Milkfood Ltd Q2 FY26: Mounting Losses Signal Deepening Operational Crisis

The quarter's performance represents a dramatic deterioration from the previous quarter, where the company reported a smaller loss of ₹0.69 crores. Sequential losses have expanded by over 1,039.13%, indicating an accelerating downward spiral in operational performance. The company's stock has consistently underperformed the broader market, generating negative alpha of 46.40% versus the Sensex over the past year, whilst the FMCG sector itself delivered positive returns of 2.56%.

With operating losses mounting and interest costs rising sharply, Milkfood faces fundamental questions about its ability to return to profitability. The company's proprietary Mojo Score has plummeted to just 17 out of 100, earning it a "STRONG SELL" rating—a clear signal that significant structural challenges lie ahead for this micro-cap dairy player.

Financial Performance: A Collapse in Profitability

The second quarter of FY2026 laid bare the severity of Milkfood's operational challenges. Net sales stood at ₹74.05 crores, declining 7.90% year-on-year from ₹80.40 crores in Q2 FY25, whilst remaining essentially flat quarter-on-quarter with a marginal 0.53% increase from ₹73.66 crores in Q1 FY26. This stagnant top-line growth reflects the company's inability to expand its market presence or command pricing power in an increasingly competitive dairy products landscape.

More alarming than the revenue decline is the complete erosion of operating profitability. The company's operating profit (PBDIT excluding other income) turned deeply negative at ₹-2.33 crores in Q2 FY26, a dramatic reversal from the ₹5.98 crores operating profit recorded in the same quarter last year. This represents an operating margin of -3.15%, compared to a healthy 7.44% in Q2 FY25—a deterioration of over 1,000 basis points. The sequential trend is equally concerning, with operating losses widening from ₹-1.06 crores in Q1 FY26.

The gross profit margin has collapsed to -7.72% in Q2 FY26, down from 3.48% in the year-ago quarter, indicating severe pressure on input costs relative to realisation. Employee costs, whilst relatively stable at ₹6.23 crores, now consume 8.41% of revenues—up from 6.95% a year earlier—reflecting the fixed nature of these expenses against a shrinking revenue base. The company's inability to manage its cost structure in line with revenue trends has resulted in a PAT margin of -10.61%, the worst in recent quarters.

Operational Challenges: Rising Costs and Shrinking Margins

The company's operational distress is compounded by a sharp escalation in interest costs, which surged to ₹3.49 crores in Q2 FY26 from ₹3.18 crores in Q2 FY25—a 9.75% year-on-year increase. On a half-yearly basis for H1 FY26, interest expenses totalled ₹6.71 crores, representing a concerning 51.47% increase over the comparable period. This rising debt servicing burden, coupled with negative operating profits, has resulted in an operating profit to interest coverage ratio of -0.67 times—the lowest on record—indicating the company cannot even cover its interest obligations from operations.

The balance sheet reveals mounting leverage concerns. Long-term debt stood at ₹57.66 crores as of March 2025, with the company's debt-to-EBITDA ratio averaging 4.91 times—significantly above comfortable levels for a company in the FMCG sector. Net debt to equity stands at 0.66, whilst the company's weak return on capital employed (ROCE) of just 5.64% and return on equity (ROE) of 2.57% underscore the inefficient deployment of capital. These profitability metrics rank amongst the poorest in the dairy products segment, highlighting fundamental operational inefficiencies.

Industry Context: Struggling in a Competitive Landscape

Milkfood's struggles stand in stark contrast to the broader FMCG sector's resilience. Whilst the FMCG sector delivered positive returns of 2.56% over the past year, Milkfood's shares have plummeted 36.90%, resulting in a massive underperformance of 39.46 percentage points. This divergence reflects company-specific operational challenges rather than sector-wide headwinds, suggesting that better-managed peers have successfully navigated the same input cost pressures and competitive dynamics that have overwhelmed Milkfood.

The dairy products segment remains highly competitive, with established players enjoying superior distribution networks, brand recognition, and economies of scale. Milkfood's micro-cap status (₹172.00 crores market capitalisation) limits its ability to invest in marketing, distribution expansion, or operational improvements. The company operates two manufacturing facilities—one in Punjab at Patiala and another in Uttar Pradesh at Moradabad—but has failed to leverage this geographic presence into meaningful market share gains or operational efficiencies.

The company's product portfolio, including milk powder, ghee, baby food, ice-creams, and yoghurt, faces intense competition from both organised players and regional brands. The inability to maintain pricing power, as evidenced by the margin collapse, suggests that Milkfood lacks the brand strength or product differentiation necessary to command premium pricing in an increasingly commoditised market.

Peer Comparison: Lagging on All Metrics

A comparative analysis with peers in the FMCG space highlights Milkfood's significant underperformance across key financial metrics. The company's ROE of 3.72% (average) trails peers substantially, with companies like Ovobel Foods achieving 19.97% and Aayush Wellness delivering 12.73%. Even within its micro-cap peer group, Milkfood's profitability metrics rank at the bottom, reflecting fundamental operational weaknesses rather than scale disadvantages.

The peer comparison reveals that Milkfood trades at a price-to-book value of 0.98x—below book value—reflecting the market's lack of confidence in the company's ability to generate returns above its cost of capital. Whilst this low valuation might appear attractive superficially, it is justified given the company's weak profitability, rising leverage, and deteriorating operational trends. The absence of a P/E ratio due to losses further underscores the severity of the company's current financial position.

