Nahar Polyfilms Q2 FY26: Profit Surge Masks Revenue Volatility Concerns

The Ludhiana-based manufacturer of Biaxially Oriented Polypropylene (BOPP) films demonstrated remarkable margin expansion during the quarter, with operating margins excluding other income climbing to 16.12% from 14.11% in Q1 FY26. PAT margins similarly improved to 9.44% from 7.57%, suggesting effective cost management and operational efficiency gains. Yet the sequential revenue contraction of ₹24.45 crores demands scrutiny, particularly given the modest 2.21% year-on-year growth that lags the company's five-year sales CAGR of 20.56%. The divergence between profit momentum and revenue softness creates a mixed narrative for investors evaluating the stock's current ₹279.15 price point.

Financial Performance: Margin Excellence Amid Revenue Headwinds

Nahar Polyfilms' Q2 FY26 results reveal a company navigating conflicting currents. Net sales of ₹172.30 crores represented a sequential decline of 12.43% from Q1 FY26's ₹196.75 crores, though year-on-year growth of 2.21% provided some consolation. The revenue volatility becomes more apparent when examining the quarterly pattern: after surging 25.61% sequentially in Q1 FY26, sales retreated sharply in Q2, suggesting potential seasonality or demand fluctuations in the BOPP film market.

Operating profit before depreciation, interest, and tax (excluding other income) reached ₹27.78 crores in Q2 FY26, essentially flat versus Q1's ₹27.77 crores despite the revenue decline. This stability drove the operating margin expansion to 16.12% from 14.11%, a 201 basis point improvement that signals enhanced pricing power or favourable raw material costs. The company's ability to maintain absolute operating profit levels whilst sales contracted 12.43% demonstrates operational resilience and cost discipline.

Standalone net profit for Q2 FY26 stood at ₹16.26 crores, up 9.13% quarter-on-quarter and 38.50% year-on-year, whilst consolidated profit of ₹20.78 crores reflected the contributions from subsidiaries. The tax rate of 29.51% in Q2 remained within the normalised range, marginally higher than Q1's 27.17% but significantly lower than the aberrant 61.41% rate in March 2024. Interest costs continued their downward trajectory, declining to ₹2.01 crores from ₹2.24 crores sequentially, benefiting from the company's improved debt profile with debt-to-equity ratio at a five-year low of 0.11 times.

Operational Excellence: Efficiency Gains Drive Profitability

Nahar Polyfilms' operational metrics paint a picture of improving efficiency despite topline challenges. The company's operating profit to interest coverage ratio reached 13.82 times in Q2 FY26, the highest in recent quarters, reflecting both improved profitability and declining debt servicing obligations. With long-term debt reduced to ₹78.22 crores as of March 2025 from ₹100.58 crores a year earlier, the company has systematically deleveraged its balance sheet, positioning itself for greater financial flexibility.

Return on capital employed (ROCE) for the half-year period stood at 8.53%, the highest in recent periods and marking a significant improvement from the five-year average of 5.93%. Return on equity (ROE) similarly improved to 7.12% for the latest period, though it remains below the industry average and signals scope for further capital efficiency gains. The company's ability to generate these returns whilst maintaining a conservative debt-to-equity ratio of 0.11 times demonstrates prudent financial management, though the absolute ROE level of 7.12% suggests the business model faces inherent margin constraints in the competitive BOPP film market.

Working capital management showed mixed signals during the period. Current assets stood at ₹144.12 crores as of March 2025, up from ₹112.58 crores a year earlier, whilst current liabilities declined to ₹45.18 crores from ₹49.05 crores. This resulted in an improved current ratio, though the increase in current assets warrants monitoring to ensure it reflects genuine business expansion rather than inventory build-up or receivables deterioration. Trade payables increased marginally to ₹12.04 crores from ₹10.94 crores, suggesting stable supplier relationships.

The company's investment portfolio of ₹576.19 crores as of March 2025, representing 72% of total assets, deserves particular attention. This substantial investment base, which declined from ₹597.30 crores a year earlier, generates other income that contributed ₹5.50 crores in Q2 FY26. Whilst these investments provide financial stability and supplementary income, they also raise questions about capital allocation priorities and whether resources could be more productively deployed in core manufacturing capacity expansion.

The Revenue Volatility Puzzle: Seasonal or Structural?

