The September 2025 quarter presented a paradoxical picture for Karnavati Finance: whilst net sales surged to ₹5.86 crores from just ₹0.22 crores in the previous quarter—a staggering 2,563.64% sequential increase—the company's bottom line collapsed under the weight of a ₹5.84 crore interest expense. This extraordinary revenue jump appears to be a one-off event rather than sustainable growth, given the company's historical quarterly sales ranging between ₹0.22 crores and ₹0.89 crores over the past seven quarters. The interest burden alone exceeded the entire quarterly revenue, resulting in a gross margin of -73.21% and a profit after tax margin of -73.21%, signalling severe operational distress.
| Quarter | Net Sales (₹ Cr) | QoQ Change | Net Loss (₹ Cr) | QoQ Change | Operating Margin |
|---|---|---|---|---|---|
| Sep'25 | 5.86 | +2,563.64% | -4.29 | -1,059% | 26.45% |
| Jun'25 | 0.22 | -15.38% | -0.37 | +58.0% | -50.0% |
| Mar'25 | 0.26 | -36.59% | -0.88 | -1,367% | -238.46% |
| Dec'24 | 0.41 | +46.43% | -0.06 | +93.3% | 51.22% |
| Sep'24 | 0.28 | -55.56% | -0.86 | -616.7% | -221.43% |
| Jun'24 | 0.63 | -29.21% | 0.12 | +166.7% | 80.95% |
| Mar'24 | 0.89 | — | -0.18 | — | 34.83% |
Financial Performance: A Revenue Spike Masked by Structural Losses
Karnavati Finance's Q2 FY26 results reveal a company caught in a destructive financial spiral. Whilst net sales jumped dramatically to ₹5.86 crores from ₹0.22 crores quarter-on-quarter, this surge appears anomalous given the company's historical revenue trajectory. On a year-on-year basis, sales increased by 1,992.86% from ₹0.28 crores in Q2 FY25, but this comparison is equally distorted by the company's erratic revenue generation pattern over the past eight quarters.
The operating profit before depreciation, interest, and tax (PBDIT) excluding other income stood at ₹1.55 crores in Q2 FY26, yielding an operating margin of 26.45%—a significant improvement from the negative 50.0% margin in Q1 FY26. However, this operational improvement was entirely negated by the ₹5.84 crore interest expense, which represented 99.66% of quarterly sales. This disproportionate interest burden reflects the company's highly leveraged capital structure and suggests that the NBFC is servicing debt obligations that far exceed its current earning capacity.
The profit before tax (PBT) deteriorated to a loss of ₹4.29 crores from a loss of ₹0.37 crores in Q1 FY26, representing an 1,059% sequential decline. With minimal tax adjustments, the net loss mirrored the PBT at ₹4.29 crores. The company's earnings per share (EPS) for the quarter stood at a negative ₹0.43, marking the lowest level in the available quarterly data and underscoring the severity of the financial deterioration.
Capital Structure Crisis: Debt Burden Overwhelming Operations
Karnavati Finance's balance sheet as of March 2025 reveals a company struggling with fundamental capital structure issues. Shareholder funds stood at ₹10.23 crores, comprising ₹10.05 crores in share capital and a meagre ₹0.18 crores in reserves and surplus. This represents a dramatic erosion from ₹1.86 crores in reserves just one year earlier, reflecting consecutive years of losses that have depleted the company's equity cushion.
Current liabilities ballooned to ₹11.48 crores as of March 2025, down from ₹17.04 crores in March 2024 but still representing 112% of shareholder funds. The company's average net debt to equity ratio of 1.08 indicates high leverage, whilst the negative net debt position suggests that debt obligations are being managed through working capital adjustments rather than sustainable cash generation. With fixed assets of just ₹0.01 crores and current assets of ₹0.17 crores, the company has minimal tangible asset backing for its liabilities.
Critical Financial Stress Indicators
Interest Coverage Crisis: Q2 FY26 interest expense of ₹5.84 crores exceeded total revenue of ₹5.86 crores, resulting in negative interest coverage. The average EBIT to interest ratio over the long term stands at just 0.15x, indicating persistent inability to service debt from operations.
Equity Erosion: Reserves and surplus declined by 90.32% from ₹1.86 crores in March 2024 to ₹0.18 crores in March 2025, reflecting consecutive years of losses that threaten the company's capital adequacy.
