The micro-cap auto components manufacturer, with a market capitalisation of ₹246.00 crores, has struggled to maintain the momentum witnessed in Q1 FY26. The stock traded at ₹10.24 as of November 10, 2025, down 0.78% on the day, reflecting investor concerns about the company's profitability trajectory. With the company now loss-making on a trailing twelve-month basis, the P/E ratio stands unavailable, whilst the stock trades at an expensive 13.34 times book value—a valuation that appears increasingly difficult to justify given the deteriorating fundamentals.
The quarter's results highlight a troubling pattern: whilst LGB Forge has managed to grow its topline, the company's inability to translate revenue growth into sustainable profitability remains a critical challenge. The sharp quarter-on-quarter decline in operating margins from 6.04% to 1.69% suggests significant operational pressures, potentially stemming from elevated input costs, pricing pressures, or operational inefficiencies that management has yet to address effectively.
| Metric | Sep'25 | Jun'25 | Mar'25 | Dec'24 | Sep'24 | Jun'24 |
|---|---|---|---|---|---|---|
| Net Sales (₹ Cr) | 26.03 | 27.64 | 23.93 | 24.20 | 23.38 | 22.53 |
| QoQ Growth | -5.82% | +15.50% | -1.12% | +3.51% | +3.77% | +13.73% |
| YoY Growth | +11.33% | +22.68% | +20.80% | — | — | — |
| Net Profit (₹ Cr) | -0.73 | 0.88 | -0.40 | -0.43 | -0.88 | 0.48 |
| Operating Margin (%) | 1.69% | 6.04% | 3.47% | 2.31% | 1.45% | -1.82% |
| PAT Margin (%) | -2.80% | 3.18% | -1.67% | -1.78% | -3.76% | 2.13% |
Financial Performance: A Quarter of Margin Erosion
The second quarter of FY26 witnessed LGB Forge's net sales decline 5.82% sequentially to ₹26.03 crores, reversing the strong 15.50% quarter-on-quarter growth achieved in Q1. On a year-on-year basis, revenues grew 11.33%, suggesting that whilst the company has managed to capture incremental demand, the sequential softening indicates potential volatility in order flows or execution challenges.
The more concerning aspect of the quarterly performance lies in the dramatic margin compression. Operating profit before depreciation, interest, tax, and other income (PBDIT excluding OI) collapsed to ₹0.44 crores from ₹1.67 crores in the preceding quarter—a sequential decline of 73.65%. This translated into an operating margin of just 1.69%, down sharply from 6.04% in Q1 FY26. Such precipitous margin erosion suggests that the company faced significant headwinds, whether from raw material cost inflation, competitive pricing pressures, or operational inefficiencies.
Employee costs rose to ₹6.08 crores in Q2 from ₹5.49 crores in Q1, representing 23.35% of revenues—a ratio that appears elevated for a manufacturing company of this scale. The sequential increase in employee costs by 10.75%, at a time when revenues declined, points to potential overstaffing or wage inflation that management has yet to address through productivity improvements.
Interest costs remained relatively stable at ₹0.68 crores, down marginally from ₹0.74 crores in Q1, whilst depreciation held steady at ₹0.87 crores. However, these fixed costs, combined with the sharp decline in operating profitability, pushed the company into a pre-tax loss of ₹0.73 crores. Notably, the company paid zero tax during the quarter, consistent with its loss-making status.
On a half-yearly basis (H1 FY26), LGB Forge posted revenues of ₹53.67 crores, up 16.80% year-on-year from ₹45.91 crores in H1 FY25. However, net profit for the half-year stood at just ₹0.15 crores—a marginal figure that underscores the company's struggle to convert revenue growth into meaningful bottom-line expansion. The half-yearly operating margin of 3.94% and PAT margin of 0.28% highlight the persistent profitability challenges facing the business.
Operational Challenges: The Profitability Puzzle
LGB Forge's operational performance reveals a company grappling with fundamental profitability challenges despite operating in the relatively stable auto components sector. The company's average return on capital employed (ROCE) over recent years stands at a deeply negative 2.81%, indicating that the business is destroying shareholder value rather than creating it. The latest ROCE of -3.59% suggests that this trend has only worsened, raising serious questions about the sustainability of the current business model.
Return on equity (ROE) tells a similarly troubling story. Whilst the average ROE of 3.67% appears marginally positive, it remains well below the cost of equity for a company of this risk profile. The latest ROE of -4.54% indicates that shareholders are experiencing negative returns on their invested capital—a situation that cannot persist indefinitely without either a strategic turnaround or capital restructuring.
