Nandan Denim Q2 FY26: Margin Pressures Mount as Revenue Contracts 25%

The quarter's results reveal a company grappling with operational headwinds. Revenue contracted sharply by 25.10% sequentially to ₹784.69 crores, marking the lowest quarterly sales figure in recent periods. Operating profit before depreciation, interest, and tax (excluding other income) fell to ₹23.44 crores, representing a concerning 2.99% margin—the lowest in at least seven quarters. This sequential decline of 27.68% in operating profit signals mounting pressure on the company's core textile manufacturing operations.

Financial Performance: Revenue Volatility Pressures Profitability

The second quarter of FY2026 exposed significant vulnerabilities in Nandan Denim's operational model. Net sales of ₹784.69 crores represented a steep 25.10% sequential decline from the previous quarter's ₹1,047.68 crores, though the company managed a modest 7.71% year-on-year contraction compared to September 2024's ₹850.25 crores. This quarterly volatility pattern has characterised the company's recent performance, with sales swinging between ₹579.12 crores and ₹1,048.65 crores over the past seven quarters.

Operating margins came under severe pressure during Q2 FY26. The operating profit margin (excluding other income) compressed to 2.99%, down 10 basis points quarter-on-quarter and a substantial 84 basis points year-on-year. In absolute terms, operating profit fell to ₹23.44 crores from ₹32.41 crores in the previous quarter—a decline that outpaced the revenue contraction, suggesting deteriorating operating leverage. The company's gross profit margin also weakened to 2.34%, down from 2.52% in Q1 FY26 and significantly below the 2.94% recorded in September 2024.

Despite the revenue and margin pressures, net profit demonstrated relative resilience at ₹9.45 crores, declining only 15.62% quarter-on-quarter whilst improving 7.61% year-on-year. This divergence between operating performance and bottom-line results stemmed from improved tax efficiency, with the company recording a negative tax rate of -13.58% in Q2 FY26 compared to 24.43% in the previous quarter. The PAT margin expanded to 1.20% from 1.07% sequentially, though this improvement appears more attributable to tax benefits than operational excellence.

The company's interest burden showed modest improvement, declining to ₹6.90 crores in Q2 FY26 from ₹7.52 crores in the previous quarter, whilst depreciation also fell to ₹10.05 crores from ₹11.61 crores. These reductions in fixed costs partially cushioned the impact of declining operating profits, with profit before tax reaching ₹8.32 crores compared to ₹14.82 crores in Q1 FY26.

Operational Challenges: Weak Capital Efficiency Constrains Returns

Nandan Denim's operational metrics reveal a company struggling with capital efficiency and return generation. The company's return on equity (ROE) stands at a modest 5.17% on average, with the latest figure at 6.01%—significantly below industry standards for textile manufacturers. This weak ROE indicates that the company generates barely adequate returns on shareholders' capital, a concerning signal for long-term value creation. The return on capital employed (ROCE) paints an equally challenging picture at 4.66% on average and 8.91% for the latest period, suggesting that the company's deployed capital generates insufficient returns relative to its cost.

The balance sheet structure reflects both progress and persistent challenges. Total shareholder funds stood at ₹618.82 crores as of March 2025, up from ₹585.17 crores a year earlier, driven primarily by retained earnings of ₹33 crores for FY2025. Long-term debt declined substantially to ₹63.32 crores from ₹96.32 crores, demonstrating commendable deleveraging efforts. However, the company's net debt-to-equity ratio of 0.36 remains elevated for a business generating such modest returns, whilst the debt-to-EBITDA ratio of 5.79 times suggests limited debt servicing capacity.

Working capital management showed mixed signals. Current assets stood at ₹798.13 crores as of March 2025, up from ₹662.50 crores a year earlier, whilst current liabilities increased to ₹535.98 crores from ₹453.34 crores. Trade payables surged to ₹318.79 crores from ₹186.86 crores, indicating extended payment cycles to suppliers—a potential sign of liquidity pressures. The inventory turnover ratio improved to 30.28 times for H1 FY26, the highest in recent periods, whilst the debtors turnover ratio reached 6.95 times, suggesting efficient receivables collection.

Cash flow generation remains a critical vulnerability. Operating cash flow for FY2025 fell to ₹95.07 crores from ₹230 crores in FY2024—the lowest annual figure in recent years. This sharp 58.67% decline in cash generation occurred despite profit growth, indicating deteriorating working capital efficiency. The company consumed ₹28 crores in working capital during FY2025 compared to generating ₹95 crores in the previous year, a concerning reversal that suggests inventory buildup or extended receivables. Closing cash stood at a meagre ₹2 crores as of March 2025, down from ₹15 crores a year earlier, leaving minimal liquidity buffer.

