Kothari Products Q2 FY26: Losses Return Amid Operational Pressures Despite Revenue Growth

The stock, trading at ₹86.62 as of November 17, 2025, has gained 0.97% in the latest trading session but remains 22.24% below its 52-week high of ₹111.40. The company's performance in Q2 FY26 marks a dramatic deterioration from the profitable Q1 FY26, where it had posted a consolidated net profit of ₹21.25 crores, raising red flags about the quality and sustainability of earnings.

The most alarming aspect of the quarterly results is the collapse in operating profitability. Operating profit before depreciation, interest, tax and other income (PBDIT excluding OI) plunged to a loss of ₹18.90 crores in Q2 FY26 from a marginal profit of ₹0.71 crores in Q1 FY26, resulting in a deeply negative operating margin of -6.68%. This suggests severe operational challenges that revenue growth alone cannot mask.

Financial Performance: Revenue Growth Masks Operational Distress

Kothari Products achieved its highest quarterly revenue of ₹282.86 crores in Q2 FY26, marking a 13.87% quarter-on-quarter increase from ₹248.41 crores in Q1 FY26 and a 6.38% year-on-year improvement from ₹265.90 crores in Q2 FY25. However, this top-line growth failed to translate into bottom-line profitability, exposing fundamental operational weaknesses.

The stark divergence between revenue growth and profitability collapse points to severe cost pressures and operational inefficiencies. Operating profit excluding other income turned negative at ₹18.90 crores, a dramatic reversal from the marginal ₹0.71 crores profit in Q1 FY26. This deterioration occurred despite the company achieving record quarterly sales, indicating that cost inflation or pricing pressures are eroding margins at an alarming rate.

The company's dependence on non-operating income became starkly evident in Q2 FY26. Other income stood at ₹12.74 crores, which constituted 233.76% of profit before tax of ₹5.45 crores. This heavy reliance on non-core income sources to prop up profitability raises serious questions about the sustainability of the business model and the quality of reported earnings.

Quarterly Performance Trend: Persistent Volatility

A review of the past eight quarters reveals a pattern of extreme volatility and persistent operational challenges. The company has swung wildly between profits and losses, with no consistent trend of improvement in core operational metrics.

The quarterly trend reveals a business struggling with operational consistency. Operating margins have been negative in four of the last seven quarters, including the most recent Q2 FY26. The catastrophic loss of ₹120.12 crores in Q2 FY25 remains a stark reminder of the company's operational fragility, and the return to negative operating profit in Q2 FY26 suggests that fundamental issues remain unresolved.

Operational Challenges: Weak Return Metrics Signal Fundamental Issues

The company's return on equity (ROE) stands at a meagre 0.90% on average, placing it among the weakest performers in its peer group. This critically low ROE indicates that Kothari Products is generating minimal returns for shareholders despite deploying substantial capital. The latest ROE of -8.58% reflects the company's slide back into loss-making territory, further eroding shareholder value.

Return on capital employed (ROCE) paints an equally concerning picture at -4.46% on average, with the latest figure standing at -11.73%. A negative ROCE indicates that the company is destroying value rather than creating it, as it fails to generate sufficient operating profit to cover the cost of capital employed in the business. This is a fundamental indicator of operational distress and poor capital allocation.

The balance sheet reveals shareholder funds of ₹1,095.58 crores as of March 2025, down from ₹1,196.16 crores in March 2024, reflecting the erosion caused by losses during FY25. Long-term debt has increased to ₹121.69 crores from ₹75.29 crores, indicating growing financial leverage at a time when the business is struggling to generate adequate returns. The debt-to-equity ratio remains modest at 0.04, but the trend is concerning given the deteriorating operational performance.

Interest costs have risen sharply to ₹3.93 crores in Q2 FY26, the highest quarterly interest expense on record, up from ₹2.99 crores in Q1 FY26. This 31.44% quarter-on-quarter increase in interest burden, combined with negative operating profits, creates a dangerous squeeze on profitability. The average EBIT to interest coverage ratio of -4.71 times indicates that the company's operating earnings are insufficient to cover interest obligations, a classic sign of financial distress.

Industry Context: Underperforming Peers in a Challenging Sector

The trading and distribution sector has faced headwinds, with the sector index declining 21.75% over the past year. However, Kothari Products has managed to outperform its struggling sector with a 17.85% gain over the same period, delivering an impressive 39.60% alpha versus the sector benchmark. This relative outperformance, however, appears disconnected from the company's weak fundamentals and deteriorating operational metrics.

Kothari Products trades at a significant discount to its book value with a price-to-book ratio of 0.46x, compared to the peer average of approximately 1.70x. This deep discount reflects market scepticism about the company's ability to generate adequate returns on its asset base. The company's ROE of 0.90% is substantially below peers such as Yamuna Syndicate (9.03%), Veritas India (5.26%), and Oswal Agro Mills (4.14%), justifying the valuation discount.

Valuation Analysis: Deep Discount Reflects Fundamental Concerns

At a current market price of ₹86.62, Kothari Products trades at a price-to-book value of 0.46x, representing a substantial 54% discount to its book value of ₹183.54 per share. This deep discount is justified given the company's loss-making status on a trailing twelve-month basis, which renders traditional P/E valuation metrics meaningless.