⚠️ Critical Profitability Concerns
Negative ROCE: At -3.59%, the company is destroying capital rather than creating value. Every rupee of capital employed generates a negative return, indicating fundamental operational inefficiencies or structural challenges in the business model.
Deteriorating ROE: The latest ROE of -4.54% means shareholders are experiencing negative returns. With an average ROE of just 3.67% over recent years, the company has consistently failed to generate adequate returns relative to the risk undertaken.
Margin Volatility: Operating margins have swung from -1.82% in Jun'24 to 6.04% in Jun'25, only to collapse back to 1.69% in Sep'25. Such volatility suggests an inability to manage costs effectively or maintain pricing power.
The company's balance sheet reveals a shareholder equity base of ₹18.29 crores as of March 2025, down from ₹20.17 crores a year earlier. This erosion of equity stems from accumulated losses, with reserves and surplus standing at negative ₹5.53 crores. The company carries long-term debt of ₹10.24 crores, resulting in a debt-to-equity ratio of approximately 0.56—manageable in absolute terms but concerning given the company's inability to generate consistent profits to service this debt.
Working capital management presents another area of concern. Whilst the company generated strong operating cash flow of ₹15.00 crores in FY25—the highest in recent years—this was driven primarily by a ₹12.00 crores reduction in working capital rather than underlying profitability. Current assets stood at ₹43.33 crores against current liabilities of ₹25.75 crores, providing a current ratio of 1.68, which offers some comfort regarding short-term liquidity. However, the sharp decline in trade payables from ₹21.73 crores to ₹9.23 crores suggests potential stress in supplier relationships or a shift in payment terms that may not be sustainable.
Industry Context: Navigating a Challenging Environment
The auto components sector in India has faced a mixed environment over the past year, with original equipment manufacturers (OEMs) experiencing varied demand patterns across segments. Whilst the passenger vehicle segment has shown resilience, commercial vehicle demand has remained subdued, and the two-wheeler segment has witnessed moderate growth. For a forging company like LGB Forge, which supplies to multiple automotive segments, this uneven demand pattern creates challenges in capacity utilisation and pricing power.
Input cost pressures have been a persistent theme across the manufacturing sector. Steel prices, a key raw material for forging operations, have experienced volatility, and whilst prices have moderated from their peaks, they remain elevated compared to historical averages. Companies with limited pricing power—such as smaller suppliers without long-term contracts or value-added differentiation—have found it difficult to pass through cost increases, resulting in margin compression.
The competitive landscape in the auto components forging segment remains fragmented, with numerous small and medium-sized players competing for business from a concentrated base of OEM customers. This dynamic typically results in limited pricing power for smaller suppliers, who must compete primarily on price rather than value-added services or technological differentiation. LGB Forge's micro-cap status and relatively small scale suggest it operates at a disadvantage compared to larger, better-capitalised peers who can invest in automation, quality systems, and customer relationship management.
Sector Headwinds
The auto components sector has witnessed margin pressures across the board, with raw material cost inflation and competitive pricing dynamics squeezing profitability. For smaller players like LGB Forge, the challenge is compounded by limited scale, which restricts their ability to negotiate favourable terms with both suppliers and customers. The company's 5-year sales growth of just 5.11% suggests it has struggled to gain market share or expand its customer base meaningfully, leaving it vulnerable to cyclical downturns and competitive pressures.
Peer Comparison: Struggling at the Bottom
A comparison with peers in the auto components space reveals LGB Forge's relative weakness across key financial metrics. The company's average ROE of 3.67% places it in the middle of its peer group, marginally ahead of Ucal's 3.43% and Setco Automotive's 0.0%, but well behind Pritika Auto's 7.44% and Uravi Defence's 5.69%. More concerning is the company's debt-to-equity ratio of 1.42, which is the highest among peers and suggests a more leveraged capital structure that amplifies risk.