Return on Equity Collapse: Latest ROE of -21.21% represents a dramatic deterioration from the already weak 5-year average of 1.49%, indicating capital destruction rather than value creation for shareholders.
Asset Quality and Business Model Concerns
As a non-banking financial company, Karnavati Finance's core business model revolves around lending and financial services. However, the company's financial statements reveal operational dysfunction rather than sustainable lending operations. The dramatic quarter-to-quarter revenue volatility—ranging from ₹0.22 crores to ₹5.86 crores—suggests either lumpy transaction-based income or inconsistent business activity rather than recurring interest income from a stable loan portfolio.
The company's five-year sales growth rate of -12.26% and five-year EBIT growth rate of -164.31% indicate not just stagnation but active business contraction. The average sales to capital employed ratio of just 0.11x suggests extremely poor asset utilisation, with the company generating only ₹0.11 in revenue for every rupee of capital employed. This compares unfavourably to efficient NBFCs that typically achieve sales to capital employed ratios above 1.0x.
The cash flow statement for FY25 shows operating cash flow of ₹5.00 crores, driven primarily by ₹4.00 crores in working capital changes rather than core profitability. With profit before tax of negative ₹1.00 crore, the positive operating cash flow appears to result from balance sheet adjustments rather than genuine cash generation. The financing cash flow of negative ₹5.00 crores suggests debt repayment or capital structure adjustments during the year.
| Financial Year | Net Sales (₹ Cr) | YoY Growth | PAT (₹ Cr) | PAT Margin |
|---|---|---|---|---|
| FY25 | 1.00 | -66.7% | -1.00 | -100.0% |
| FY24 | 3.00 | +50.0% | -1.00 | -33.3% |
| FY23 | 2.00 | 0.0% | 0.00 | 0.0% |
| FY22 | 2.00 | +100.0% | 0.00 | 0.0% |
| FY21 | 1.00 | -50.0% | 0.00 | 0.0% |
Peer Comparison: Trailing the NBFC Universe
Karnavati Finance's positioning within the NBFC sector reveals a company operating at the extreme periphery of the industry. Whilst direct peer comparison is challenging due to the company's micro-cap status and operational distress, available data shows Karnavati Finance significantly underperforming on key metrics. The company's average ROE of 1.49% pales in comparison to functional NBFCs, which typically generate ROEs in the mid-teens to low-twenties range.
| Company | P/E Ratio (TTM) | Return on Equity | Debt to Equity | Price to Book |
|---|---|---|---|---|
| Karnavati Finance | NA (Loss Making) | 1.49% | 1.08 | 1.46x |
| GSL Securities | 64.13x | — | — | — |
| SRG Fingrow Fin | 15.32x | — | — | — |
| Rander Corpn. | NA (Loss Making) | 2.58% | -0.02 | 0.69x |
| Neil Industries | 11.75x | 2.27% | 0.10 | 0.27x |
| Ashtasidhhi Ind | 1,628.90x | 0.90% | 0.00 | 1.60x |
The company's price-to-book ratio of 1.46x appears elevated given its loss-making status and deteriorating fundamentals. Compared to peers like Neil Industries (0.27x P/BV) and Rander Corporation (0.69x P/BV), Karnavati Finance trades at a premium that seems unjustified by operational performance. The market capitalisation of ₹15.00 crores ranks the company at the bottom of the NBFC peer group, reflecting its distressed status.
Valuation Analysis: Risky Assessment Justified by Fundamentals
Karnavati Finance currently trades at ₹1.49 per share with a book value per share of ₹10.18, resulting in a price-to-book ratio of 1.46x. Given the company's loss-making status, traditional earnings-based valuation metrics such as P/E ratio are not applicable. The enterprise value to sales ratio of 22.26x appears extraordinarily high for a company generating minimal revenue and consistent losses, suggesting significant valuation risk.
The stock's valuation grade has oscillated between "Risky" and "Very Expensive" over the past year, with the current "Risky" designation accurately reflecting the company's financial distress. The EV/EBITDA ratio of -22.85x (negative due to operating losses) further confirms that traditional valuation frameworks break down when applied to Karnavati Finance. The company's enterprise value to capital employed ratio of 1.22x suggests the market is valuing the company's capital base with minimal regard for its inability to generate returns.
