Indo Count Industries Q2 FY26: Margin Pressures Overshadow Revenue Growth

The quarter's performance reveals a troubling narrative: whilst revenue expanded 10.79% quarter-on-quarter to ₹1,062.14 crores, profitability metrics deteriorated sharply. Operating margins excluding other income contracted to 9.76% from 11.58% in Q1 FY26, and PAT margins compressed to 3.67% from 4.07%. The year-on-year comparison paints an even grimmer picture, with net profit plunging from ₹80.38 crores in Q2 FY25 despite revenue growing 2.54% to ₹1,062.14 crores.

The company's struggle to translate top-line growth into bottom-line expansion reflects mounting operational challenges in a competitive textile landscape. Employee costs surged 17.63% year-on-year to ₹124.45 crores, whilst interest expenses climbed 4.39% to ₹31.82 crores, squeezing profitability despite revenue gains. The sharp deterioration in margins signals pricing pressure, elevated input costs, and operational inefficiencies that management must address urgently.

Quarterly Performance Trend: A Concerning Trajectory

The quarterly trend table reveals persistent margin erosion over the past year. Operating margins excluding other income have contracted from 15.11% in Q2 FY25 to just 9.76% in Q2 FY26—a decline of 535 basis points. PAT margins have similarly compressed from 7.76% to 3.67% over the same period. This deterioration suggests structural challenges rather than temporary headwinds, with the company struggling to maintain pricing power amidst rising costs.

Financial Performance Analysis: Revenue Growth Masks Profitability Crisis

Indo Count Industries' Q2 FY26 results present a troubling dichotomy between top-line resilience and bottom-line weakness. Net sales of ₹1,062.14 crores marked a 10.79% sequential improvement from Q1 FY26's ₹958.71 crores, reflecting seasonal demand recovery and volume growth. However, the 2.54% year-on-year revenue increase to ₹1,062.14 crores from ₹1,035.85 crores in Q2 FY25 demonstrates modest growth momentum in a challenging operating environment.

The profitability picture, however, deteriorated sharply. Operating profit before depreciation, interest, and tax (excluding other income) stood at ₹103.66 crores in Q2 FY26, down from ₹111.01 crores in Q1 FY26 and significantly lower than ₹156.51 crores in Q2 FY25. This represents a year-on-year decline of 33.77%, far steeper than the modest revenue growth, indicating severe margin compression. The operating margin excluding other income contracted to 9.76% from 15.11% a year ago—a decline of 535 basis points that signals fundamental profitability challenges.

Cost pressures intensified across multiple fronts. Employee costs surged to ₹124.45 crores in Q2 FY26, up 17.63% year-on-year from ₹105.79 crores, reflecting wage inflation and potentially higher headcount to support capacity expansion. Interest expenses climbed to ₹31.82 crores from ₹30.48 crores a year ago, driven by elevated debt levels as long-term borrowings increased to ₹337.56 crores in FY25 from ₹195.07 crores in FY24. Depreciation charges also rose to ₹39.20 crores from ₹25.35 crores year-on-year, reflecting recent capital expenditure on capacity additions.

The quality of earnings raises concerns. Other income contributed ₹19.43 crores in Q2 FY26, representing 37.32% of profit before tax—an unhealthy dependence on non-operating income to support headline profitability. This compares unfavourably to ₹8.94 crores in Q2 FY25, when other income constituted just 8.16% of PBT. Such elevated reliance on treasury income and other non-core sources masks the underlying operational weakness and suggests core business profitability remains under severe pressure.

Operational Challenges: Eroding Return Ratios Signal Structural Issues

Indo Count Industries' operational metrics paint a concerning picture of deteriorating capital efficiency and profitability. The company's return on equity (ROE) averaged 16.93% over the past five years, which appears respectable on the surface. However, the latest half-yearly ROE has slumped to just 9.92%, marking the lowest level in recent periods and signalling a sharp deterioration in profitability relative to shareholder equity. This decline reflects the severe margin compression and profit erosion witnessed in recent quarters.

