Kokuyo Camlin Q2 FY26: Profit Recovery Masks Underlying Weakness

The September quarter results paint a picture of operational improvement but strategic challenges. Whilst the company successfully reversed its year-ago losses and improved profitability metrics across the board, revenue growth remained anaemic at just 1.06% year-on-year. More concerning is the sequential decline of 23.33% from Q1 FY26's ₹226.58 crores, highlighting the seasonality and volatility inherent in the stationery business. The stock has responded with muted enthusiasm, trading 41.06% below its 52-week high of ₹178.05 and languishing in bearish technical territory since late September.

Financial Performance: Profit Recovery on Stagnant Revenues

Kokuyo Camlin's Q2 FY26 financial performance reveals a company navigating through operational turbulence with mixed results. Net sales for the quarter stood at ₹173.71 crores, registering marginal year-on-year growth of 1.06% but declining sharply by 23.33% quarter-on-quarter from ₹226.58 crores in Q1 FY26. This sequential contraction reflects the cyclical nature of the stationery business, where the June quarter typically benefits from back-to-school demand whilst September sees normalisation.

The company's profitability metrics, however, tell a more encouraging story. Operating profit excluding other income surged to ₹16.12 crores from a negative ₹7.61 crores in the year-ago quarter, driving operating margin expansion to 9.28% from -4.43%. This 1,371 basis point improvement demonstrates better cost management and operational leverage, though it's worth noting that margins remain below the 12.15% achieved in Jun'24. Net profit of ₹7.86 crores represents a complete reversal from the ₹10.63 crore loss in Sep'24, translating to a PAT margin of 4.52% versus -6.18% previously.

Interest costs declined to ₹0.42 crores from ₹1.00 crores year-on-year, reflecting improved financial management and lower debt levels. Depreciation remained stable at ₹5.32 crores, whilst employee costs increased to ₹28.25 crores from ₹22.94 crores, likely reflecting inflationary pressures and potential headcount additions. The tax rate normalised to 25.64% from an abnormal 24.50% in the loss-making quarter of Sep'24.

On a half-yearly basis (H1 FY26), the company generated net sales of ₹400.29 crores and net profit of ₹17.92 crores, demonstrating improved performance compared to the challenging prior year period. However, the sustainability of these margins remains questionable given the company's historical volatility and the competitive intensity in the stationery segment.

Operational Challenges: Weak Returns and Leverage Concerns

Beneath the surface-level profit recovery lies a more troubling operational reality. Kokuyo Camlin's return on equity (ROE) stands at a meagre 5.21% on average, with the latest quarter showing a negative ROE of -0.11%. This weak capital efficiency indicates the company is struggling to generate adequate returns for shareholders, a critical concern for any manufacturing business. For context, an ROE below 10% is generally considered subpar, and Kokuyo Camlin's performance falls well short of this threshold.

The company's return on capital employed (ROCE) fares slightly better at 7.62% on average, with the latest reading at 10.31%, but this still represents modest returns on the capital deployed in the business. The five-year sales compound annual growth rate of 8.64% and EBIT growth of 19.98% suggest some progress, but these figures must be viewed against the backdrop of a low base and significant year-to-year volatility.

Market Context: Struggling in a Challenging Sector

The miscellaneous sector, within which Kokuyo Camlin operates, has faced headwinds over the past year, declining 23.69%. However, Kokuyo Camlin's 38.66% decline over the same period represents significant underperformance of 14.97 percentage points versus its sector peers. This suggests company-specific challenges beyond broader industry trends.

The stationery and art materials market in India remains fragmented and highly competitive, with pricing power limited by the presence of numerous unorganised players. Whilst Kokuyo Camlin benefits from established brand equity through its Camel and Camlin franchises, the company faces ongoing pressure from both traditional competitors and newer entrants leveraging e-commerce channels. The seasonal nature of demand, with peaks around the academic calendar, creates revenue volatility that complicates financial planning and margin management.

The company's Japanese parent, Kokuyo Company Limited, holds 74.44% of shares, providing strategic support but also raising questions about minority shareholder interests. Institutional participation remains minimal at just 0.09%, with FII holdings declining from 0.64% in Sep'24 to 0.09% in Sep'25, signalling waning confidence from sophisticated investors. The absence of mutual fund and insurance company holdings further underscores the lack of institutional conviction in the stock.

Within its peer group, Kokuyo Camlin demonstrates relatively better ROE at 5.21% compared to most peers, though it trails R M Drip & Sprinklers' 9.24%. The company's price-to-book value of 3.48 times sits below the inflated multiples of some peers but above the distressed valuations of others. The lack of a P/E ratio due to trailing twelve-month losses places Kokuyo Camlin in the same category as several struggling peers, highlighting the profitability challenges facing this segment.

Valuation Analysis: Attractive Entry or Value Trap?

