Kennametal India Q3 FY26: Margin Pressures Mount Despite Revenue Growth

The company's most recent quarterly performance for Q2 FY23 (Sep'22) presents a paradox that has left market participants divided. Whilst net profit surged 12.10% quarter-on-quarter to ₹31.50 crores, revenue growth stalled with a marginal 0.48% sequential decline to ₹267.30 crores. Year-on-year comparisons paint a more encouraging picture, with revenue advancing 12.55% and net profit climbing 11.31%, yet the underlying operational dynamics reveal mounting pressures that warrant careful scrutiny.

Financial Performance: Growth Momentum Stalling

Kennametal India's quarterly trajectory over the past 18 months reveals a company struggling to maintain consistent momentum. In Q2 FY23 (Sep'22), net sales of ₹267.30 crores represented a modest sequential decline from the previous quarter's ₹268.60 crores, breaking a pattern of steady expansion. However, the year-on-year comparison demonstrates resilience, with revenue advancing 12.55% from ₹237.50 crores in Sep'21.

The profitability narrative presents a more nuanced picture. Net profit of ₹31.50 crores in Q2 FY23 marked a healthy 12.10% sequential improvement and 11.31% year-on-year growth. However, the PAT margin of 11.78% remains under pressure compared to the 12.80% achieved in Dec'21, reflecting the company's struggle to translate revenue growth into proportionate bottom-line expansion.

Operating margins have demonstrated volatility, oscillating between 15.31% and 19.25% over the past seven quarters. The latest quarter's operating margin of 17.51% represents a 72 basis point sequential improvement from 16.79% in Jun'22, yet falls short of the 19.25% peak achieved in Dec'21. This margin compression, despite relatively stable revenue growth, signals rising input costs or pricing pressures that management has been unable to fully offset.

Operational Excellence: Strong ROCE Offset by Modest ROE

Kennametal India's operational efficiency metrics present a study in contrasts. The company's Return on Capital Employed (ROCE) of 21.65% stands as a testament to effective capital deployment, demonstrating management's ability to generate healthy returns from the assets at its disposal. This figure significantly exceeds the cost of capital and positions the company favourably within the industrial manufacturing sector.

However, the Return on Equity (ROE) of 14.00% tells a different story. Whilst not alarmingly low, this metric lags behind what investors typically seek in quality manufacturing franchises. The divergence between ROCE and ROE suggests a capital structure that may not be optimally leveraged, though the company's zero-debt status eliminates concerns about financial risk. The ROE of 14.00% indicates that for every ₹100 of shareholder equity, the company generates ₹14.00 in annual profit—a respectable but not exceptional return.

The balance sheet reflects conservative financial management. With shareholder funds of ₹646.30 crores as of Jun'22 and zero long-term debt, Kennametal India operates with a fortress balance sheet that provides substantial financial flexibility. Current assets of ₹478.60 crores comfortably exceed current liabilities of ₹175.90 crores, yielding a healthy current ratio of 2.72x. This liquidity cushion enables the company to weather industry downturns and pursue growth opportunities without financial constraints.

Industry Context: Manufacturing Sector Headwinds

The industrial manufacturing sector has faced a challenging environment characterised by volatile raw material prices, supply chain disruptions, and fluctuating demand patterns. Kennametal India's performance must be viewed through this lens, where maintaining revenue growth of 12.55% year-on-year represents a creditable achievement. The company's focus on hard metal products and capital-intensive machinery positions it within specialised niches that typically command premium pricing, though this also exposes it to cyclical industrial capital expenditure trends.

The company's five-year sales growth of 13.98% CAGR demonstrates resilience through multiple economic cycles, whilst the impressive 51.31% CAGR in EBIT growth over the same period highlights operating leverage and improving profitability. However, recent quarterly volatility suggests that sustaining this momentum may prove challenging in the current environment.

Peer Comparison: Premium Valuation Without Premium Returns

Kennametal India's positioning within the industrial manufacturing peer group reveals a valuation disconnect that raises questions about market expectations. The company trades at a P/E ratio of 42.87x, significantly above the industry average of 32x, yet delivers a Return on Equity of 14.00%—below what such a premium multiple typically commands.

The comparison reveals Kennametal India's relative strengths and weaknesses. Its ROE of 14.00% surpasses most peers except Praj Industries (18.07%), yet the company commands a P/E multiple that implies growth expectations not evident in recent quarterly performance. The Price-to-Book ratio of 6.27x sits mid-range amongst peers, though significantly above Texmaco Rail's 1.71x and Praj Industries' 4.04x.

Kennametal India's dividend yield of 1.88% offers modest income, exceeding most peers except Praj Industries' 2.10%. The company's zero-debt status (reflected in the negative Debt-to-Equity ratio of -0.22) provides financial stability that justifies some valuation premium, yet the overall picture suggests the market may be pricing in optimism that current fundamentals struggle to support.

Valuation Analysis: Expensive Territory Despite Recent Decline

Kennametal India's valuation metrics uniformly point towards expensive territory, raising concerns about downside risk if operational performance fails to improve. At a P/E ratio of 42.87x, the stock trades at a significant premium to both the industry average of 32x and historical norms. The PEG ratio of 42.87 proves particularly troubling, suggesting investors are paying ₹42.87 for each percentage point of earnings growth—a level that leaves little room for disappointment.

The EV/EBITDA multiple of 24.77x and EV/EBIT of 33.16x further reinforce the expensive valuation narrative. These enterprise value metrics, which account for the company's net cash position, indicate that even after adjusting for balance sheet strength, the stock appears richly valued relative to operational earnings. The Price-to-Book ratio of 6.27x means investors pay ₹6.27 for every ₹1.00 of book value, a premium that typically requires exceptional ROE—which the company's 14.00% figure struggles to justify.