Return on capital employed (ROCE) tells a similar story. Whilst the five-year average ROCE stands at 18.97%, indicating historically efficient capital deployment, the latest annualised ROCE has contracted to 12.01%. This represents a significant decline from peak levels and suggests the company's recent capital investments—reflected in fixed assets rising from ₹1,298.79 crores in FY24 to ₹1,647.50 crores in FY25—have yet to generate commensurate returns. The capacity expansion appears mistimed given current demand and margin pressures.

Balance sheet leverage has increased materially. Long-term debt more than doubled from ₹195.07 crores in FY24 to ₹337.56 crores in FY25, funding aggressive capital expenditure. Whilst the average net debt-to-equity ratio of 0.53 remains moderate, the trajectory is concerning given deteriorating profitability. The average debt-to-EBITDA ratio of 1.83 times provides some comfort, but interest coverage has weakened, with EBIT-to-interest falling from comfortable levels to an average of 8.10 times over five years.

Working capital management shows mixed signals. Debtor turnover ratio improved to 8.24 times in H1 FY26, the highest in recent periods, indicating efficient receivables collection. However, current assets of ₹2,228.28 crores against current liabilities of ₹1,313.96 crores in FY25 suggest adequate liquidity but potentially excess working capital deployment. Cash flow from operations stood at ₹394.00 crores in FY25, up from ₹145.00 crores in FY24, providing some cushion, though this was largely absorbed by capital expenditure of ₹485.00 crores.

Industry Context: Textile Sector Headwinds Intensify

Indo Count Industries operates in the garments and apparels sector, which faces significant headwinds from global demand softness, elevated cotton prices, and intense competition from low-cost producers. The company's 16.22% five-year sales compound annual growth rate (CAGR) demonstrates historical resilience, but recent quarters reveal slowing momentum. Full-year FY25 sales grew 16.70% to ₹4,151.00 crores, but quarterly growth rates have moderated sharply, with Q2 FY26 registering just 2.54% year-on-year expansion.

The textile industry's margin pressures stem from multiple sources. Raw material costs, particularly cotton and polyester, remain elevated despite recent corrections. Energy costs have surged, impacting manufacturing economics. Labour costs continue rising, reflected in Indo Count's 17.63% year-on-year increase in employee expenses. Simultaneously, pricing power remains constrained by intense competition and weak end-market demand, particularly in key export markets like the United States and Europe where consumer spending on home textiles has softened.

Indo Count's positioning in the bedding and home textiles segment provides some differentiation, with the company supplying to major global retailers. However, this exposure also creates vulnerability to demand fluctuations in developed markets. The company's 100% export-oriented unit status provides duty benefits, but currency volatility and changing trade dynamics pose ongoing risks. Recent capacity additions appear mistimed given current demand weakness, with utilisation rates likely below optimal levels, contributing to margin compression.

Peer Comparison: Valuation Discount Reflects Performance Concerns

Indo Count Industries trades at a P/E ratio of 26.88 times trailing twelve-month earnings, below the industry average P/E of 22 times but reflecting concerns about earnings sustainability. The company's price-to-book ratio of 2.43 times represents a significant discount to peers like Garware Technical Fibres (5.83x), Pearl Global Industries (5.50x), and Arvind Fashions (6.79x), suggesting the market harbours doubts about the company's ability to generate sustainable returns on equity.

Indo Count's ROE of 16.93% (five-year average) compares favourably to most peers, exceeding Pearl Global (14.51%) and Gokaldas Exports (12.50%), though trailing Garware Technical Fibres (18.21%). However, the recent deterioration to 9.92% in H1 FY26 erodes this advantage. The company's debt-to-equity ratio of 0.53 sits in the middle of the peer group, higher than Garware's net cash position but lower than Arvind Fashions' 1.17 times, indicating moderate leverage.

