Nahar Industrial Enterprises Q2 FY26: Operating Losses Deepen Despite Strong Other Income

The September 2025 quarter presented a tale of two narratives for Nahar Industrial Enterprises. Whilst the bottom line showed remarkable improvement on a sequential basis, the operational performance deteriorated sharply. Net sales declined 12.43% quarter-on-quarter to ₹340.24 crores, marking the lowest quarterly revenue figure in recent periods. More alarmingly, the company reported an operating loss (PBDIT excluding other income) of ₹3.31 crores, translating to a negative operating margin of 0.98%, compared to a positive 3.92% margin in Q1 FY26.

The profitability improvement was entirely driven by a substantial surge in other income, which jumped to ₹46.28 crores from ₹14.12 crores in the previous quarter. This non-operating income constituted 225.98% of profit before tax, raising questions about the sustainability of earnings and the underlying health of core operations. On a year-on-year basis, consolidated net profit plunged 610.53% from a loss of ₹3.23 crores in Q2 FY25, though this comparison is distorted by the base effect of last year's loss-making quarter.

Financial Performance: Core Operations Under Pressure

The quarterly performance reveals significant stress in Nahar Industrial's core textile and sugar manufacturing operations. Net sales of ₹340.24 crores represented a 4.40% decline year-on-year and a steeper 12.43% drop sequentially, indicating weak demand conditions. The company's gross profit margin stood at 9.54% in Q2 FY26, an improvement from 4.32% in Q1 FY26 but still below the 8.77% achieved in March 2024.

Employee costs remained elevated at ₹47.24 crores, up 2.94% quarter-on-quarter, contributing to margin pressure. Interest expenses declined to ₹9.82 crores from ₹12.58 crores in Q1 FY26, providing some relief. However, depreciation increased to ₹12.69 crores from ₹11.32 crores, reflecting the capital-intensive nature of the business. The tax rate for Q2 FY26 stood at 16.29%, down from 28.25% in the previous quarter, suggesting potential tax optimisation or lower taxable income.

On a half-yearly basis for H1 FY26, the company reported consolidated net profit of ₹20.58 crores on revenues of ₹728.76 crores. This represents a significant improvement from the loss-making H1 FY25, though the comparison is complicated by the base effect. The PAT margin for H1 FY26 stood at 2.82%, indicating thin profitability despite the turnaround from losses.

The Other Income Dependency: A Sustainability Question

The most striking feature of Q2 FY26 results is the company's heavy reliance on other income to sustain profitability. Other income surged to ₹46.28 crores, constituting 225.98% of profit before tax of ₹19.70 crores. This means that without non-operating income, the company would have reported a substantial pre-tax loss of approximately ₹25.80 crores from its core manufacturing operations.

This dependency on other income is not a new phenomenon for Nahar Industrial Enterprises. The company has consistently relied on non-operating sources to bolster earnings, with other income contributing significantly across recent quarters. For the full year FY25, other income stood at ₹47.00 crores against operating profit (excluding other income) of just ₹69.00 crores, indicating that nearly 40% of EBITDA came from non-core sources.

Whilst other income can include legitimate sources such as interest on deposits, dividend income from investments, or gains from asset sales, such heavy reliance raises concerns about earnings quality and the sustainability of profitability. Investors typically prefer companies that generate consistent profits from core operations rather than one-time or irregular non-operating sources.

Return Ratios: Weak Capital Efficiency

Nahar Industrial Enterprises' return metrics paint a concerning picture of capital efficiency. The company's average return on equity (ROE) stood at just 5.81% over the measurement period, significantly below the threshold of 15% typically expected by quality-conscious investors. This low ROE indicates that the company is generating minimal returns for shareholders relative to the equity capital deployed in the business.

The average return on capital employed (ROCE) fared marginally better at 6.07%, though this too falls well short of the company's cost of capital. More worryingly, the latest ROCE figure deteriorated to just 1.50%, indicating severe pressure on the profitability of deployed capital. For a capital-intensive manufacturing business like textiles and sugar, such weak returns suggest either structural challenges in the industry, operational inefficiencies, or both.

The company's average EBIT-to-interest coverage ratio of 1.66 times is particularly concerning, indicating limited headroom to service debt obligations from operating profits. This weak coverage, combined with the high debt-to-EBITDA ratio of 5.29, suggests potential financial stress if operating performance does not improve meaningfully in coming quarters.

Industry Context: Textile Sector Headwinds

Nahar Industrial Enterprises operates in the highly competitive garments and apparels sector, which has faced significant headwinds including weak global demand, rising input costs, and intense competition from imports. The company's performance must be viewed against this challenging sectoral backdrop, where many players have struggled with margin compression and volume pressure.

The textile industry in India has been grappling with subdued export demand from key markets, elevated cotton and energy costs, and working capital pressures. Whilst the domestic market has shown some resilience, it has not been sufficient to offset export weakness for companies with significant overseas exposure. The sugar business, which forms the other leg of Nahar Industrial's operations, has its own cyclicality driven by monsoon patterns, government policies on minimum support prices, and ethanol blending mandates.

Compared to its peers in the garments and apparels sector, Nahar Industrial trades at a relatively modest P/E multiple of 11.16 times, well below the sector average. However, this valuation discount appears justified given the company's significantly lower ROE of 5.81% compared to peers averaging around 16%. The price-to-book ratio of 0.48 times indicates the stock trades at less than half its book value, suggesting either deep value or fundamental concerns about asset quality and earning power.

