Lakshmi Mills Q2 FY26: Profitability Returns But Revenue Concerns Persist

The stock, trading at ₹8,458.00 with a market capitalisation of ₹604.00 crores, has delivered impressive long-term returns of 106.77% over two years but has struggled recently, declining 12.98% over the past three months. The company's micro-cap status and loss-making position over the past year (P/E ratio not applicable) underscore the volatility and execution risks facing investors.

The quarter's performance reflects a tale of two narratives: operational efficiency improvements driving margin expansion, offset by worrying top-line contraction. Net sales of ₹58.63 crores represent a 7.50% decline from the previous four-quarter average, suggesting demand headwinds in the textile sector remain entrenched. On a sequential basis, revenue grew 6.46% from Q1 FY26's ₹55.07 crores, but the year-on-year comparison reveals the structural challenges facing the business.

Financial Performance: Margin Expansion Amidst Revenue Pressure

The standout feature of Q2 FY26 was the dramatic improvement in operating efficiency. Operating profit (PBDIT excluding other income) surged to ₹7.00 crores, delivering an operating margin of 11.94%—the highest recorded in seven quarters and a significant expansion from Q1 FY26's 9.39%. This margin improvement, achieved despite revenue headwinds, demonstrates effective cost management and operational discipline.

Employee costs remained relatively stable at ₹10.70 crores in Q2 FY26, representing 18.25% of net sales compared to 18.98% in the previous quarter. This marginal improvement in employee cost efficiency contributed to the margin expansion. Interest expenses declined to ₹2.44 crores from ₹3.23 crores quarter-on-quarter, reflecting reduced debt servicing costs. Depreciation stood at ₹3.42 crores, slightly up from ₹3.32 crores in Q1 FY26.

The profit before tax of ₹3.01 crores marked a dramatic turnaround from the previous quarter's loss of ₹1.00 crore. Tax expenses of ₹0.48 crores at an effective rate of 15.95% were significantly lower than the aberrational negative 2,103.00% rate in Q1 FY26, which had distorted that quarter's results. The net profit of ₹2.52 crores translated to a PAT margin of 4.30%, a healthy recovery from the previous quarter's negative 40.00% margin.

Operational Challenges: Revenue Decline and Non-Operating Income Dependence

Despite the profitability recovery, Lakshmi Mills faces significant operational headwinds. The company's revenue trajectory has been erratic, with Q2 FY26 net sales of ₹58.63 crores falling 19.19% year-on-year from ₹72.55 crores in Q2 FY25. This represents a concerning trend, particularly when compared to the previous four-quarter average, suggesting persistent demand challenges in the textile manufacturing segment.

A critical concern is the company's dependence on non-operating income. Other income of ₹1.87 crores in Q2 FY26 constituted 62.13% of profit before tax, indicating that core operations alone would have generated minimal profitability. This heavy reliance on non-operating income—which can include investment income, rental income, or one-time gains—raises questions about the sustainability of earnings and the underlying health of the core textile business.

The company's return on equity (ROE) tells a sobering story. At just 0.93% on average and a negative 2.88% for the latest period, Lakshmi Mills demonstrates exceptionally weak capital efficiency. This places the company far below industry standards and suggests that the business is destroying shareholder value rather than creating it. The average return on capital employed (ROCE) of 0.48% further underscores the poor returns generated from deployed capital.

Balance Sheet Analysis: Improving Financial Position

On the balance sheet front, Lakshmi Mills shows some positive developments. Shareholder funds stood at ₹887.98 crores as of March 2025, up from ₹868.70 crores in the previous year, reflecting retained earnings and reserves accumulation. The company's book value per share of ₹12,766.61 provides significant downside protection, with the current market price of ₹8,458.00 trading at just 0.66 times book value.

The company's debt profile has improved, with long-term debt declining to ₹61.77 crores in FY25 from ₹73.86 crores in FY24. The average net debt to equity ratio of 0.15 indicates conservative leverage, providing financial flexibility. However, the average EBIT to interest coverage ratio of just 0.67 times reveals that earnings before interest and tax are insufficient to cover interest obligations comfortably, highlighting profitability challenges.

