Kalyan Capitals Q3 FY26: Rising Revenues Offset by Surging Interest Costs and Margin Compression

The quarter presented a mixed picture: whilst net sales surged 123.81% year-on-year to ₹9.87 crores—the highest quarterly revenue on record—profitability came under severe pressure from escalating interest expenses, which jumped to ₹7.29 crores, also a quarterly high. This interest burden, coupled with margin compression, resulted in profit after tax (PAT) of just ₹0.82 crores, translating to a PAT margin of 8.31%, down from 15.99% in the previous quarter.

The results underscore a fundamental tension in Kalyan Capitals' business model: aggressive revenue expansion funded by high-cost debt is eroding profitability. For a company already burdened with a debt-to-equity ratio of 4.97 times (on a half-yearly basis) and average return on equity of just 8.65%, the sustainability of this growth trajectory warrants serious scrutiny. The company's proprietary Mojo score of 26 out of 100 reflects these structural concerns, placing it firmly in "Strong Sell" territory.

Financial Performance: Growth Masking Fundamental Weakness

On the surface, Kalyan Capitals' top-line performance appears impressive. Net sales for Q3 FY26 reached ₹9.87 crores, up 15.17% sequentially from ₹8.57 crores in Q2 FY26 and more than doubling year-on-year from ₹4.41 crores. For the nine-month period ending December 2025, total revenues stood at ₹27.27 crores, representing substantial growth from the comparable period.

However, this revenue expansion has come at an unsustainable cost. Operating profit before depreciation, interest, and tax (PBDIT) excluding other income reached ₹8.43 crores in Q3 FY26, maintaining a healthy operating margin of 85.41%. Yet this operational efficiency evaporates once the company's financing costs are factored in. Interest expenses surged to ₹7.29 crores in the quarter, consuming 73.85% of net sales and leaving minimal room for profitability.

The deterioration in profitability margins tells the story. PAT margin compressed to 8.31% in Q3 FY26 from 15.99% in Q2 FY26 and 27.41% in Q1 FY26. Gross profit margin similarly declined to 12.16% from 18.67% quarter-on-quarter. This margin erosion, despite strong top-line growth, signals that the company is sacrificing profitability for scale—a dangerous strategy for a highly leveraged NBFC.

For the nine-month period ending December 2025, consolidated net profit stood at ₹3.79 crores compared to ₹2.43 crores in the corresponding period of the previous year, representing growth of 55.97%. Whilst this appears positive, the quarterly trajectory shows profitability peaking in Q1 FY26 and declining steadily thereafter—a worrying trend that suggests the company's growth model may be unsustainable.

Operational Challenges: The Debt Burden Weighs Heavy

The core operational challenge facing Kalyan Capitals is its excessive leverage. With a debt-to-equity ratio of 4.97 times on a half-yearly basis—and an average of 4.85 times over recent periods—the company is amongst the most highly leveraged in its peer group. This heavy debt burden translates directly into crippling interest costs that consume the bulk of operating profits.

Interest expenses have climbed relentlessly: from ₹4.82 crores in Q1 FY26 to ₹6.17 crores in Q2 FY26 to ₹7.29 crores in Q3 FY26. This 51.24% increase over two quarters far outpaces revenue growth of 11.78% over the same period. The interest coverage ratio—measured by EBIT to interest—stands at a weak 1.45 times on average, indicating limited cushion to service debt obligations.

Return on capital employed (ROCE) has deteriorated to 7.90% on a half-yearly basis—the lowest on record—down from an average of 10.90%. Return on equity (ROE), whilst higher than several loss-making peers, stands at just 8.65% on average and 6.59% in the latest period. These returns are well below the cost of capital for a company of this risk profile, indicating value destruction rather than creation.

The balance sheet provides further cause for concern. Current liabilities surged to ₹198.30 crores as of March 2025 from ₹138.27 crores the previous year, whilst current assets stood at just ₹36.14 crores, creating a substantial negative working capital position. This mismatch between short-term obligations and liquid resources raises questions about the company's ability to meet near-term liabilities without further borrowing.

Industry Context: Underperformance in a Rising Sector

The broader NBFC sector has experienced a strong rally over the past year, with the Non Banking Financial Company index delivering returns of 28.15%. Against this favourable backdrop, Kalyan Capitals' 41.45% decline over the same period represents a staggering underperformance of 69.60 percentage points. This divergence suggests company-specific issues rather than sector headwinds.

The company's quality assessment has been downgraded to "Below Average" since November 2025, reflecting deteriorating long-term financial performance and elevated valuation parameters relative to historical norms. Key quality indicators paint a concerning picture: whilst five-year sales growth of 49.57% appears robust, this has been achieved through unsustainable leverage rather than operational excellence.

The company's financial trend classification shifted to "Flat" for Q3 FY26, down from "Positive" in Q2 FY25. This deterioration reflects the confluence of negative factors: highest-ever interest expenses, lowest return on capital employed, and peak debt-to-equity ratios. The trend analysis highlights that whilst quarterly net sales and PBDIT reached record highs, these achievements are overshadowed by structural profitability challenges.

Peer Comparison: Limited Consolation in Relative Metrics

Within its peer group of micro-cap NBFCs, Kalyan Capitals presents a mixed comparative picture. The company's ROE of 8.65% substantially exceeds peers such as Yamini Investments (0.94%), IndiaNivesh (0.00%), and Salem Erode Investments (0.14%). However, this relative outperformance must be contextualised against the company's significantly higher leverage and risk profile.