Industry Context: Garments Sector Faces Demand Headwinds

The Indian garments and apparels sector has navigated a challenging environment over the past year, with demand volatility and margin pressures affecting most players. Nandan Denim's 40.22% stock price decline over the past year significantly underperformed the sector's 3.39% positive return, resulting in a substantial 43.61 percentage point underperformance. This divergence suggests company-specific challenges beyond broader industry trends.

The textile manufacturing landscape remains intensely competitive, with margin compression affecting most participants. Raw material price volatility, energy cost inflation, and wage pressures have squeezed operating margins across the sector. Nandan Denim's operating margin of 2.99% in Q2 FY26 sits at the lower end of the industry spectrum, indicating either unfavourable product mix, insufficient pricing power, or operational inefficiencies. The company's margin trajectory—declining from 6.73% in March 2024 to current levels—suggests structural challenges rather than temporary cyclical pressures.

Peer Comparison: Valuation Discount Reflects Operational Weakness

Nandan Denim trades at a significant discount to sector peers across most valuation metrics, reflecting market scepticism about the company's operational outlook and return generation capability. The company's price-to-earnings ratio of 12.53 times compares favourably to the sector average of approximately 108 times, though this discount appears justified given the substantially lower return on equity.

The company's price-to-book ratio of 0.75 times represents a 62% discount to the peer average of approximately 3.9 times, suggesting the market assigns limited value to Nandan Denim's asset base. This deep discount reflects concerns about the company's ability to generate adequate returns on its fixed assets, particularly given the declining operating margins. The ROE comparison proves particularly unflattering—Nandan Denim's 5.17% lags the peer average of approximately 15%, explaining much of the valuation discount. Only Nahar Industrial Enterprises, with an ROE of 5.81%, trades at a comparable price-to-book multiple of 0.49 times.

The debt-to-equity comparison reveals Nandan Denim's moderate leverage position at 0.36, lower than several peers including Donear Industries (1.62) and Nahar Industrial (0.60). However, this relatively conservative capital structure hasn't translated into superior returns, suggesting operational rather than financial leverage issues constrain performance. With a market capitalisation of ₹464.15 crores, Nandan Denim ranks fifth among its peer group, indicating limited scale advantages in a sector where size often drives purchasing power and operational efficiency.

Valuation Analysis: Attractive Multiples Cannot Offset Weak Fundamentals

Nandan Denim's valuation metrics present a classic value trap scenario—statistically cheap multiples that reflect genuine operational challenges rather than market mispricing. The company trades at a P/E ratio of 13 times trailing twelve-month earnings, representing a 43% discount to the industry P/E of 23 times. However, this discount appears justified given the company's inferior return profile, with ROE of 6.01% generating less than half the returns of better-performing peers.

The stock's enterprise value-to-EBITDA multiple of 5.36 times appears superficially attractive, particularly for a manufacturing business with tangible assets. However, this metric loses appeal when considering the company's EBITDA-to-debt ratio of 5.79, indicating that nearly six years of current EBITDA would be required to eliminate debt—a concerning leverage profile. The EV-to-EBIT multiple of 8.92 times similarly reflects the market's limited confidence in earnings quality and sustainability.

The proprietary Mojo Score of 37 out of 100 places Nandan Denim firmly in "SELL" territory, reflecting the algorithm's assessment that weak fundamentals outweigh valuation appeal. The score breakdown reveals the core issues: whilst valuation grades as "Very Attractive," the quality assessment of "Average," negative financial trend, and mildly bearish technical outlook collectively overwhelm any multiple-based appeal. The stock's 52-week price range of ₹2.96 to ₹6.05 demonstrates the market's uncertainty, with the current price of ₹3.22 sitting just 8.78% above the annual low.

Shareholding Pattern: Stable Promoter Base, Limited Institutional Interest

Nandan Denim's shareholding structure remained remarkably stable through the first half of FY2026, with promoter holding steady at 51.01% across all five recent quarters. This unwavering promoter commitment provides some governance comfort, particularly given the complete absence of pledged shares—a positive signal indicating promoters aren't leveraging their holdings for external financing. The Chiripal family and associated entities maintain control through Chiripal Industries Limited (24.96%), Chiripal Exim LLP (9.30%), and various other vehicles.

The concerning aspect of the shareholding pattern lies in the near-complete absence of institutional investors. Foreign institutional investors (FIIs) hold a negligible 0.68% as of September 2025, down from 1.40% in June 2025—a 72 basis point reduction suggesting foreign investors are reducing exposure. More tellingly, mutual funds hold precisely 0.00% of the company, indicating no domestic institutional fund manager finds the investment case compelling enough to allocate capital. Insurance companies similarly maintain zero holdings, whilst other domestic institutional investors hold just 1.32%.

The non-institutional shareholding of 46.99% represents primarily retail investors and high-net-worth individuals, a shareholder base that typically exhibits greater volatility during periods of operational stress. The sequential increase of 66 basis points from June to September 2025 in non-institutional holdings, coinciding with FII reduction, suggests institutional capital is being replaced by retail participation—often a contrarian indicator. The presence of just three FIIs with minimal aggregate holdings underscores the limited institutional validation of the company's investment thesis.

