The quarter's results paint a concerning picture of operational stress, with the company posting its lowest quarterly sales in recent quarters at ₹510.37 crores. More worryingly, operating profit before depreciation, interest, tax, and other income (PBDIT excluding OI) collapsed to just ₹12.25 crores from ₹64.97 crores in the previous quarter, representing an 81.15% sequential decline. The operating margin compression from 9.66% in Q1 FY26 to a meagre 2.40% in Q2 FY26 signals significant challenges in cost management and pricing power within the highly competitive and government-regulated fertiliser sector.
Quarterly Performance Trend: A Volatile Pattern
| Quarter | Net Sales (₹ Cr) | QoQ Growth | Net Profit (₹ Cr) | QoQ Growth | Operating Margin | PAT Margin |
|---|---|---|---|---|---|---|
| Sep'25 | 510.37 | -24.09% | 12.95 | -70.60% | 2.40% | 2.54% |
| Jun'25 | 672.37 | +21.20% | 44.06 | +184.01% | 9.66% | 6.55% |
| Mar'25 | 554.76 | -30.61% | -52.44 | -170.27% | -11.02% | -9.45% |
| Dec'24 | 799.52 | +50.17% | 74.63 | +4623.42% | 13.39% | 9.33% |
| Sep'24 | 532.42 | -18.73% | 1.58 | -96.10% | 2.07% | 0.30% |
| Jun'24 | 655.15 | -13.62% | 40.48 | -54.15% | 9.99% | 6.18% |
| Mar'24 | 758.48 | — | 88.30 | — | 12.16% | 11.64% |
The quarterly trend reveals extreme volatility in both revenue and profitability, characteristic of the fertiliser industry's cyclical nature and regulatory environment. Q2 FY26 marks the lowest sales quarter in the trailing twelve-month period, whilst operating margins have compressed dramatically from the 12-13% range seen in strong quarters to barely 2.40%. This volatility underscores the challenges inherent in a business heavily dependent on government subsidy policies, raw material price fluctuations, and seasonal demand patterns.
Financial Performance: Revenue Contraction Meets Margin Erosion
In Q2 FY26, Madras Fertilizers recorded net sales of ₹510.37 crores, representing a 24.09% quarter-on-quarter decline from ₹672.37 crores in Q1 FY26. On a year-on-year basis, sales fell 4.14% from ₹532.42 crores in Q2 FY25, indicating both sequential and annual revenue pressure. The company's gross profit margin contracted sharply to 4.01% in Q2 FY26 from 9.22% in the previous quarter, whilst the PAT margin slipped to 2.54% from 6.55%.
The profit before tax (PBT) stood at ₹17.37 crores in Q2 FY26, down 70.50% from ₹58.88 crores in Q1 FY26. Notably, other income of ₹22.62 crores constituted a substantial 130.22% of PBT, raising questions about the quality and sustainability of earnings. When excluding other income, the operating profit before interest and tax (PBIT) was actually negative at ₹-5.25 crores, having fallen 143.30% from the previous four-quarter average. This dependence on non-operating income to deliver positive bottom-line results represents a significant red flag for investors assessing the core business health.
On a half-yearly basis for H1 FY26 (April to September 2025), the company reported net sales of ₹1,182.74 crores and net profit of ₹57.01 crores. Whilst the half-yearly profit showed a 35.54% growth compared to the corresponding period last year, this improvement is largely attributable to the exceptionally weak base of H1 FY25, when margins were severely compressed. The underlying trend within FY26 itself shows deterioration, with Q2 significantly underperforming Q1 across all key metrics.
Operational Challenges: Negative Core Profitability
The most alarming aspect of Q2 FY26 results is the company's inability to generate positive operating profit when excluding other income. With operating profit (PBDIT excluding OI) at just ₹12.25 crores on sales of ₹510.37 crores, the core business delivered a meagre 2.40% operating margin. After accounting for interest costs of ₹14.40 crores and depreciation of ₹3.10 crores, the profit before tax from core operations would have been negative without the cushion of ₹22.62 crores in other income.
Critical Concern: Other Income Dependency
Other income of ₹22.62 crores represented 130.22% of profit before tax in Q2 FY26. This means the core fertiliser manufacturing operations were loss-making before accounting for non-operating income. Such dependency on other income sources—typically comprising treasury income, subsidies, or one-time gains—raises serious questions about business sustainability and the quality of reported earnings.
The company's balance sheet reveals structural challenges, with shareholder funds standing at negative ₹32.30 crores as of March 2025, improved from negative ₹189.72 crores in March 2024. This negative net worth, whilst showing improvement, indicates the company has accumulated losses exceeding its equity capital over the years. The book value per share stands at negative ₹1.99, making traditional valuation metrics like price-to-book value meaningless for investment analysis.