The 12.43% sequential revenue decline in Q2 FY26 represents the most pressing concern for Nahar Polyfilms' investment case. After posting 25.61% sequential growth in Q1 FY26, the sharp reversal suggests either pronounced seasonality in the BOPP film business or potential demand softness in key end-user industries such as food packaging, textiles, and consumer goods. The year-on-year growth of just 2.21% further compounds concerns, falling well short of the company's five-year sales CAGR of 20.56% and indicating a marked deceleration in business momentum.

Examining the broader trend, Nahar Polyfilms generated net sales of ₹599.00 crores in FY24, down 17.2% from ₹723.00 crores in FY23. This decline followed exceptional growth of 48.2% in FY23 and 61.1% in FY22, suggesting the company benefited from post-pandemic demand surge and favourable industry conditions that have since normalised. The current quarterly run rate of approximately ₹172-197 crores suggests FY26 revenues could reach ₹700-750 crores, representing recovery towards FY23 levels but still reflecting volatility concerns.

Industry Leadership: Valuation Discount Reflects Quality Gap

Nahar Polyfilms trades at a significant valuation discount to its packaging industry peers, reflecting both its micro-cap status and relatively weaker financial metrics. With a price-to-earnings ratio of 11.51 times trailing twelve-month earnings, the stock trades at a substantial discount to the industry average P/E of 52 times. The price-to-book ratio of 0.82 times similarly suggests the market values the company below its stated book value of ₹318.70 per share, indicating scepticism about the sustainability of current profitability levels or concerns about asset quality.

The valuation discount becomes more understandable when examining return metrics. Nahar Polyfilms' ROE of 6.50% trails the peer group average of approximately 11%, with companies like Arrow Greentech achieving 18.72% and Cropster Agro posting 14.80%. This return differential suggests Nahar Polyfilms generates lower profitability per unit of shareholder capital, justifying a lower valuation multiple. However, the company's conservative leverage profile with debt-to-equity of 0.10 times compares favourably to Ester Industries' 0.71 times, offering a margin of safety that partially offsets the return disadvantage.

The dividend yield of 0.35% based on the latest ₹1.00 per share dividend appears modest compared to peers like Oricon Enterprises at 0.86% and Arrow Greentech at 0.69%. With a dividend payout ratio of 44.29%, Nahar Polyfilms returns a reasonable portion of earnings to shareholders whilst retaining capital for growth investments. The company's market capitalisation of ₹697.00 crores positions it as the sixth-largest player in the peer group, reflecting its micro-cap status and limited institutional following.

Valuation Analysis: Attractive Entry Point or Value Trap?

At the current price of ₹279.15, Nahar Polyfilms trades at valuations that appear optically attractive but warrant careful interpretation. The P/E ratio of 11.51 times represents a significant discount to both the broader market and the packaging sector, whilst the price-to-book ratio of 0.82 times suggests the stock trades below book value. The enterprise value-to-EBITDA multiple of 8.34 times and EV-to-capital employed ratio of 0.84 times similarly indicate modest valuations relative to the company's asset base and earnings generation capacity.

The company's proprietary Mojo Score of 70 out of 100 supports a "BUY" rating, upgraded from "HOLD" on October 13, 2025. This score reflects the combination of attractive valuation (graded as "Attractive"), average quality metrics, positive financial trends, and mildly bullish technical indicators. The PEG ratio of 0.06 suggests the stock may be undervalued relative to its historical growth trajectory, though this metric should be interpreted cautiously given the recent revenue volatility and questions about forward growth sustainability.

The stock's distance from its 52-week high of ₹388.00 stands at 28.05%, whilst it trades 59.51% above the 52-week low of ₹175.00. This positioning suggests the stock has corrected meaningfully from peak levels, potentially offering a more attractive risk-reward profile for patient investors. However, the recent price action shows weakness, with the stock declining 8.80% over the past week and trading below all key moving averages (5-day, 20-day, 50-day, 100-day, and 200-day), indicating negative momentum that could persist in the near term.

Shareholding Pattern: Promoter Confidence Building Gradually

The shareholding structure of Nahar Polyfilms reveals a promoter-dominated ownership pattern with limited institutional participation. Promoter holding stood at 72.28% as of September 2025, up marginally from 72.24% in June 2025 and 71.88% in September 2024. This gradual increase of 40 basis points over the past year demonstrates promoter confidence, though the absolute change remains modest. The promoter group, led by Nahar Capital And Financial Services Limited (49.16%), Nahar Spinning Mills Limited (18.88%), and Sankheshwar Holding Co., Limited (3.19%), maintains a stable ownership base with zero pledged shares, eliminating concerns about forced selling or financial distress.