The dividend yield of 0.72% exceeds most textile peers, reflecting a consistent dividend policy with a payout ratio of 16.10%. However, this modest yield provides limited support to the investment case given the earnings decline. The valuation discount appears justified given deteriorating margins, falling returns, and uncertain earnings trajectory. Until operational metrics stabilise and margin recovery becomes evident, the stock is likely to continue trading at a discount to higher-quality textile peers.

Valuation Analysis: Attractive Entry Point or Value Trap?

Indo Count Industries' current valuation metrics present a mixed picture. Trading at a P/E ratio of 26.88 times trailing earnings, the stock appears moderately valued relative to its historical range. However, this multiple is predicated on earnings that have declined sharply, with net profit falling 51.44% year-on-year in Q2 FY26. The price-to-book ratio of 2.43 times compares favourably to the broader textile peer group but reflects concerns about the sustainability of returns on equity, which have contracted to 9.92% in the latest half-year.

The enterprise value-to-EBITDA multiple of 13.50 times appears reasonable for a company with Indo Count's historical growth profile, but elevated given current margin pressures. The EV-to-EBIT ratio of 18.25 times reflects the impact of depreciation charges from recent capacity additions, whilst the EV-to-sales ratio of 1.62 times suggests moderate revenue multiples. These metrics indicate the stock is not egregiously overvalued but lacks a significant margin of safety given deteriorating fundamentals.

The stock's 52-week range of ₹210.70 to ₹423.40 provides context for current levels. Trading at ₹278.45, the stock sits 34.23% below its 52-week high and 32.15% above its 52-week low, suggesting it has partially corrected from peak valuations but remains elevated relative to recent lows. The valuation grade of "Attractive" assigned by proprietary models reflects the correction from highs, but investors must question whether this represents genuine value or a falling knife given ongoing margin erosion.

The dividend yield of 0.72% provides minimal income support, with the latest dividend of ₹2 per share representing a 16.10% payout ratio. Whilst this conservative payout preserves capital for reinvestment, it offers little cushion for patient investors. The valuation appears attractive only if one believes margins will recover meaningfully in coming quarters—a scenario that requires evidence of stabilising input costs, improved pricing power, and operational efficiencies that remain conspicuously absent from recent results.

Shareholding Pattern: Institutional Confidence Gradually Building

Promoter holding remains rock-solid at 58.74%, unchanged over the past year, with zero pledging—a positive indicator of management confidence and financial stability. The promoter group, led by Sandridge Investments Limited (31.31%) and Indocount Securities Limited (15.67%), maintains strong control whilst leaving adequate free float for institutional participation.

Foreign institutional investor (FII) holdings have stabilised around 10%, with a marginal sequential increase of 0.10% in Q2 FY26 to 9.99%. This follows a gradual declining trend from 10.69% in Q3 FY25, suggesting cautious positioning by global investors concerned about margin pressures and earnings visibility. The presence of 91 FII investors indicates reasonably broad international interest despite recent performance concerns.

Mutual fund holdings have shown consistent sequential increases, rising from 3.25% in Q3 FY25 to 4.86% in Q2 FY26—a gain of 161 basis points over four quarters. The latest quarter saw a 16 basis point increase, with 12 mutual funds holding positions. This gradual accumulation suggests domestic institutional investors view current levels as attractive entry points, potentially anticipating margin recovery in coming quarters. However, the absolute level of mutual fund ownership remains modest at just 4.86%, indicating limited conviction among domestic fund managers.

Non-institutional holdings declined marginally by 26 basis points to 25.96% in Q2 FY26, suggesting retail investors are trimming positions amidst earnings concerns. Overall institutional holdings of 15.30% remain moderate, providing room for increased participation if operational metrics improve. The shareholding pattern reflects cautious optimism from domestic institutions but limited enthusiasm from global investors and retail participants.