Valuation Dashboard: Distressed Metrics
P/E Ratio (TTM): NA (Loss Making) | Industry P/E: 36x
Price to Book Value: 1.46x | EV/Sales: 22.26x
EV/EBITDA: -22.85x | EV/Capital Employed: 1.22x
Dividend Yield: NA | Mojo Score: 3/100 (Strong Sell)
With the stock trading 38.93% below its 52-week high of ₹2.44 and just 11.19% above its 52-week low of ₹1.34, investors appear to be pricing in significant downside risk. The lack of dividend payments and the company's consistent losses eliminate any income-based investment rationale. Fair value estimation is problematic given the absence of sustainable earnings, but a conservative approach would value the company at or below its eroded book value, suggesting potential downside from current levels.
Shareholding: Stable Promoter Base Amidst Operational Turmoil
Karnavati Finance's shareholding pattern has remained remarkably stable over the past five quarters, with promoter holding consistently at 58.64% and non-institutional shareholders holding the remaining 41.36%. The complete absence of institutional investors—foreign institutional investors (FIIs), mutual funds, insurance companies, and other domestic institutional investors (DIIs) all hold 0.00%—signals a lack of professional investor confidence in the company's prospects.
| Shareholder Category | Sep'25 | Jun'25 | Mar'25 | Dec'24 | Sep'24 |
|---|---|---|---|---|---|
| Promoter Holding | 58.64% | 58.64% | 58.64% | 58.64% | 58.64% |
| FII Holding | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| Mutual Fund Holding | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| Insurance Holdings | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| Non-Institutional | 41.36% | 41.36% | 41.36% | 41.36% | 41.36% |
The promoter group, led by Raman P Morzaria (29.24%), Kush Ramanbhai Morzaria (14.71%), and Morzaria Jay R (11.52%), has maintained its stake despite the company's deteriorating financial performance. Positively, there is no promoter pledging, eliminating one potential risk factor. However, the absence of any institutional participation—typically a sign of professional due diligence and quality assessment—raises concerns about the company's investment merit and governance standards.
Stock Performance: Severe Underperformance Across All Timeframes
Karnavati Finance's stock performance has been uniformly negative across all measured timeframes, with the company significantly underperforming both the Sensex benchmark and its NBFC sector peers. Over the past year, the stock has declined 38.93% whilst the Sensex gained 9.50%, resulting in a negative alpha of -48.43 percentage points. This underperformance extends across shorter and longer timeframes, with the stock generating negative returns of -12.35% over one month, -25.13% over three months, and -28.71% over six months.
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | -3.25% | 1.69% | -4.94% |
| 1 Month | -12.35% | 1.19% | -13.54% |
| 3 Month | -25.13% | 5.40% | -30.53% |
| 6 Month | -28.71% | 3.18% | -31.89% |
| YTD | -30.70% | 8.72% | -39.42% |
| 1 Year | -38.93% | 9.50% | -48.43% |
| 2 Years | -26.60% | 29.12% | -55.72% |
| 3 Years | -84.73% | 37.57% | -122.30% |
The three-year return of -84.73% represents particularly severe wealth destruction, with the stock underperforming the Sensex by 122.30 percentage points over this period. The company has also underperformed its NBFC sector peers by 18.82 percentage points over the past year, with the sector declining 20.11% compared to Karnavati Finance's 38.93% decline. The stock's high beta of 1.50 indicates greater volatility than the broader market, with volatility of 57.24% compared to the Sensex's 12.26%, resulting in a negative risk-adjusted return of -0.68 over the past year.
From a technical perspective, the stock is in a confirmed bearish trend since September 10, 2025, trading below all major moving averages including the 5-day (₹1.52), 20-day (₹1.61), 50-day (₹1.68), 100-day (₹1.81), and 200-day (₹1.93) moving averages. The MACD, Bollinger Bands, and KST indicators all signal bearish momentum, whilst delivery volumes have increased by 33.37% over the past month, suggesting that selling pressure involves genuine position unwinding rather than speculative trading.
Investment Thesis: Multiple Red Flags Overwhelm Any Positives
Karnavati Finance presents an investment case dominated by fundamental weaknesses and operational distress. The company's Mojo Score of 3/100 places it firmly in "Strong Sell" territory, reflecting the confluence of negative factors across valuation, quality, financial trends, and technical indicators. The financial trend is classified as "Negative," the technical trend is "Bearish," the quality grade is "Below Average," and the valuation assessment is "Risky"—a comprehensive indictment of the company's investment merit.