On the positive side, Madras Fertilizers maintains a debt-free status with zero long-term debt as of March 2025, and the company is a net cash entity with an average net debt to equity ratio of negative 28.74. Cash and cash equivalents stood at ₹652 crores as of March 2025, up from ₹561 crores in the previous year, providing a liquidity buffer. However, this cash position must be viewed in context of the negative shareholder funds and the company's need to fund ongoing operations in a capital-intensive, low-margin business.
Industry Context: Navigating a Regulated, Volatile Sector
The fertiliser industry in India operates within a complex regulatory framework where pricing, production, and distribution are heavily influenced by government policies. Urea and other fertilisers are sold at government-controlled prices, with manufacturers receiving subsidies to cover the gap between production costs and retail prices. This subsidy regime, whilst ensuring affordability for farmers, creates margin volatility for manufacturers depending on subsidy disbursement timing, raw material cost fluctuations, and policy changes.
Madras Fertilizers' Q2 FY26 performance reflects broader sector challenges, including elevated raw material costs, particularly for natural gas and imported inputs, which have compressed margins industry-wide. The company's 5-year sales CAGR of 12.04% and EBIT CAGR of 156.58% demonstrate long-term growth, though the latter is heavily influenced by recovery from loss-making years. The average ROCE of 12.53% over recent years is respectable but masks significant year-to-year volatility.
| Metric | FY25 | FY24 | FY23 | FY22 | FY21 |
|---|---|---|---|---|---|
| Net Sales (₹ Cr) | 2,541 | 2,228 | 3,447 | 2,302 | 1,532 |
| YoY Growth | +14.0% | -35.4% | +49.7% | +50.3% | +18.7% |
| Operating Margin | 5.0% | 4.6% | 9.6% | 10.6% | 8.7% |
| PAT (₹ Cr) | 64 | 5 | 185 | 162 | 2 |
| PAT Margin | 2.5% | 0.2% | 5.4% | 7.0% | 0.1% |
The annual data reveals the cyclical nature of the business, with FY23 representing a peak year (sales of ₹3,447 crores, PAT of ₹185 crores, margins of 9.6%) followed by significant contraction in FY24 and modest recovery in FY25. The current quarterly trend in FY26 suggests the recovery may be stalling, with Q2 showing concerning signs of renewed margin pressure and volume weakness.
Peer Comparison: Lagging on Profitability Metrics
| Company | Market Cap (₹ Cr) | P/E (TTM) | P/BV | Debt/Equity | Dividend Yield |
|---|---|---|---|---|---|
| Madras Fertilizers | 1,257 | 18.59x | -39.03x | -28.74 | NA |
| National Fertilizers | — | 29.53x | 1.67x | 0.72 | 1.63% |
| SPIC | — | 11.19x | 1.49x | 0.53 | 2.28% |
| Zuari Agro Chemicals | — | 3.48x | 0.04x | 0.17 | NA |
| Khaitan Chemicals | — | 15.06x | 0.36x | 0.90 | NA |
Madras Fertilizers' negative book value of ₹1.99 per share makes it an outlier amongst peers, reflecting years of accumulated losses that have eroded equity. Whilst the company is debt-free (hence the negative debt-to-equity ratio representing net cash), the absence of a positive net worth raises fundamental concerns about financial health. The P/E ratio of 18.59x appears reasonable relative to some peers, but this metric is of limited value given the volatile, subsidy-dependent earnings profile and negative book value.
Compared to peers, Madras Fertilizers lacks the dividend-paying capability seen in better-capitalised competitors like National Fertilizers (1.63% yield) and SPIC (2.28% yield). The company's institutional holding stands at a mere 0.14%, reflecting limited confidence from sophisticated investors. With promoter holding at 85.27% (Government of India at 59.5% and Naftiran Inter Trade Company at 25.77%), the stock has minimal free float and limited liquidity.
Valuation Analysis: Risky Profile Limits Appeal
At the current market price of ₹81.46, Madras Fertilizers trades at a P/E (TTM) of 18.59x, compared to the fertiliser industry average of 25x. Whilst this suggests a valuation discount, the negative book value, volatile earnings, and dependence on other income make traditional valuation metrics unreliable. The company's valuation grade is classified as "Risky" and has remained in this category since January 2015, reflecting persistent concerns about financial stability and earnings quality.
The stock has declined 16.02% over the past year, significantly underperforming the Sensex return of 5.50% and the fertiliser sector return of 9.62%. This underperformance reflects deteriorating fundamentals and investor scepticism about the company's ability to sustain profitability. Trading at ₹81.46, the stock is 24.96% below its 52-week high of ₹108.55, though it remains 22.79% above its 52-week low of ₹66.34.