Valuation Analysis: Discount Reflects Fundamental Weakness

At the current market price of ₹120.00, Nahar Industrial Enterprises trades at a P/E ratio of 11.16 times trailing twelve-month earnings, which appears reasonable on the surface. However, this multiple must be assessed in the context of the company's weak operational performance and heavy reliance on other income. The stock's price-to-book ratio of 0.48 times represents a substantial discount to book value of ₹220.47 per share, indicating market scepticism about the company's ability to generate adequate returns on its asset base.

The enterprise value-to-EBITDA multiple of 17.97 times appears elevated, though this metric is complicated by the inclusion of other income in EBITDA calculations. More tellingly, the EV-to-EBIT ratio of 119.17 times is extraordinarily high, reflecting the minimal operating profit generation from core business activities. The EV-to-sales ratio of 0.69 times suggests the market values the entire enterprise at less than one year's revenue, typical for low-margin, capital-intensive businesses with uncertain growth prospects.

The PEG ratio of 0.13 times might superficially suggest undervaluation, but this metric is of limited utility given the volatility in earnings and the questionable sustainability of growth driven primarily by non-operating income rather than core business expansion.

Shareholding Pattern: Stable Promoter Base, Minimal Institutional Interest

The shareholding pattern of Nahar Industrial Enterprises has remained remarkably stable over recent quarters, with promoter holding steady at 71.24% across the last five quarters through September 2025. This consistent promoter stake provides some comfort regarding management commitment to the business. Notably, there is no promoter pledging, eliminating concerns about potential distress sales or margin calls.

However, the near-total absence of institutional investor interest is a significant red flag. Foreign institutional investors (FIIs) reduced their already minimal stake from 0.04% to 0.00% in Q2 FY26, effectively exiting the stock entirely. Mutual fund holdings remain negligible at 0.02%, whilst insurance companies hold just 0.23%. The combined institutional holding of merely 0.25% indicates that professional investors have largely shunned the stock, likely due to concerns about operational performance, earnings quality, and return metrics.

The marginal increase in non-institutional holdings to 28.51% from 28.47% suggests some retail investor accumulation, possibly attracted by the low valuation multiples. However, the absence of smart money participation should give pause to potential investors, as institutional investors typically conduct rigorous due diligence before committing capital.

Stock Performance: Underperformance Across Timeframes

Nahar Industrial Enterprises' stock performance has been disappointing across most relevant timeframes, significantly underperforming both the broader market and its sectoral peers. Over the past year, the stock has declined 6.36%, generating negative alpha of 15.84 percentage points relative to the Sensex's 9.48% gain. This underperformance is even more pronounced relative to the garments and apparels sector, which delivered a positive return of 3.96% over the same period.

The recent price surge of 8.84% following the Q2 results appears to be a technical bounce rather than a fundamental re-rating, given the underlying operational weakness. The stock has generated positive alpha over the past week and month, but this short-term outperformance does not offset the sustained underperformance over longer periods. Year-to-date, the stock is down 12.06% against the Sensex's 8.36% gain, translating to negative alpha of 20.42 percentage points.

The stock's beta of 1.50 indicates high volatility relative to the broader market, with annualised volatility of 42.44% classifying it as a high-risk investment. The risk-adjusted return of -0.15 over the past year places it firmly in the "high risk, low return" category, an unattractive profile for most investors. The stock currently trades 25.67% below its 52-week high of ₹161.45, though it has recovered 34.50% from its 52-week low of ₹89.22.

Technical Picture: Mildly Bearish Trend Persists

From a technical perspective, Nahar Industrial Enterprises remains in a mildly bearish trend as of November 18, 2025, having transitioned from a bearish trend on the same day. The stock is currently trading above all key moving averages—5-day (₹110.90), 20-day (₹113.15), 50-day (₹115.06), 100-day (₹119.63), and 200-day (₹116.21)—which provides some near-term technical support.

However, the technical indicators present a mixed picture. On a weekly basis, the MACD shows mildly bullish signals, whilst the monthly MACD remains bearish. Bollinger Bands indicate bullish positioning on a weekly timeframe but mildly bearish on a monthly basis. The KST indicator shows mildly bullish signals weekly but bearish monthly, suggesting conflicting momentum across different timeframes.

The on-balance volume (OBV) indicator shows mildly bearish signals on a weekly basis but mildly bullish on a monthly basis, indicating uncertain accumulation/distribution patterns. Delivery volumes have shown significant variation, with the latest session recording 78.03% delivery percentage, substantially higher than the five-day average of 70.72%. The trailing one-month delivery percentage of 69.57% represents a 29.7% increase from the previous month's 51.45%, suggesting some genuine investor interest rather than purely speculative trading.

Investment Thesis: Quality Concerns Overshadow Valuation Appeal

The investment case for Nahar Industrial Enterprises presents a classic value trap scenario, where attractive headline valuation metrics mask fundamental operational challenges. The company's overall quality grade of "Below Average" reflects weak long-term financial performance, with 5-year sales growth of just 3.04% and average return ratios (ROE of 5.81%, ROCE of 6.07%) well below acceptable thresholds for quality businesses.

Whilst the stock trades at an attractive P/E of 11.16 times and a steep discount to book value (0.48 times), these valuation metrics reflect legitimate concerns about earnings sustainability and capital efficiency. The company's heavy reliance on other income to sustain profitability, combined with operating losses in the core business, raises serious questions about the quality and durability of earnings.

The weak interest coverage ratio of 1.66 times and high debt-to-EBITDA ratio of 5.29 times indicate potential financial stress if operating performance does not improve meaningfully. The near-complete absence of institutional investor interest, with total institutional holdings of just 0.25%, suggests that sophisticated investors have evaluated the company and chosen to stay away.

Outlook: What to Watch