| Company | P/E (TTM) | ROE (%) | Debt/Equity | P/BV | Div Yield |
|---|---|---|---|---|---|
| LGB Forge | NA (Loss Making) | 3.67% | 1.42 | 13.34 | NA |
| Ucal | NA (Loss Making) | 3.43% | 0.77 | 0.79 | NA |
| Pritika Auto | 14.29 | 7.44% | 0.68 | 1.08 | NA |
| Uravi Defence | 157.40 | 5.69% | 0.41 | 5.41 | NA |
| Setco Automotive | NA (Loss Making) | 0.0% | -1.58 | -0.35 | NA |
| Bimetal Bearings | 21.33 | 3.89% | -0.02 | 1.08 | 2.03% |
The valuation differential is stark and difficult to justify. LGB Forge trades at a price-to-book value of 13.34 times, dramatically higher than the peer average of approximately 1.6 times (excluding outliers). This premium valuation appears entirely disconnected from fundamentals, particularly given the company's loss-making status and deteriorating profitability metrics. Ucal, with a comparable ROE of 3.43%, trades at just 0.79 times book value, whilst Pritika Auto, with superior profitability (7.44% ROE), commands a P/BV of only 1.08 times.
The company's market capitalisation of ₹246.00 crores places it firmly in micro-cap territory, ranking fifth among its peer group. This small size limits the company's ability to invest in capacity expansion, technology upgrades, or working capital optimisation—all critical factors for competing effectively in the capital-intensive auto components sector.
Valuation Analysis: Expensive Despite Deteriorating Fundamentals
LGB Forge's valuation metrics present a troubling picture of a stock trading at premium multiples despite weak fundamentals. With the company loss-making on a trailing twelve-month basis, the P/E ratio is unavailable, yet the stock commands a price-to-book value of 13.34 times—a multiple that appears entirely unjustified given the negative ROE and deteriorating profitability.
The enterprise value to EBITDA multiple of 79.39 times is extraordinarily high, suggesting that investors are paying a steep premium for a business generating minimal operating profits. Similarly, the EV/EBIT multiple of 269.94 times and EV/Sales of 2.72 times indicate valuation levels that are difficult to reconcile with the company's operational performance and financial health.
The stock's 52-week range of ₹8.86 to ₹21.75 highlights the extreme volatility that has characterised its trading pattern. Currently trading at ₹10.24, the stock sits 52.92% below its 52-week high, suggesting significant wealth destruction for investors who entered at higher levels. The valuation grade has consistently remained in "Expensive" or "Risky" territory since January 2022, indicating that the stock has persistently traded above fair value levels.
Book value per share stands at just ₹0.77, meaning investors are paying ₹10.24 for every ₹0.77 of net assets—a premium that would only be justified if the company demonstrated exceptional profitability, growth prospects, or competitive advantages. None of these conditions appear to be met based on available financial data.
Stock Performance: Consistent Underperformance
LGB Forge's stock price performance has been characterised by significant volatility and consistent underperformance against the broader market. Over the past year, the stock has declined 6.57%, whilst the Sensex has gained 5.09%, resulting in a negative alpha of 11.66 percentage points. This underperformance has been even more pronounced over longer time horizons, with the stock generating negative alpha of 38.60% over three years.
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | -2.29% | -0.53% | -1.76% |
| 1 Month | +13.78% | +1.25% | +12.53% |
| 3 Months | +1.79% | +4.61% | -2.82% |
| 6 Months | +2.40% | +5.14% | -2.74% |
| YTD | -37.94% | +6.91% | -44.85% |
| 1 Year | -6.57% | +5.09% | -11.66% |
| 3 Years | -0.78% | +37.82% | -38.60% |
| 5 Years | +314.57% | +93.02% | +221.55% |
The year-to-date performance has been particularly weak, with the stock declining 37.94% whilst the Sensex has gained 6.91%—a negative alpha of 44.85 percentage points. This dramatic underperformance reflects investor concerns about the company's deteriorating fundamentals and uncertain outlook. Interestingly, the stock has also underperformed its sector, with the Auto Components & Equipments sector declining 13.89% over the past year—meaning LGB Forge has outperformed its sector by 7.32 percentage points, though this provides little consolation given the absolute negative returns.
The stock's beta of 1.50 indicates high volatility relative to the broader market, with volatility of 53.85% over the past year compared to the Sensex's 12.35%. This high volatility, combined with negative returns, results in a negative Sharpe ratio, classifying the stock as "HIGH RISK LOW RETURN"—the least favourable risk-return profile for investors.
Technical indicators paint a bearish picture, with the stock currently in a "Mildly Bearish" trend that began on October 17, 2025. The stock trades below all key moving averages—5-day, 20-day, 50-day, 100-day, and 200-day—suggesting weak momentum and a lack of buying interest. Immediate support lies at the 52-week low of ₹8.86, whilst resistance is clustered around the ₹10.12 to ₹10.73 range, corresponding to various moving averages.