Investments on the balance sheet surged to ₹1,025.54 crores in FY25 from ₹978.69 crores in FY24, representing a substantial portion of total assets. This investment portfolio likely generates the non-operating income that has been crucial to recent profitability. Current assets of ₹62.55 crores against current liabilities of ₹120.94 crores suggest some working capital pressure, though cash flow from operations of ₹27.00 crores in FY25 indicates the business can generate operational cash despite profitability challenges.

Industry Context: Textile Sector Headwinds

The garments and apparels sector has faced significant headwinds in recent quarters, with demand pressures from both domestic and export markets. Lakshmi Mills' revenue decline of 19.19% year-on-year in Q2 FY26 reflects broader industry challenges, including subdued consumer spending, intense competition, and fluctuating raw material costs. The company's five-year sales growth of 7.97% suggests modest historical expansion, but recent quarters indicate a deceleration in growth momentum.

Lakshmi Mills operates in a highly competitive segment where margins are typically thin and scale advantages are crucial. The company's micro-cap status (market capitalisation of ₹604.00 crores) limits its ability to compete with larger, better-capitalised peers who can leverage economies of scale and invest more aggressively in capacity expansion and technology upgrades.

The textile industry's cyclical nature means that companies like Lakshmi Mills are particularly vulnerable to macroeconomic fluctuations. Rising cotton prices, energy costs, and labour expenses can quickly erode margins if companies cannot pass through costs to customers. The company's ability to expand operating margins to 11.94% in Q2 FY26 despite revenue pressures demonstrates some pricing power and cost management capability, but sustainability remains uncertain.

The peer comparison reveals Lakshmi Mills' competitive disadvantages. With an ROE of just 0.93%, the company significantly underperforms peers like Borana Weaves (48.03% ROE) and Bizotic Commerce (25.30% ROE). Even more modest performers like VTM (7.26% ROE) and Orbit Exports (10.37% ROE) generate substantially better returns on equity. This ROE gap suggests fundamental operational inefficiencies or structural challenges in Lakshmi Mills' business model.

The company's price-to-book ratio of 0.66 times is the second-lowest in the peer group, reflecting the market's scepticism about the company's ability to generate adequate returns on its asset base. Whilst this low valuation could theoretically offer value for contrarian investors, it primarily signals concerns about earnings quality and growth prospects. The lack of a P/E ratio (due to loss-making status on a trailing twelve-month basis) further distinguishes Lakshmi Mills from most profitable peers.

Valuation Analysis: Attractive on Book Value, Questionable on Earnings Power

Lakshmi Mills' valuation presents a paradox. Trading at 0.66 times book value with a book value per share of ₹12,766.61, the stock appears to offer a significant margin of safety based on asset value. The current price of ₹8,458.00 represents a 33.77% discount to book value, which could appeal to value investors betting on a turnaround or asset monetisation.

However, valuation based on earnings power tells a different story. With the company loss-making on a trailing twelve-month basis (P/E ratio not applicable), traditional earnings-based valuation metrics cannot be applied. The EV/EBITDA multiple of 39.03 times appears elevated, suggesting the market is pricing in expectations of significant earnings improvement. The EV/Sales ratio of 2.84 times indicates investors are paying ₹2.84 for every rupee of revenue, which seems generous given the revenue decline and profitability challenges.

The company's valuation grade recently changed to "Fair" from "Attractive" on September 23, 2025, suggesting that the stock's run-up in prior months has reduced the valuation cushion. The stock has delivered exceptional five-year returns of 447.46%, far outpacing the Sensex's 91.30% gain, generating alpha of 356.16%. However, recent performance has been more subdued, with the stock declining 12.98% over three months whilst the Sensex gained 3.46%, resulting in negative alpha of 16.44%.

Shareholding Pattern: Stable Promoter Base, Minimal Institutional Interest

The shareholding pattern reveals a stable promoter base with minimal institutional participation. Promoter holding has remained virtually unchanged at 65.11% across the last five quarters, with just a marginal 0.01% increase in December 2024. This stability signals promoter confidence and commitment, though the lack of any meaningful increase also suggests promoters are not aggressively increasing their stake despite the stock trading below book value.

The complete absence of mutual fund holdings and negligible foreign institutional investor (FII) presence (0.00% in the last two quarters after holding 0.23% previously) indicates limited institutional confidence in the stock. Total institutional holdings of just 3.18% underscore that sophisticated investors have largely avoided Lakshmi Mills, likely due to concerns about profitability, scale, and growth prospects.