Valuation Analysis: Distress Pricing Reflects Fundamental Weakness

Milkfood's shares trade at ₹70.80, representing a 42.90% decline from the 52-week high of ₹124.00, though still 15.59% above the 52-week low of ₹61.25. The stock's valuation grade has been marked as "VERY ATTRACTIVE" by proprietary metrics, primarily reflecting the severe price decline rather than any improvement in underlying fundamentals. The price-to-book value of 0.98x suggests the market values the company's assets at a discount, typically a sign of distress or expected value destruction.

With the company loss-making, traditional valuation metrics like P/E ratio are not applicable. The EV/EBITDA multiple of 34.62x appears elevated, but this is distorted by the depressed EBITDA base. More tellingly, the EV/Sales ratio of 0.69x indicates that the enterprise is valued at less than one times annual sales—a level typically reserved for companies facing existential challenges or those in terminal decline.

The company paid a dividend of ₹2.50 per share with an ex-date of July 5, 2024, representing a dividend payout ratio of 18.01% for FY24 when it was profitable. However, given the current loss-making status, dividend sustainability appears questionable. The absence of institutional interest (just 0.03% institutional holdings) and the stock's classification as "HIGH RISK LOW RETURN" with negative risk-adjusted returns of -1.03 further validate the bearish investment case.

Shareholding Pattern: Stable Promoter Holdings Amid Institutional Exit

The shareholding pattern reveals a stable promoter base holding 56.03% across the last five quarters, with no change in promoter stake. The Jaiswal family, controlling the company through L P Investments (a subsidiary of Jagatjit Industries), has maintained its commitment. Key promoters include Karamjit Jaiswal (43.76%), Roshini Sanah Jaiswal (11.49%), and smaller holdings through Blue Skies Investments Pvt. Ltd. (0.41%) and Snowhite Holdings Pvt. Ltd. (0.38%). Importantly, there is no promoter pledging, which removes one potential concern.

The most concerning trend is the complete exit of foreign institutional investors (FIIs), who held 1.00% in September 2024 but have reduced their stake to zero by September 2025. This represents a clear vote of no confidence from sophisticated investors. Mutual fund holdings remain negligible at 0.02%, with just three mutual funds holding positions. The absence of insurance company holdings and other domestic institutional investors (DIIs) further underscores the lack of institutional confidence in the company's turnaround prospects.

Stock Performance: Consistent Underperformance Across All Timeframes

Milkfood's stock performance has been dismal across all timeframes, with the shares generating negative returns and massive underperformance versus the benchmark Sensex. Over the past year, the stock has declined 36.90% whilst the Sensex gained 9.50%, resulting in negative alpha of 46.40%. The underperformance accelerates over longer periods, with three-year returns of -55.15% versus Sensex gains of 37.57% (alpha of -92.72%), and five-year returns of -23.99% against Sensex returns of 93.28% (alpha of -117.27%).

The technical picture is equally bleak, with the stock in a confirmed bearish trend since November 6, 2025. All moving averages—from the 5-day MA (₹71.64) to the 200-day MA (₹80.99)—are above the current price of ₹70.80, indicating consistent selling pressure. Technical indicators including MACD, RSI, Bollinger Bands, and KST all flash bearish signals on both weekly and monthly timeframes. The stock's beta of 1.50 indicates high volatility, with the shares moving 50% more than the market—a characteristic that has worked entirely to shareholders' detriment given the negative returns.

Investment Thesis: Multiple Red Flags Across All Parameters

The investment thesis for Milkfood is overwhelmingly negative across all four key parameters of the proprietary Mojo framework. The company scores just 17 out of 100, firmly in "STRONG SELL" territory, with deterioration evident across near-term drivers, quality metrics, and technical indicators. Whilst valuation appears "VERY ATTRACTIVE" on paper, this reflects distress pricing rather than genuine opportunity.

The near-term drivers are decidedly negative, with the quarterly financial trend marked as "NEGATIVE" and technical indicators uniformly bearish. The company's quality grade of "BELOW AVERAGE" reflects weak long-term financial performance, with five-year sales growth of -3.15%, EBIT growth of -6.58%, and critically low returns on capital (ROCE of 5.17%, ROE of 3.72%). The financial trend analysis highlights multiple red flags, including operating losses, the lowest operating profit to interest coverage on record (-0.67 times), and the worst operating margin in recent history (-3.15%).

Key Strengths & Risk Factors

Outlook: What to Watch

The path forward for Milkfood requires urgent and decisive action. The company must address its cost structure, restore operating profitability, and reduce its debt burden to survive. Without a credible turnaround plan and demonstrable execution, the current distress valuation may prove justified rather than opportunistic. The absence of institutional support, combined with consistently negative financial trends, suggests the market has lost faith in management's ability to navigate these challenges.

For investors, the risk-reward equation is heavily skewed to the downside. Whilst the stock trades at distressed valuations, the fundamental deterioration shows no signs of abating. The company's quality grade of "BELOW AVERAGE," negative financial trend, bearish technical setup, and mounting operational losses all point to continued value destruction. Until there is tangible evidence of operational stabilisation and a credible path to profitability, prudent investors should maintain a safe distance from this troubled micro-cap dairy player.