over six months against the Sensex's 3.23% gain.

Financial Performance: Revenue Growth Outpaces Profit Expansion

HPL Electric's Q3 FY26 financial performance reveals a company experiencing topline momentum but struggling with profitability. Net sales of ₹473.92 crores represented sequential growth of 9.09% and year-on-year expansion of 20.75%, demonstrating the company's ability to capture market share and expand its revenue base. For the nine-month period ending December 2025, cumulative sales reached ₹1,291.40 crores, up 13.42% from ₹1,138.71 crores in the corresponding period of the previous year.

However, the profit trajectory tells a more concerning story. Consolidated net profit of ₹19.45 crores declined 12.66% sequentially from ₹22.27 crores in Q2 FY26, despite the 9.09% revenue increase. This disconnect between revenue and profit growth indicates margin pressures that warrant close examination. On a year-on-year basis, profit growth of 7.58% significantly lagged revenue growth of 20.75%, suggesting deteriorating operating leverage.

Operating profit margin (excluding other income) remained relatively stable at 15.14%, virtually unchanged from 15.17% in Q2 FY26, suggesting that the company maintained reasonable control over direct operating expenses. However, PAT margin contracted sharply to 4.12% from 5.15% in the previous quarter, a decline of 103 basis points. This margin compression at the bottom line, despite stable operating margins, points to rising interest costs and depreciation charges eating into profitability.

Interest expenses climbed to ₹25.65 crores in Q3 FY26 from ₹23.57 crores in Q2 FY26, an 8.83% sequential increase that outpaced revenue growth. Depreciation also surged 21.31% quarter-on-quarter to ₹15.37 crores, likely reflecting recent capital expenditure coming into operation. The combined impact of these non-operating expenses resulted in profit before tax of ₹26.14 crores, down 14.27% sequentially despite the revenue increase.

Operational Challenges: Weak Returns on Capital Employed

HPL Electric's return metrics reveal fundamental concerns about the quality of earnings and capital efficiency. The company's average return on equity (ROE) stands at a mere 5.48%, significantly below industry standards and indicating weak shareholder value creation. Whilst the latest ROE improved to 10.04%, this remains modest for a manufacturing business and suggests the company struggles to generate adequate returns on shareholders' capital.

Return on capital employed (ROCE) averaged 9.63% over recent years, with the latest reading at 13.30%. These returns, whilst showing improvement, remain below the threshold typically expected for value creation, especially considering the company's beta of 1.28 indicates higher volatility than the broader market. For investors assuming above-market risk, the returns delivered appear inadequate compensation.

The balance sheet reveals a working capital-intensive business model. Trade payables increased substantially to ₹429.84 crores in FY25 from ₹304.81 crores in FY24, a 41.00% surge that suggests the company may be stretching payment terms with suppliers to manage cash flows. Current assets stood at ₹1,571.31 crores against current liabilities of ₹1,127.56 crores, providing a current ratio of approximately 1.39, which offers reasonable short-term liquidity but indicates substantial capital tied up in working capital.

Cash flow from operations reached ₹138 crores in FY25, up from ₹100 crores in FY24, demonstrating improved cash generation. However, this was largely offset by investing activities consuming ₹70 crores and financing activities using ₹65 crores, resulting in minimal net cash generation of ₹2 crores for the year. The company's closing cash position of ₹61 crores provides limited buffer for unexpected challenges or growth opportunities.

Margin Dynamics: Pressure Points Emerge

A granular examination of HPL Electric's margin structure reveals concerning trends. Gross profit margin in Q3 FY26 contracted to 8.76% from 9.93% in Q2 FY26, a decline of 117 basis points that signals either pricing pressure or rising input costs. This represents the lowest gross margin since Q4 FY25, when the company reported 12.53%, highlighting the volatility in the company's cost structure.

Employee costs increased to ₹51.90 crores in Q3 FY26 from ₹54.89 crores in Q2 FY26, actually declining 5.45% sequentially. This suggests the margin pressure originated not from labour costs but from other operational expenses or material costs. The operating profit (PBDIT) excluding other income reached ₹71.73 crores, up from ₹65.90 crores, but the operating margin remained flat at 15.14%, indicating that operating leverage failed to materialise despite the 9.09% revenue increase.

On an annual basis, FY25 demonstrated stronger margin expansion, with operating margin (excluding other income) improving to 14.90% from 13.20% in FY24. PAT margin nearly doubled to 5.50% from 2.90%, driven by better operating leverage and improved cost management. However, the recent quarterly trend suggests this annual improvement may not be sustainable, with margins showing renewed pressure in the current fiscal year.

Peer Comparison: Valuation Discount Reflects Weak Fundamentals

HPL Electric trades at a significant discount to most peers in the electrical equipment sector, but this discount appears justified by its inferior return metrics. The company's P/E ratio of 21.83x compares favourably to the sector average of approximately 35x and the industry P/E of 60x, suggesting apparent value. However, this valuation gap reflects fundamental quality differences rather than an attractive entry opportunity.

The stark difference in ROE explains much of the valuation gap. Shilchar Technologies commands a P/BV of 10.69x with an ROE of 33.71%, whilst HPL Electric trades at just 2.19x P/BV with an ROE of 5.48%. This valuation framework suggests that HPL Electric would need to demonstrate sustained improvement in return metrics to justify a re-rating. The company's ROE of 5.48% ranks amongst the weakest in the peer group, with only Bharat Bijlee posting similar returns at 5.91%.

From a price-to-book perspective, HPL Electric's 2.19x multiple appears reasonable given its weak returns, actually suggesting the stock may not be as undervalued as the low P/E ratio implies. The peer group average P/BV of approximately 8.5x reflects companies with materially superior return profiles. HPL Electric's dividend yield of 0.31% offers minimal income support, comparing unfavourably to Bharat Bijlee's 1.22% yield.