The company's valuation grade has been classified as "Risky" since August 2022, reflecting persistent concerns about its ability to generate sustainable profits. The enterprise value to EBITDA ratio of -4.17x and EV to EBIT of -4.11x are both negative, indicating that the company's operating losses have rendered traditional valuation multiples inapplicable. The EV to sales ratio of 0.57x suggests that the market values the entire business at just 57% of its annual revenue, a clear indication of deep scepticism about future profitability.

The stock has retreated 22.24% from its 52-week high of ₹111.40 but remains 41.70% above its 52-week low of ₹61.13. The wide trading range reflects significant uncertainty about the company's prospects and investor nervousness about operational volatility. With no dividend paid since September 2019, the stock offers no income support, making it purely a speculative bet on operational turnaround.

Shareholding: Stable Promoter Base, Zero Institutional Interest

The shareholding pattern reveals a highly concentrated ownership structure with promoters holding a stable 74.99% stake across the past five quarters. This unwavering promoter holding provides some stability, but the complete absence of institutional investors raises concerns about professional investor confidence in the company's prospects.

The total absence of foreign institutional investors (FIIs), mutual funds, insurance companies, and other domestic institutional investors (DIIs) is a glaring red flag. This zero institutional holding indicates that professional fund managers have no conviction in the company's business model or growth prospects. The 25.01% non-institutional holding represents retail investors who may lack the resources to conduct thorough due diligence.

Positively, there is no promoter pledging, which eliminates one potential risk factor. However, the lack of institutional validation combined with deteriorating fundamentals suggests that sophisticated investors are staying clear of this stock, viewing the risk-reward profile as unattractive.

Stock Performance: Medium-Term Gains Mask Recent Weakness

Kothari Products has delivered mixed returns across different time horizons, with strong medium-term performance offset by recent weakness and concerning year-to-date losses.

The stock has delivered impressive long-term returns, with a 195.38% gain over five years, significantly outperforming the Sensex's 93.28% return and generating a substantial alpha of 102.10%. The three-year return of 56.00% also beats the benchmark by 18.43%, suggesting that the stock has historically rewarded patient investors willing to endure volatility.

However, recent performance has deteriorated sharply. The year-to-date loss of 12.51% compares unfavourably to the Sensex's 8.72% gain, resulting in a negative alpha of 21.23%. Short-term returns are also concerning, with one-week and one-month performances both in negative territory, underperforming the benchmark by 3.65% and 4.65% respectively.

The stock exhibits high volatility with a beta of 1.50, indicating that it moves 50% more than the broader market. This high beta, combined with a volatility of 55.43%, classifies the stock as "HIGH RISK MEDIUM RETURN," suitable only for aggressive investors with high risk tolerance. The risk-adjusted return of 0.32 over one year is substantially below the Sensex's 0.77, indicating that investors are not being adequately compensated for the elevated risk.

Technical Analysis: Mildly Bullish Trend Faces Resistance

From a technical perspective, Kothari Products is currently in a "Mildly Bullish" trend that began on November 11, 2025 at ₹86.93, transitioning from a previous "Bullish" trend. The stock is trading at ₹86.62, below all major moving averages including the 5-day (₹86.87), 20-day (₹89.60), 50-day (₹87.53), 100-day (₹84.78), and 200-day (₹81.24) moving averages.

Weekly technical indicators show a bullish MACD and Bollinger Bands, suggesting positive momentum in the near term. However, monthly indicators present a more mixed picture with MACD remaining bullish but KST turning mildly bearish, indicating potential weakening of the uptrend. The stock faces immediate resistance at the 20-day moving average of ₹89.60, which it needs to reclaim to confirm bullish momentum.

Support lies at the 52-week low of ₹61.13, which is 29.46% below current levels. The stock is trading 22.24% below its 52-week high of ₹111.40, suggesting limited upside potential unless fundamentals improve dramatically. Delivery volumes have shown a sharp spike, with one-day delivery volume 305.82% higher than the five-day average, indicating increased conviction among buyers, though this could also represent distribution by informed sellers.

Investment Thesis: Weak Fundamentals Outweigh Technical Positives

The investment thesis for Kothari Products is severely undermined by weak fundamentals across all key parameters. The company carries a "Below Average" quality grade, reflecting its poor long-term financial performance characterised by declining sales growth of -23.95% over five years and EBIT growth of -157.46%. The financial trend is classified as "Flat" for Q2 FY26, masking the concerning return to negative operating margins.

The proprietary Mojo score of 46 out of 100 places the stock in the "SELL" category, with the advisory recommending that investors "Consider selling" and "Look for exit opportunities." This score reflects the confluence of risky valuation, below-average quality, and flat financial performance, offset only partially by mildly bullish technical indicators.

Key Strengths & Risk Factors

Outlook: Critical Monitoring Points

The path forward for Kothari Products requires urgent operational improvements. The company must address the fundamental issue of negative operating margins and reduce its dependence on non-core income sources. Management needs to demonstrate at least two to three consecutive quarters of positive operating profits and improving return metrics before investors can gain confidence in a sustainable turnaround.