Investment Thesis: Multiple Red Flags
The investment thesis for LGB Forge is severely challenged by multiple fundamental and technical weaknesses. The company's proprietary Mojo Score of 28 out of 100 places it firmly in "STRONG SELL" territory, reflecting concerns across all four key assessment parameters: valuation, quality, financial trend, and technical momentum.
The valuation grade of "EXPENSIVE" is particularly concerning given the company's loss-making status and deteriorating profitability. The quality grade of "BELOW AVERAGE" reflects weak long-term financial performance, with an average ROCE of -2.81% and average ROE of 3.67%—both well below acceptable thresholds for value creation. The financial trend is classified as "FLAT," indicating inconsistent quarterly performance and an inability to demonstrate sustainable improvement. Finally, the technical trend of "MILDLY BEARISH" suggests limited near-term upside potential and continued downward pressure on the stock price.
"With negative ROCE, volatile margins, expensive valuation, and persistent losses, LGB Forge presents a high-risk proposition with limited visibility on a turnaround."
Key Strengths & Risk Factors
Key Strengths
- Revenue Growth: 11.33% YoY growth in Q2 FY26 and 16.80% H1 FY26 growth demonstrate ability to capture market share
- No Promoter Pledging: Zero pledged shares indicate promoter confidence and financial discipline
- Liquidity Position: Current ratio of 1.68 provides adequate short-term liquidity cushion
- Operating Cash Flow: Generated ₹15.00 crores in FY25, the highest in recent years
- Established Presence: Operating since 1937 with manufacturing facilities across Tamil Nadu, Karnataka, and Pondicherry
Key Concerns
- Negative ROCE: -3.59% latest ROCE indicates capital destruction and fundamental operational issues
- Margin Volatility: Operating margin collapsed from 6.04% to 1.69% in one quarter, raising questions about cost management
- Loss-Making Status: Net loss of ₹0.73 crores in Q2 reverses Q1 profitability, highlighting earnings instability
- Expensive Valuation: P/BV of 13.34x versus peer average of ~1.6x is unjustifiable given fundamentals
- High Leverage: Debt-to-equity of 1.42 is highest among peers, amplifying financial risk
- Eroding Equity: Shareholder funds declined from ₹20.17 crores to ₹18.29 crores due to accumulated losses
- Weak ROE: Latest ROE of -4.54% means shareholders are experiencing negative returns on invested capital
Outlook: What to Watch
Positive Catalysts
- Sustained margin improvement above 5% for three consecutive quarters
- Return to consistent quarterly profitability with positive PAT margins
- Reduction in debt levels and improvement in interest coverage ratio
- Major new customer wins or long-term supply contracts with OEMs
- Successful capacity expansion with improved asset turnover ratios
Red Flags
- Further margin deterioration below 1% or continued quarterly losses
- Increase in debt levels or breach of debt covenants
- Loss of major customers or significant decline in order book
- Continued erosion of shareholder equity through accumulated losses
- Technical breakdown below ₹8.86 support (52-week low)
The road ahead for LGB Forge is fraught with challenges. The company must demonstrate its ability to stabilise margins, return to consistent profitability, and improve capital efficiency before investors can gain confidence in its long-term prospects. The current quarter's results suggest that operational challenges remain unresolved, and without decisive management action, the company risks further value destruction.
The Verdict: High Risk, Limited Reward
Score: 28/100
For Fresh Investors: Avoid initiating any position. The combination of negative ROCE, volatile margins, expensive valuation, and persistent losses presents an unfavourable risk-reward profile. The stock offers no margin of safety at current levels.
For Existing Holders: Consider exiting positions on any near-term strength. The deteriorating fundamentals, expensive valuation, and bearish technical setup suggest limited upside potential and significant downside risk. The company has yet to demonstrate a credible path to sustainable profitability.
Fair Value Estimate: ₹4.50-5.50 (56% downside risk from current levels), based on 6-7x book value—still a premium but more aligned with micro-cap peers with similar quality profiles.
Rationale: LGB Forge's Q2 FY26 results highlight fundamental profitability challenges that have persisted for years. With negative ROCE, deteriorating ROE, volatile margins, and expensive valuation, the stock presents a high-risk proposition with limited visibility on a turnaround. The company's inability to translate revenue growth into sustainable profits, combined with elevated leverage and weak capital efficiency, suggests that shareholders face continued value destruction until management demonstrates meaningful operational improvements.
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.