Insurance companies maintain a steady 2.41% stake, whilst other domestic institutional investors hold 0.76%. The non-institutional shareholding of 31.70% represents primarily retail investors and high-net-worth individuals. The lack of institutional buying despite the stock's attractive price-to-book valuation suggests that institutional investors remain unconvinced about the company's ability to generate sustainable returns on equity.

Stock Performance: Long-Term Winner, Recent Underperformer

Lakshmi Mills' stock performance presents a study in contrasts between long-term wealth creation and recent volatility. Over five years, the stock has delivered extraordinary returns of 447.46%, crushing the Sensex's 91.30% gain and generating alpha of 356.16%. This exceptional performance reflects the stock's journey from deeply undervalued levels, rewarding patient investors who recognised value when the market was sceptical.

However, recent performance has been concerning. The stock has declined 12.98% over three months, significantly underperforming the Sensex's 3.46% gain. This recent weakness coincides with the company's revenue challenges and profitability concerns highlighted in recent quarterly results. The stock's one-year return of 29.13% remains healthy, outperforming the Sensex by 24.23%, but the momentum has clearly decelerated.

Technical indicators present a mixed picture. The stock is currently in a "Mildly Bullish" trend as of November 10, 2025, having changed from "Sideways" the previous day. However, the stock trades below all key moving averages (5-day, 20-day, 50-day, 100-day, and 200-day), suggesting underlying weakness. The 52-week high of ₹10,059.00 stands 15.92% above current levels, whilst the 52-week low of ₹4,900.05 lies 72.61% below, indicating significant volatility.

The stock's beta of 1.50 classifies it as a high-beta stock, meaning it tends to move 50% more than the broader market in either direction. This high volatility (36.70% annual volatility versus 12.38% for the Sensex) makes Lakshmi Mills suitable only for risk-tolerant investors who can withstand significant price swings. The risk-adjusted return of 0.79 over one year, whilst positive, reflects the elevated volatility investors must endure.

Investment Thesis: Turnaround Story with Execution Risks

The investment case for Lakshmi Mills rests on several pillars, each with attendant risks. The company's return to profitability in Q2 FY26 demonstrates that management can execute operationally when conditions permit. The operating margin expansion to 11.94% shows pricing power and cost discipline. The balance sheet, with low leverage and substantial investments, provides financial stability and downside protection.

The stock's valuation at 0.66 times book value offers an apparent margin of safety for value investors. The promoter holding of 65.11% signals alignment of interests, whilst the absence of pledged shares eliminates a common micro-cap risk. The company's long-term track record, dating back to 1907, demonstrates institutional resilience and the ability to navigate multiple business cycles.

However, significant concerns temper this optimistic view. The persistently weak ROE of 0.93% (average) and negative 2.88% (latest) indicates fundamental capital inefficiency. Revenue declining 19.19% year-on-year in Q2 FY26 suggests demand challenges that margin improvements alone cannot overcome. The dependence on non-operating income (62.13% of PBT in Q2 FY26) raises questions about core business viability.

The complete absence of institutional investor interest (just 3.18% total institutional holdings) speaks volumes about sophisticated investors' assessment of the company's prospects. The micro-cap status limits liquidity and increases volatility, whilst the loss-making trailing twelve-month performance prevents traditional valuation analysis. The company's quality grade of "Below Average" reflects long-term financial performance concerns.

Outlook: What Lies Ahead

The path forward for Lakshmi Mills depends critically on management's ability to address the fundamental revenue challenge whilst sustaining the recent margin improvements. The company must demonstrate that Q2 FY26's operating margin of 11.94% represents a sustainable new baseline rather than a temporary achievement. Revenue stabilisation and eventual growth are essential to validate the investment thesis.

Investors should monitor several key indicators in upcoming quarters. First, whether revenue can stabilise and return to growth, particularly on a year-on-year basis. Second, whether operating margins can be maintained above 10% consistently. Third, whether the company can reduce dependence on non-operating income and demonstrate that core operations can generate adequate profitability. Fourth, whether any institutional investors begin accumulating shares, which would signal improving confidence.

The broader textile industry outlook remains challenging, with subdued demand from both domestic and export markets. Companies that can differentiate through product innovation, cost efficiency, and scale advantages will likely outperform. Lakshmi Mills' micro-cap status and limited scale may constrain its ability to compete effectively with larger, better-capitalised peers in this difficult environment.