Kalyan Capitals' price-to-earnings ratio of 10.34 times appears reasonable compared to the broader NBFC sector average of 28 times, suggesting the stock trades at a significant discount to sector multiples. The price-to-book value of 0.68 times indicates the market values the company's net assets at just 68% of book value, reflecting scepticism about the quality and sustainability of reported equity.

However, this apparent valuation discount must be weighed against the company's debt-to-equity ratio of 4.85 times—far exceeding peers like Yamini Investments (0.28), Salem Erode (0.06), and Bervin Investments (0.47). This extreme leverage amplifies both returns and risks, making the company's equity position far more volatile and vulnerable to adverse developments than the headline P/E ratio might suggest.

Valuation Analysis: Cheap for Good Reason

At the current price of ₹6.78, Kalyan Capitals trades at what appears to be an attractive valuation: P/E of 10.34 times, P/BV of 0.68 times, and EV/EBITDA of 11.50 times. The company's valuation grade has oscillated between "Very Attractive" and "Attractive" over recent months, currently sitting at "Very Attractive" as of January 9, 2025.

However, this valuation discount reflects fundamental concerns rather than market inefficiency. The stock has declined 42.93% from its 52-week high of ₹11.88, with the price now trading just 8.13% above its 52-week low of ₹6.27. This proximity to multi-year lows, combined with a bearish technical trend that began in late October 2025, suggests the market has lost confidence in the company's prospects.

Book value per share stands at ₹6.33, meaning the stock trades at a mere 7% premium to book value. For a profitable company, such a modest premium typically signals market concerns about asset quality, earnings sustainability, or governance. In Kalyan Capitals' case, the extreme leverage and deteriorating profitability margins provide ample justification for this sceptical valuation.

The company pays no dividends, with a dividend payout ratio of 0.0%, meaning shareholders receive no cash returns despite the company reporting profits. For a highly leveraged NBFC, this reinvestment of all earnings makes sense from a capital adequacy perspective, but it also means investors are entirely dependent on capital appreciation—which has been sharply negative—for returns.

Shareholding Pattern: Stable but Uninspiring

The shareholding structure of Kalyan Capitals has remained remarkably stable over recent quarters, with promoter holding steady at 67.61% across the last four quarters. This consistency provides some reassurance about management commitment, particularly given the absence of any pledged shares. However, the complete absence of institutional participation—zero holdings by foreign institutional investors (FIIs), mutual funds (MFs), insurance companies, and other domestic institutional investors (DIIs)—speaks volumes about professional investors' assessment of the company's prospects.

The remaining 32.39% is held by non-institutional investors, predominantly retail shareholders. This concentration in promoter and retail hands, with zero institutional validation, is a significant red flag for a publicly traded financial services company. Sophisticated institutional investors typically conduct rigorous due diligence and their complete absence suggests concerns about business quality, governance, or growth prospects that retail investors may not fully appreciate.

The promoter group is highly fragmented across 18 entities, with the largest individual holding being Sunil Kumar Malik at 26.09%, followed by Rajesh Gupta at 9.26%. This fragmentation, whilst reducing concentration risk, also raises questions about governance complexity and potential for divergent interests amongst promoters.

Stock Performance: Consistent Value Destruction

The stock price performance of Kalyan Capitals has been dismal across virtually all time horizons. Over the past year, the stock has declined 41.45%, dramatically underperforming the Sensex's 8.84% gain by 50.29 percentage points. This underperformance extends across longer periods: over two years, the stock is down 65.34% versus the Sensex's 15.82% gain (negative alpha of 81.16 percentage points), and over three years, down 64.98% versus the Sensex's 37.13% gain (negative alpha of 102.11 percentage points).

The stock exhibits high volatility with an adjusted beta of 1.50, meaning it tends to move 50% more than the broader market. This high beta, combined with negative returns, places the stock in the "High Risk Low Return" category—the worst possible combination for investors. The risk-adjusted return of -0.88 over the past year, compared to the Sensex's positive 0.77, underscores the poor risk-reward profile.

Technical indicators uniformly point to continued weakness. The stock trades below all key moving averages: 5-day (₹6.67), 20-day (₹6.72), 50-day (₹7.39), 100-day (₹8.01), and 200-day (₹8.60). The overall technical trend is classified as "Bearish" since October 29, 2025, when it changed from "Mildly Bearish" at ₹8.84. Multiple technical indicators—MACD, RSI, Bollinger Bands, and KST—flash bearish signals on both weekly and monthly timeframes.

Investment Thesis: Multiple Red Flags Trump Valuation Appeal

The investment case for Kalyan Capitals rests primarily on its apparently attractive valuation metrics and year-on-year revenue growth. However, these positives are overwhelmed by a litany of structural concerns that justify the stock's "Strong Sell" rating and Mojo score of just 26 out of 100.

The company's quality assessment of "Below Average" reflects weak long-term fundamentals: average ROCE of just 10.90%, average ROE of 8.65%, weak interest coverage of 1.45 times, and extreme leverage with debt-to-equity of 4.85 times. These metrics indicate a business model that generates inadequate returns relative to the risks undertaken and the capital employed.

The financial trend classification of "Flat" for Q3 FY26 masks deteriorating underlying dynamics. Whilst revenues reached record highs, profitability has compressed sharply due to surging interest costs. The trajectory of declining margins—PAT margin falling from 27.41% in Q1 FY26 to 8.31% in Q3 FY26—suggests the business model is fundamentally flawed, with growth coming at the expense of profitability.

Key Strengths and Risk Factors

Outlook: What to Monitor Going Forward