Stock Performance: Severe Underperformance Across All Timeframes

Nandan Denim's stock price performance over the past year represents one of the weakest among garments sector peers, with the shares declining 40.22% compared to the Sensex's 8.50% gain—a negative alpha of 48.72 percentage points. The stock currently trades at ₹3.22, perilously close to its 52-week low of ₹2.96 and 46.78% below its 52-week high of ₹6.05. All major moving averages—5-day (₹3.26), 20-day (₹3.27), 50-day (₹3.37), 100-day (₹3.50), and 200-day (₹3.68)—sit above the current price, indicating sustained downward momentum.

The technical picture remains decidedly bearish. The stock's current trend classification of "Mildly Bearish" as of November 3, 2025, represents a marginal improvement from the previous "Bearish" designation, though the overall trajectory remains negative. Weekly indicators show mixed signals—MACD and KST flash mildly bullish readings, whilst Bollinger Bands remain bearish. Monthly indicators prove uniformly negative, with MACD, Bollinger Bands, and KST all signalling bearish conditions. The on-balance volume (OBV) indicator shows mildly bearish on weekly and no trend on monthly, suggesting limited buying conviction.

The stock's beta of 1.50 indicates significantly higher volatility than the broader market, with annualised volatility of 43.20% compared to the Sensex's 12.26%. This high-beta characteristic means the stock amplifies market movements, creating both upside potential during rallies and magnified downside during corrections. The risk-adjusted return of -0.93 over the past year, compared to the Sensex's positive 0.69, places Nandan Denim in the "High Risk Low Return" category—the least desirable quadrant for investors. The negative Sharpe ratio confirms that the stock has destroyed value on a risk-adjusted basis.

Longer-term performance data reveals a more nuanced picture. Over two years, the stock delivered 37.87% returns with positive 8.24 percentage point alpha, whilst the five-year return of 376.61% significantly outpaced the Sensex's 92.89% gain. However, these historical gains increasingly appear disconnected from current operational realities, with the past year's severe underperformance suggesting a fundamental reassessment of the company's prospects by market participants.

Investment Thesis: Weak Fundamentals Override Valuation Appeal

The investment case for Nandan Denim presents a cautionary tale of value traps—statistically cheap multiples masking deteriorating operational fundamentals. The company's Mojo Score of 37 out of 100 reflects this dichotomy, with "Very Attractive" valuation parameters unable to overcome "Average" quality, negative financial trends, and mildly bearish technical indicators. The proprietary scoring system has maintained a consistent "SELL" rating since late September 2025, with the score oscillating between 46 and 51 as quarterly results have disappointed.

The quality assessment of "Average" appears generous given the company's weak return metrics. An ROE of 5.17% and ROCE of 4.66% indicate capital employed generates returns barely above risk-free rates, questioning the economic viability of reinvestment. The EBIT-to-interest coverage of just 1.62 times leaves minimal cushion for operational volatility, whilst the debt-to-EBITDA ratio of 5.79 times constrains financial flexibility. These metrics collectively paint a picture of a business struggling to generate adequate returns on invested capital, with limited margin for error.

Outlook: Critical Monitoring Points for Potential Stabilisation

The path forward for Nandan Denim requires demonstrable operational improvements across multiple dimensions. Investors should monitor quarterly results for signs of margin stabilisation, with particular focus on whether operating margins can recover towards the 4-5% range achieved in earlier periods. Revenue growth consistency matters more than absolute levels—sustained sequential growth over multiple quarters would signal demand stabilisation and improved order book visibility.

Cash flow generation represents the most critical metric to watch. The company must demonstrate ability to convert profits into cash, with operating cash flow ideally recovering towards ₹150-200 crores annually to support both debt servicing and modest capital expenditure. Any further deterioration in working capital or cash reserves would raise serious concerns about near-term liquidity adequacy. The current closing cash balance of ₹2 crores provides minimal buffer against operational disruptions or unexpected expenses.

Institutional investor participation would provide an important validation signal. The current complete absence of mutual fund holdings and minimal FII presence suggests sophisticated investors find the risk-reward proposition unattractive. Any meaningful institutional buying, particularly from quality-focused domestic mutual funds, would indicate improving confidence in the company's turnaround prospects. Conversely, further FII reduction from current minimal levels would reinforce negative sentiment.

Technical indicators warrant attention for potential trend reversal signals. The stock needs to reclaim its 200-day moving average at ₹3.68—a 14% upside from current levels—to suggest genuine momentum shift. Until then, the persistent bearish technical setup reinforces the fundamental concerns, with the stock trapped below all major moving averages and exhibiting weak relative strength. Volume patterns should be monitored for signs of accumulation, though current delivery volumes show mixed signals with recent uptick potentially indicating short-term trading interest rather than long-term conviction.