The risk-adjusted returns over one year stand at negative 0.43, with stock volatility of 37.59% significantly exceeding Sensex volatility of 12.38%. The beta of 1.35 indicates the stock is 35% more volatile than the broader market, making it unsuitable for risk-averse investors. With a Sharpe ratio in negative territory, the stock has failed to compensate investors for the elevated risk undertaken.
Shareholding Pattern: Stable but Illiquid
| Holder Category | Sep'25 | Jun'25 | Mar'25 | Dec'24 | QoQ Change |
|---|---|---|---|---|---|
| Promoter | 85.27% | 85.27% | 85.27% | 85.27% | 0.00% |
| FII | 0.09% | 0.05% | 0.03% | 0.00% | +0.04% |
| Mutual Funds | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| Insurance | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| Other DII | 0.05% | 0.05% | 0.05% | 0.04% | 0.00% |
| Non-Institutional | 14.59% | 14.63% | 14.66% | 14.69% | -0.04% |
The shareholding pattern has remained remarkably stable over the past year, with promoter holding unchanged at 85.27%. The Government of India holds 59.5% whilst Naftiran Inter Trade Company (an Iranian entity) holds 25.77%. The minimal institutional participation—with FII holding at just 0.09%, mutual fund holding at 0.00%, and insurance holding at 0.00%—reflects the stock's illiquidity and lack of appeal to sophisticated investors.
The marginal increase in FII holding from 0.00% to 0.09% over the past year represents minimal capital inflow and does not signal institutional confidence. The slight decline in non-institutional holding from 14.69% to 14.59% suggests retail investors are gradually reducing exposure. The absence of mutual fund and insurance company participation is particularly telling, as these institutions typically avoid stocks with negative book values, volatile earnings, and governance concerns associated with public sector enterprises.
Stock Performance: Significant Underperformance Across Timeframes
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | -0.13% | 0.49% | -0.62% |
| 1 Month | -2.19% | 1.66% | -3.85% |
| 3 Months | -9.30% | 4.05% | -13.35% |
| 6 Months | 0.04% | 5.56% | -5.52% |
| YTD (2025) | -14.52% | 7.34% | -21.86% |
| 1 Year | -16.02% | 5.50% | -21.52% |
| 3 Years | 69.71% | 35.73% | +33.98% |
| 5 Years | 409.13% | 92.39% | +316.74% |
The stock's recent performance has been dismal, with negative alpha across all timeframes from one week to one year. Year-to-date, Madras Fertilizers has declined 14.52% whilst the Sensex gained 7.34%, resulting in negative alpha of 21.86 percentage points. Over the past year, the stock's 16.02% decline compares unfavourably to the Sensex gain of 5.50% and the fertiliser sector return of 9.62%, representing underperformance of 25.64 percentage points versus the sector.
However, longer-term returns tell a different story. Over three years, the stock has delivered 69.71% returns versus Sensex returns of 35.73%, generating positive alpha of 33.98 percentage points. The five-year return of 409.13% significantly outpaces the Sensex return of 92.39%, reflecting the stock's recovery from deeply depressed levels during the COVID-19 period and subsequent years. These longer-term returns, however, are largely attributable to recovery from a very low base rather than sustainable business improvement.
"The stock's negative alpha of 21.52 percentage points over one year, combined with high volatility of 37.59%, positions Madras Fertilizers in the 'high risk, low return' category—an unattractive risk-reward profile for investors."
Technical Analysis: Bearish Trend with Limited Support
From a technical perspective, Madras Fertilizers is currently in a bearish trend, having changed from sideways to bearish on November 4, 2025, at ₹81.53. The stock trades below all key moving averages—5-day MA (₹79.99), 20-day MA (₹81.53), 50-day MA (₹85.88), 100-day MA (₹88.47), and 200-day MA (₹86.38)—indicating persistent selling pressure and lack of buying interest.
Technical indicators across weekly and monthly timeframes paint a predominantly bearish picture. The MACD shows bearish signals on both weekly and monthly charts, whilst Bollinger Bands indicate bearish to mildly bearish conditions. The KST indicator is bearish on both timeframes, and Dow Theory suggests no clear trend on weekly charts but mildly bearish on monthly charts. The only positive signal comes from the On-Balance Volume (OBV) indicator, which shows mildly bullish momentum on weekly charts, suggesting some accumulation despite price weakness.
Immediate support lies at the 52-week low of ₹66.34, representing potential downside of 18.56% from current levels. Immediate resistance is at ₹81.53 (the 20-day moving average area), with major resistance at ₹88.47 (100-day MA) and ₹86.38 (200-day MA). The 52-week high of ₹108.55 represents strong resistance, 33.24% above current levels. The delivery volume trend shows a 49.01% spike versus the 5-day average, suggesting increased retail participation, though whether this represents accumulation or distribution remains unclear given the bearish technical setup.