The stock's valuation grade of "EXPENSIVE" reflects market recognition of stretched multiples. Having oscillated between "Expensive" and "Very Expensive" classifications throughout the latter half of 2025, the current assessment suggests limited value for fresh capital deployment. The dividend yield of 1.88%, whilst providing some income cushion, fails to compensate adequately for valuation risk.

Shareholding Pattern: Institutional Confidence Building Gradually

The shareholding structure reveals a promoter-dominated company with gradually increasing institutional participation. Promoter holding has remained rock-solid at 75.00% across the past five quarters, demonstrating unwavering commitment from the parent entities Meturit AG (51%) and Kennametal Inc (24%). This stable promoter base provides governance continuity and strategic direction, though it also limits free float availability.

Mutual fund holdings have shown steady accumulation, rising from 13.49% in Mar'25 to 14.06% in Dec'25, with seven mutual fund schemes holding positions. This 57 basis point increase over three quarters suggests growing domestic institutional confidence, though the pace remains modest. The sequential 33 basis point increase in the latest quarter represents the strongest quarterly addition, potentially signalling improving sentiment.

Foreign Institutional Investor (FII) holdings present a contrasting narrative. After peaking at 0.93% in Jun'25, FII stake has declined to just 0.38% in Dec'25, with a sharp 49 basis point reduction in the latest quarter alone. This retreat by foreign investors, whilst representing a small absolute stake, indicates waning international appetite—possibly reflecting concerns about valuation or growth prospects. The minimal insurance company presence (effectively zero) further highlights limited institutional conviction.

Stock Performance: Underperforming Across Timeframes

Kennametal India's stock price trajectory over the past year paints a sobering picture of sustained underperformance. Trading at ₹2,132.00 as of February 05, 2026, the stock has declined 11.13% over the past year, contrasting sharply with the Sensex's 6.44% gain during the same period. This 17.57 percentage point negative alpha represents a significant value destruction relative to the broader market.

The medium-term picture proves equally challenging. Over two years, the stock has declined 14.76% whilst the Sensex advanced 16.15%, resulting in a 30.91 percentage point underperformance. The three-year return of -0.24% compares dismally with the Sensex's 36.94% gain, highlighting persistent value destruction. Only over the five-year horizon does the stock demonstrate outperformance, with a 119.91% return exceeding the Sensex's 64.22% gain by 55.69 percentage points—though this reflects historical strength rather than current momentum.

Recent trading activity offers modest encouragement. The stock has gained 6.59% over the past week and 1.10% over the past month, outperforming the Sensex in both periods. Year-to-date performance of +1.76% also exceeds the Sensex's -2.24% decline. However, these short-term gains must be viewed against the backdrop of sustained medium-term underperformance and a stock price that remains 22.33% below its 52-week high of ₹2,745.10.

The stock's high beta of 1.35 indicates elevated volatility relative to the broader market, with annualised volatility of 40.19% over the past year—more than three times the Sensex's 11.52%. This volatility, combined with negative risk-adjusted returns of -0.28, places the stock in the "HIGH RISK LOW RETURN" category, a particularly unattractive combination for investors.

Technical Analysis: Bearish Momentum Persists

The technical landscape for Kennametal India remains challenging, with the stock currently in a "MILDLY BEARISH" trend as of February 05, 2026. This represents a marginal improvement from the previous "Bearish" classification, though the overall technical picture continues to signal caution. Multiple technical indicators align bearishly, with MACD showing bearish signals on both weekly and monthly timeframes, whilst the KST indicator similarly points downward across both periods.

The stock trades below all major moving averages, a concerning technical configuration. At ₹2,132.00, the price sits below the 200-day moving average of ₹2,200.60, the 100-day average of ₹2,129.92, and even the shorter-term 20-day average of ₹2,018.84. This alignment of moving averages above the current price creates significant overhead resistance and suggests the path of least resistance remains downward.

Support levels appear limited, with the 52-week low of ₹1,932.10 representing the nearest meaningful floor—approximately 9.38% below current levels. Resistance clusters between ₹2,018.84 (20-day moving average) and ₹2,200.60 (200-day moving average), creating a formidable barrier to sustained upward movement. The stock would need to reclaim these moving averages convincingly to signal a technical trend reversal.

Investment Thesis: Quality Company, Questionable Value

Kennametal India's investment proposition centres on a fundamentally sound business model hampered by valuation concerns and momentum challenges. The company's quality grade of "GOOD" reflects solid long-term financial performance, with five-year EBIT growth of 51.31% CAGR demonstrating operational leverage and improving profitability. The zero-debt balance sheet, consistent dividend payments, and absence of promoter pledging further underscore financial stability and governance quality.

However, the investment case weakens considerably when examining valuation and momentum factors. The "EXPENSIVE" valuation grade, combined with a P/E ratio of 42.87x and PEG ratio of 42.87, suggests the market has priced in growth expectations that current performance struggles to support. The "FLAT" financial trend for the most recent quarter indicates stalling momentum, whilst the "MILDLY BEARISH" technical trend signals ongoing selling pressure.

The company's Mojo score of 38 out of 100, resulting in a "SELL" rating, reflects this confluence of negative factors. Consistent underperformance against the Sensex over one, two, and three-year periods, combined with expensive valuation multiples and weak near-term momentum, creates a challenging risk-reward profile. The high beta of 1.35 and elevated volatility of 40.19% further amplify downside risk without commensurate upside potential.

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