Mojo Parameters Dashboard
Overall Score: 3/100 (Strong Sell)
Valuation: Risky | Quality Grade: Below Average
Financial Trend: Negative | Technical Trend: Bearish
Advisory: Strongly consider selling | Exit recommended
The company's below-average quality rating stems from weak long-term financial performance, with five-year sales growth of -12.26% and five-year EBIT growth of -164.31%. The average ROCE of 1.35% and average ROE of 1.49% indicate minimal value creation, whilst the latest ROE of -21.21% signals active capital destruction. The average EBIT to interest coverage of just 0.15x demonstrates persistent inability to service debt obligations from operations, a critical concern for any financial services company.
Key Strengths
✓ No Promoter Pledging: Zero pledged shares eliminate one potential governance risk factor.
✓ Stable Promoter Holding: Consistent 58.64% promoter stake over five quarters indicates promoter commitment.
✓ Q2 Operating Margin Recovery: Operating margin of 26.45% in Q2 FY26 showed sequential improvement from negative territory.
Key Concerns
⚠️ Deepening Losses: Net loss of ₹4.29 crores in Q2 FY26 represents severe deterioration and capital erosion.
⚠️ Unsustainable Interest Burden: Interest expense of ₹5.84 crores exceeded total revenue, resulting in negative interest coverage.
⚠️ Revenue Volatility: Erratic quarterly sales ranging from ₹0.22 crores to ₹5.86 crores indicates unstable business model.
⚠️ Equity Erosion: Reserves declined 90.32% from ₹1.86 crores to ₹0.18 crores, threatening capital adequacy.
⚠️ Zero Institutional Holding: Complete absence of FII, MF, and insurance participation signals lack of professional investor confidence.
⚠️ Weak Return Metrics: ROE of -21.21% and ROCE of -2.44% indicate capital destruction rather than value creation.
⚠️ Severe Stock Underperformance: 38.93% decline over one year and 84.73% decline over three years reflects sustained investor exit.
Outlook: What to Monitor for Any Signs of Stabilisation
For investors monitoring Karnavati Finance, the outlook remains decidedly negative with limited visibility on potential turnaround catalysts. The company faces fundamental challenges that extend beyond cyclical headwinds to structural business model issues. Any assessment of future prospects must weigh the remote possibility of operational stabilisation against the high probability of continued deterioration.
Potential Positive Catalysts
Revenue Stabilisation: Consistent quarterly sales above ₹1.00 crore for three consecutive quarters would signal business model viability.
Interest Burden Reduction: Quarterly interest expense declining below ₹1.00 crore would indicate debt restructuring progress.
Operating Profitability: Positive PBT for two consecutive quarters would demonstrate operational viability.
Capital Infusion: Fresh equity injection to rebuild reserves and strengthen capital base.
Critical Red Flags
Further Reserve Erosion: Reserves declining below ₹0.10 crores would signal imminent capital adequacy crisis.
Continued Revenue Volatility: Quarterly sales below ₹0.50 crores in Q3 FY26 would confirm unsustainable business model.
Interest Coverage Deterioration: Interest expense exceeding 150% of revenue would indicate accelerating financial distress.
Promoter Stake Reduction: Any decline in promoter holding below 55% would signal loss of promoter confidence.
Stock Below ₹1.34: Break below 52-week low would likely trigger accelerated selling and potential delisting concerns.
"With interest expenses exceeding total revenue and reserves depleted by 90%, Karnavati Finance faces existential challenges that extend far beyond normal cyclical pressures—this is a company fighting for financial survival."
The Verdict: Exit Recommended for Existing Holders
Score: 3/100
For Fresh Investors: Avoid completely. Karnavati Finance presents unacceptable risk with minimal probability of recovery. The company's fundamental financial distress, unsustainable interest burden, and complete absence of institutional investor confidence make this unsuitable for any investment portfolio. The micro-cap status and operational dysfunction create conditions for potential total capital loss.
For Existing Holders: Exit at the earliest opportunity. The deteriorating financial trend, deepening losses, and equity erosion suggest high probability of continued value destruction. Whilst the stock has already declined 38.93% over the past year, the risk of further downside remains substantial given the company's inability to generate sustainable profits or service its debt obligations. Consider any price recovery as an exit opportunity rather than a buying signal.
Fair Value Estimate: Given the loss-making status and capital erosion, fair value is estimated at ₹0.90-₹1.10 per share (book value less adjustment for operational distress), representing 32-26% downside from current levels of ₹1.49. Traditional valuation frameworks break down for companies in financial distress, making liquidation value or distressed asset valuation more appropriate methodologies.
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.