Investment Thesis: Limited Appeal for Quality-Focused Investors
Madras Fertilizers' investment case is severely compromised by multiple structural weaknesses. The company's quality grade is "Below Average," reflecting weak long-term financial performance, negative book value, and dependence on non-operating income for profitability. The valuation is classified as "Risky" and has remained so for over a decade, indicating persistent concerns about financial stability. The current financial trend is "Negative" as of Q2 FY26, with key metrics deteriorating sequentially. The technical trend is "Bearish," with the stock trading below all major moving averages and showing negative momentum.
The company's proprietary Mojo Score stands at just 17 out of 100, firmly in the "Strong Sell" category (score 0-30). This score reflects the confluence of negative factors: bearish technical trend, negative financial trend, weak fundamental strength due to negative book value, and significant underperformance versus the market over the past year. The score has remained in the "Sell" or "Strong Sell" range throughout recent months, with no signs of improvement.
Key Strengths & Risk Factors
✓ KEY STRENGTHS
- Debt-Free Balance Sheet: Zero long-term debt and net cash position of ₹652 crores provides financial flexibility and eliminates solvency risk.
- Government Backing: 85.27% promoter holding with Government of India at 59.5% ensures continued operational support and reduces bankruptcy risk.
- Strategic Sector: Operates in the critical fertiliser sector with assured demand from India's agricultural economy.
- Long-Term Growth: 5-year sales CAGR of 12.04% demonstrates ability to grow revenues over economic cycles.
- No Promoter Pledging: Zero pledged shares eliminates governance concerns related to promoter financial stress.
⚠ KEY CONCERNS
- Negative Book Value: Shareholder funds of negative ₹32.30 crores reflect years of accumulated losses exceeding equity capital.
- Earnings Volatility: Extreme quarter-to-quarter swings in profitability make earnings unpredictable and unreliable for valuation.
- Other Income Dependency: Q2 FY26 other income of ₹22.62 crores constituted 130.22% of PBT, indicating core operations were loss-making.
- Margin Compression: Operating margin collapsed from 9.66% in Q1 FY26 to 2.40% in Q2 FY26, a 720 basis point decline.
- No Dividend: Company has not paid dividends, depriving investors of income whilst capital appreciation remains elusive.
- Minimal Institutional Interest: FII holding of 0.09%, mutual fund holding of 0.00%, and insurance holding of 0.00% reflect lack of sophisticated investor confidence.
- High Volatility: Stock volatility of 37.59% and beta of 1.35 make it unsuitable for risk-averse investors.
Outlook: What to Watch Going Forward
POSITIVE CATALYSTS
- Sustained improvement in operating margins above 8-10% for multiple consecutive quarters
- Positive core operating profit (PBIT excluding other income) demonstrating business viability
- Return to positive book value through sustained profitability and equity rebuilding
- Increased institutional participation (FII/MF holdings rising above 2-3%)
- Favourable changes in government subsidy policies improving realisation and margin visibility
RED FLAGS
- Further deterioration in operating margins below 2% or negative operating profit for multiple quarters
- Continued dependence on other income exceeding 100% of PBT
- Quarterly losses returning (as seen in Q4 FY25 with ₹52.44 crore loss)
- Decline in cash position below ₹500 crores, reducing financial flexibility
- Further institutional selling or FII/DII holdings declining towards zero
- Technical breakdown below 52-week low of ₹66.34
The Verdict: Avoid for Quality-Focused Investors
Score: 17/100
For Fresh Investors: Avoid initiating positions. The combination of negative book value, volatile earnings heavily dependent on other income, deteriorating quarterly trends, and bearish technical setup makes this an unsuitable investment for quality-focused portfolios. The stock's classification in the "high risk, low return" category, coupled with minimal institutional interest, suggests significant downside risk with limited upside potential.
For Existing Holders: Consider exiting on any technical bounce towards ₹85-88 levels (near moving averages). The negative financial trend in Q2 FY26, with core operations loss-making before other income, raises serious questions about business sustainability. The stock's negative alpha of 21.52 percentage points over one year and underperformance of 25.64 percentage points versus the fertiliser sector indicates capital is better deployed elsewhere.
Fair Value Estimate: ₹65-70 (20-25% downside risk from current levels of ₹81.46). This estimate reflects the company's negative book value, volatile earnings profile, dependence on non-operating income, and persistent "Risky" valuation classification. Any investment case would require multiple quarters of sustained improvement in core operating profitability, margin expansion, and progress towards positive book value—none of which appear imminent based on current trends.
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. Past performance is not indicative of future results. The fertiliser sector is subject to significant regulatory, commodity price, and subsidy policy risks that can materially impact company performance.