Valuation Analysis: Attractive Multiples, Questionable Quality

At the current price of ₹325.60, HPL Electric trades at a P/E ratio of 21.83x based on trailing twelve-month earnings, representing a substantial 64% discount to the industry P/E of 60x. The company's EV/EBITDA multiple of 10.55x and EV/EBIT of 12.78x also appear reasonable in absolute terms. The PEG ratio of 0.44x suggests the stock trades below its growth rate, typically considered attractive.

However, valuation must be assessed in the context of quality and sustainability of earnings. The company's enterprise value to capital employed ratio of 1.70x, combined with ROCE of 13.30%, indicates the market values the business at a premium to its capital base despite modest returns. This suggests investors are pricing in expectations of future improvement that may or may not materialise.

The stock's 52-week range of ₹308.20 to ₹639.50 illustrates the dramatic re-rating that has occurred. Currently trading just 5.65% above the 52-week low and 49.09% below the high, the stock has clearly lost investor confidence. The valuation grade of "Attractive" must be interpreted cautiously—the stock appears cheap for a reason, with fundamental challenges justifying the discount.

Book value per share of ₹142.32 compares to the current price of ₹325.60, implying a P/BV of 2.29x. For a company generating ROE of just 5.48%, this multiple suggests limited margin of safety. In contrast, high-quality peers with ROE above 15% trade at P/BV multiples of 5x to 10x, reflecting the market's willingness to pay premiums for superior capital efficiency.

Shareholding Pattern: Stable Promoter Base, Minimal Institutional Interest

HPL Electric's shareholding structure reveals a promoter-dominated company with minimal institutional participation. Promoter holding remained steady at 72.66% across the last five quarters, indicating strong management commitment but also limited float for institutional investors. The stability in promoter holding provides some comfort regarding management confidence, though the 1.56% pledged shares warrant monitoring.

Foreign institutional investor (FII) holding declined to 0.27% in Q3 FY26 from 0.34% in Q2 FY26, continuing a downward trend from 0.70% in Q1 FY26. This reduction in FII participation, though from already minimal levels, suggests foreign investors are losing interest in the stock. The complete absence of mutual fund holdings (0.00% across all quarters) represents a significant red flag, indicating that domestic institutional investors see limited merit in the investment case.

Other domestic institutional investor (DII) holdings also declined to 0.10% from 0.19% quarter-on-quarter, reinforcing the pattern of institutional exit. The total institutional holding of just 0.38% ranks amongst the lowest in the electrical equipment sector and reflects the market's assessment of the company's investment quality. Non-institutional holdings increased marginally to 26.96%, but this likely represents retail investors rather than sophisticated institutional capital.

Stock Performance: Severe Underperformance Across All Timeframes

HPL Electric's stock performance has been dismal across most relevant timeframes, with particularly severe underperformance versus the broader market over the past year. The stock declined 30.43% over twelve months whilst the Sensex advanced 6.44%, resulting in negative alpha of 36.87 percentage points. This underperformance accelerated in recent months, with six-month returns of -45.23% against the Sensex's 3.23% gain, producing negative alpha of 48.46 percentage points.

The medium to long-term picture presents a stark contrast. Three-year returns of 248.42% and five-year returns of 731.67% demonstrate that HPL Electric delivered exceptional wealth creation for patient investors who entered at lower levels. However, these historical returns offer little comfort to investors who bought at elevated valuations in 2025. The stock's current technical trend classification as "Bearish" and position below all moving averages suggests the downward momentum may persist.

Sector comparison reveals additional concerns. HPL Electric's one-year return of -30.43% compares unfavourably to the Other Electrical Equipment sector return of 6.60%, resulting in underperformance of 37.03 percentage points. This indicates company-specific challenges beyond broader sector headwinds. The stock's beta of 1.28 implies higher volatility than the market, with the current phase characterised as "HIGH RISK LOW RETURN"—the worst possible combination for investors.

Risk-adjusted returns paint an even grimmer picture. The one-year risk-adjusted return of -0.64 with volatility of 47.40% indicates investors assumed substantial risk for negative returns. The negative Sharpe ratio confirms that the stock failed to compensate investors for the risk undertaken. In contrast, the Sensex delivered a risk-adjusted return of 0.56 with volatility of just 11.52%, highlighting the opportunity cost of holding HPL Electric.

Investment Thesis: Valuation Trap Despite Apparent Cheapness

HPL Electric's investment case rests on shaky foundations despite seemingly attractive valuation multiples. The company's Mojo Score of 37/100 places it firmly in "SELL" territory, reflecting the confluence of negative factors: bearish technical trend, flat financial performance, weak return metrics, and deteriorating institutional interest. The four key parameters of the Mojo framework reveal a mixed picture at best.

The "Attractive" valuation grade must be interpreted with extreme caution. Whilst the P/E of 21.83x appears reasonable, the underlying quality concerns justify the discount. The company's average quality grade reflects weak return on equity (5.48%), modest ROCE (9.63%), and concerning debt-to-EBITDA ratio (3.71x). These quality metrics suggest the low valuation represents a value trap rather than a genuine opportunity.

The flat financial trend classification for Q3 FY26 captures the essence of the problem: revenue growth without proportionate profit expansion. Key positive factors include highest-ever debtors turnover ratio of 2.47 times and healthy sales growth of 20.75% YoY. However, the absence of key negative triggers in the trend analysis seems optimistic given the sequential profit decline and margin compression observed in the quarter.

Key Strengths and Risk Factors

Outlook: What to Watch