Institutional participation remains negligible, with foreign institutional investors holding just 0.10%, mutual funds at 0.01%, and insurance companies absent entirely. The other domestic institutional investor category showed 0.27% holding in June 2025 but reduced to zero by September 2025, suggesting limited institutional appetite for the stock. This lack of institutional ownership reflects the company's micro-cap status, limited liquidity (average daily volume of just 1,027 shares), and absence from major indices. For retail investors, this creates both opportunity (potential for institutional discovery) and risk (limited liquidity and price discovery challenges).

Non-institutional holdings increased to 27.62% in September 2025 from 27.39% in June 2025, indicating some retail accumulation. The presence of just three FIIs and two mutual funds in the shareholder registry underscores the stock's under-researched status. This institutional void could present an opportunity if the company demonstrates consistent financial performance and revenue growth, potentially attracting institutional interest that could drive valuation re-rating.

Stock Performance: Long-Term Gains Mask Recent Weakness

Nahar Polyfilms' stock price performance presents a tale of two timeframes: exceptional long-term returns overshadowed by recent underperformance. Over the past decade, the stock has delivered 532.28% returns, massively outperforming the Sensex's 233.05% gain and generating alpha of 299.23 percentage points. The five-year return of 221.42% similarly dwarfs the Sensex's 92.10% gain, demonstrating the wealth-creation potential for patient long-term investors who identified the opportunity early.

However, the near-term picture looks decidedly less attractive. The stock has declined 8.80% over the past week, underperforming the Sensex by 9.99 percentage points, and has lost 6.28% over the past month versus the Sensex's 1.09% gain. The three-month underperformance of 10.46 percentage points and one-year underperformance of 2.31 percentage points suggest momentum has shifted decisively negative. The stock trades below all key moving averages, with the price of ₹279.15 sitting 6.85% below the 5-day moving average of ₹299.68 and 10.59% below the 100-day moving average of ₹312.24.

The risk-adjusted return profile reveals high volatility with moderate returns. Over the past year, the stock delivered 7.43% absolute returns with volatility of 53.45%, resulting in a risk-adjusted return of just 0.14. This compares unfavourably to the Sensex's risk-adjusted return of 0.79 with volatility of 12.26%. The stock's beta of 1.50 indicates it moves 50% more than the market, amplifying both gains and losses. This high-beta characteristic classifies Nahar Polyfilms as a "High Risk Medium Return" investment, suitable primarily for investors with higher risk tolerance and longer investment horizons.

Investment Thesis: Margin Improvement Meets Revenue Uncertainty

Nahar Polyfilms presents a nuanced investment proposition characterised by improving profitability metrics set against uncertain revenue momentum. The company's Mojo Score of 70 out of 100 reflects this balance, with attractive valuation (P/E of 11.51 times, P/BV of 0.82 times) and positive financial trends offsetting average quality grades and recent technical weakness. The stock's classification as "Mildly Bullish" from a technical perspective, downgraded from "Bullish" on July 23, 2025, suggests cautious optimism tempered by near-term headwinds.

The quality assessment reveals a mixed picture. Whilst the company demonstrates strong interest coverage (20.42 times average EBIT to interest), healthy five-year sales growth (20.56% CAGR), and zero promoter pledging, the average ROE of 6.50% and ROCE of 5.93% indicate modest capital efficiency. The debt-to-EBITDA ratio of 2.17 times remains manageable, and the debt-to-equity ratio of 0.10 times provides substantial financial flexibility. However, the lack of institutional ownership (0.11%) and limited liquidity pose challenges for larger investors seeking meaningful positions.

Key Strengths & Risk Factors

Outlook: What to Watch in Coming Quarters

The coming quarters will prove critical in determining whether Nahar Polyfilms' margin expansion represents sustainable competitive advantage or temporary benefit from favourable input costs. Investors should closely monitor quarterly revenue trends, particularly whether Q3 FY26 shows sequential recovery or further decline. The company's ability to maintain operating margins above 15% whilst growing volumes would validate the investment thesis and potentially attract institutional interest. Conversely, continued revenue softness combined with margin pressure would suggest more fundamental challenges in the BOPP film market.