At the current market price of ₹104.95, Kokuyo Camlin trades at a price-to-book value of 3.48 times against a book value per share of ₹24.81. Whilst the stock's proprietary valuation grade reads "Attractive," having shifted from "Expensive" in August 2025, investors must exercise caution in interpreting this assessment. The absence of a meaningful P/E ratio due to inconsistent profitability makes traditional valuation comparisons challenging.

The company's enterprise value-to-EBITDA multiple of 42.34 times and EV-to-EBIT of 240.81 times appear elevated, though these metrics can be distorted by the small scale and volatility of earnings. The EV-to-sales ratio of 1.43 times suggests the market assigns moderate value to the top line, but without consistent margin expansion, this multiple may prove difficult to sustain.

The stock's 41.06% decline from its 52-week high of ₹178.05 to the current ₹104.95 reflects a significant de-rating, bringing it closer to the 52-week low of ₹91.00. This compression in valuation might appear to offer value, but the fundamental challenges—weak ROE, inconsistent profitability, and stagnant revenue growth—suggest the market's scepticism may be warranted. The dividend yield remains unavailable due to the company's inconsistent payout history, with the last dividend of ₹0.50 per share declared in July 2024.

Shareholding: Institutional Exodus Signals Caution

The shareholding pattern reveals a concerning trend of institutional disinterest. Promoter holding remains stable at 74.99%, unchanged over the past five quarters, demonstrating commitment from the controlling Japanese parent Kokuyo Company Limited. However, this stability masks the more troubling exodus of financial investors.

Foreign institutional investors have steadily reduced their stake from 0.64% in Sep'24 to just 0.09% in Sep'25, a decline of 86% in absolute terms. This sustained selling pressure from FIIs, who typically conduct rigorous due diligence, raises red flags about the company's prospects. The complete absence of mutual fund and insurance company holdings—typically the backbone of institutional support for mid and small-cap stocks—further underscores the lack of professional investor conviction.

The modest increase in public shareholding to 24.92% from 24.36% year-on-year suggests some retail interest, but this is insufficient to offset the institutional withdrawal. With just six FII holders remaining and zero mutual fund participation, Kokuyo Camlin lacks the institutional sponsorship that often provides price support and liquidity during market volatility.

Stock Performance: Severe Underperformance Across Timeframes

Kokuyo Camlin's stock performance has been deeply disappointing across virtually all meaningful timeframes. Over the past year, the stock has plummeted 38.66% whilst the Sensex gained 5.94%, resulting in a negative alpha of 44.60 percentage points. This underperformance extends to the two-year horizon, where the stock declined 22.66% against the Sensex's robust 29.67% gain, translating to a staggering 52.33 percentage point underperformance.

The technical picture reinforces the bearish fundamental narrative. The stock entered a bearish trend on 22nd September 2025 at ₹113.55 and has remained in this downtrend since. Currently trading at ₹104.95, the stock sits below all key moving averages—5-day (₹103.34), 20-day (₹103.87), 50-day (₹109.79), 100-day (₹115.36), and 200-day (₹112.57)—a classic sign of technical weakness. The MACD indicator shows bearish signals on both weekly and monthly timeframes, whilst the RSI provides no clear directional signal.

With a beta of 1.50, Kokuyo Camlin exhibits higher volatility than the broader market, amplifying both gains and losses. However, given the recent track record, this high beta has predominantly worked against shareholders. The stock's risk-adjusted return of -0.97 over the past year, combined with volatility of 39.79%, places it firmly in the "high risk, low return" category—an unattractive combination for risk-conscious investors.

Investment Thesis: Mixed Signals Demand Caution

The investment case for Kokuyo Camlin presents a complex mosaic of contradictory signals. On one hand, the company has demonstrated its ability to return to profitability after a challenging Sep'24 quarter, with operating margins recovering to 9.28% and net profit reaching ₹7.86 crores in Q2 FY26. The attractive valuation grade and low debt levels provide some comfort. On the other hand, the weak ROE of 5.21%, stagnant revenue growth, institutional exodus, and bearish technical trend paint a concerning picture.

The proprietary Mojo score of 37 out of 100 assigns a "SELL" rating, reflecting the balance of these competing factors. The score has remained unchanged at 37 since 10th September 2025, when it shifted from "HOLD" to "SELL" territory. This rating acknowledges the attractive valuation but weighs it against poor long-term growth (5-year sales CAGR of just 8.64%), bearish technicals, and average quality metrics.

Key Strengths & Risk Factors

Outlook: What to Watch

The path forward for Kokuyo Camlin hinges on its ability to demonstrate consistent profitability and revenue growth over multiple quarters. The company must prove that Q2 FY26's profit recovery represents a sustainable turnaround rather than a temporary respite. Investors should closely monitor the December quarter results for signs of margin stability and revenue momentum, particularly given the seasonal weakness typically associated with that period.