Stock Performance: Severe Underperformance Across Timeframes

Indo Count Industries' stock performance reveals a tale of two distinct periods. Over the longer three-year horizon, the stock has delivered exceptional returns of 107.03%, massively outperforming the Sensex's 36.53% gain with positive alpha of 70.50 percentage points. This reflects the company's strong post-pandemic recovery and capacity expansion story that attracted investor interest through 2023 and early 2024.

However, recent performance has deteriorated sharply. The stock has declined 19.39% over the past year, underperforming the Sensex's 7.24% gain by a substantial 26.63 percentage points. Year-to-date returns of -14.61% compare unfavourably to the Sensex's +7.97% gain, representing negative alpha of 22.58 percentage points. The six-month return of -15.54% against the Sensex's +2.35% gain further underscores the severity of underperformance as margin pressures intensified.

The three-month return of +15.66% provides a glimmer of hope, outperforming the Sensex's +5.15% gain with positive alpha of 10.51 percentage points. This recent bounce from the 52-week low of ₹210.70 reflects value-buying and speculation about potential margin stabilisation. However, the stock remains 34.23% below its 52-week high of ₹423.40, indicating significant wealth erosion from peak levels.

Technical indicators paint a cautious picture. The stock trades below its 200-day moving average of ₹283.04, signalling a mildly bearish trend that began on October 27, 2025. With a beta of 1.35, Indo Count exhibits higher volatility than the broader market, amplifying both gains and losses. The risk-adjusted return of -0.35 over the past year, combined with 55% volatility, classifies the stock as "High Risk Low Return"—an unattractive risk-reward profile for most investors.

Investment Thesis: Quality Company Facing Cyclical Headwinds

Indo Count Industries presents a complex investment proposition—a fundamentally good quality company with strong historical growth facing severe near-term operational challenges. The company's quality grade of "Good" reflects solid long-term fundamentals: 16.22% five-year sales CAGR, 16.06% EBIT CAGR, average ROCE of 18.97%, average ROE of 16.93%, and zero promoter pledging. These metrics demonstrate the company's ability to generate value over longer time horizons.

However, the financial trend has turned decisively negative. The latest half-year results show PAT declining 50.66%, profit before tax excluding other income falling 67.59%, and ROCE contracting to 9.92%—the lowest in recent periods. Other income constitutes 37.32% of profit before tax in Q2 FY26, an unhealthy dependence on non-operating sources. These deteriorating metrics indicate the company is navigating significant operational challenges that could persist for multiple quarters.

The technical picture reinforces caution. The stock's mildly bearish trend, combined with trading below key moving averages, suggests limited near-term price support. The valuation grade of "Attractive" provides some comfort, but this assessment is predicated on current depressed earnings—if margins fail to recover, the stock could face further de-rating despite appearing statistically cheap.

The proprietary Mojo score of 41/100 places Indo Count in "SELL" territory, down from "HOLD" in May 2025. This rating reflects the confluence of negative financial trends, bearish technicals, and uncertain earnings visibility despite attractive valuation and good long-term quality. The recommendation to "consider selling" or "look for exit opportunities" aligns with the deteriorating operational metrics and lack of near-term catalysts for margin recovery.

Key Strengths & Risk Factors

Outlook: What to Watch in Coming Quarters

The outlook for Indo Count Industries hinges critically on management's ability to stabilise margins and restore profitability to sustainable levels. The next two quarters will be decisive—investors should monitor Q3 and Q4 FY26 results closely for evidence of margin bottoming, cost control success, and improving capacity utilisation. Until clear signs of operational improvement emerge, the stock is likely to remain range-bound with limited upside potential.

The company's strong historical track record and solid balance sheet provide a foundation for eventual recovery, but the timing remains uncertain. Current margin levels of 9.76% appear unsustainable relative to historical norms of 15%+, suggesting either a structural reset in industry economics or temporary cyclical pressures. Management commentary on demand trends, pricing environment, and cost outlook will be critical in assessing whether this represents a cyclical trough or a more permanent impairment of earning power.