The quarter's performance marks a continuation of troubling trends that began emerging in recent periods. Whilst net sales surged 54.08% year-on-year to ₹28.35 crores in Q2 FY26, the company's profitability metrics deteriorated sharply across the board. Operating profit margin excluding other income contracted to 6.88% from 14.73% in the year-ago quarter, whilst PAT margin shrank to a mere 0.99% from 6.63%. The sequential comparison was equally concerning, with net profit declining 61.11% from Q1 FY26's ₹0.72 crores.
Financial Performance: The Margin Collapse Story
Nandani Creation's Q2 FY26 results present a stark paradox: strong revenue momentum undermined by severe margin compression. Net sales of ₹28.35 crores represented the company's highest quarterly revenue on record, growing 4.38% sequentially from Q1 FY26's ₹27.16 crores and 54.08% year-on-year from Q2 FY25's ₹18.40 crores. This top-line expansion, however, came at a devastating cost to profitability.
| Quarter | Revenue (₹ Cr) | Net Profit (₹ Cr) | Operating Margin | PAT Margin |
|---|---|---|---|---|
| Sep'25 | 28.35 | 0.28 | 6.88% | 0.99% |
| Jun'25 | 27.16 | 0.72 | 7.81% | 2.65% |
| Mar'25 | 19.78 | 0.68 | 8.95% | 3.44% |
| Dec'24 | 13.42 | 0.66 | 15.13% | 4.92% |
| Sep'24 | 18.40 | 1.22 | 14.73% | 6.63% |
| Jun'24 | 18.04 | 1.14 | 14.52% | 6.32% |
| Mar'24 | 19.59 | 2.74 | 22.92% | 13.99% |
The margin erosion is particularly alarming when examined across multiple dimensions. Operating profit excluding other income fell to ₹1.95 crores from ₹2.71 crores in Q2 FY25, despite a 54% increase in revenue. This indicates that incremental revenue is being generated at significantly lower profitability, suggesting either aggressive pricing to capture market share or inefficient cost management. Interest costs surged to ₹1.05 crores—the highest quarterly level on record—from ₹0.60 crores in Q2 FY25, reflecting increased borrowing costs that further pressured profitability.
The gross profit margin contraction to 3.21% from 13.15% year-on-year represents a near-collapse in operational efficiency at the most fundamental level. This dramatic deterioration suggests significant challenges in raw material procurement, production efficiency, or pricing power. Employee costs rose to ₹1.70 crores from ₹1.45 crores, representing 6.00% of sales compared to 7.88% in the prior year—one of the few metrics showing relative improvement.
Operational Challenges: The Profitability Crisis
The company's operational performance reveals deep-seated structural challenges that extend beyond cyclical pressures. Return on Equity (ROE) stands at a weak 3.10% on average, significantly below industry standards and indicating poor capital efficiency. The latest ROE of 7.08% shows some improvement but remains inadequate for a growth-oriented manufacturing business. Return on Capital Employed (ROCE) of 7.96% average suggests the company is barely generating returns above the cost of capital, raising questions about the economic viability of incremental investments.
Critical Concern: Working Capital Deterioration
The most alarming aspect of Nandani Creation's financials lies in its cash flow dynamics. For FY25, the company reported a negative operating cash flow of ₹16.94 crores—the worst annual performance on record. This working capital drain, driven by a ₹26.00 crore increase in working capital requirements, suggests the company is funding revenue growth through unsustainable balance sheet expansion. Current assets ballooned to ₹84.07 crores by March 2025 from ₹58.06 crores a year earlier, whilst current liabilities increased to ₹32.06 crores from ₹24.46 crores.
The balance sheet metrics paint a picture of increasing financial stress. Whilst shareholder funds grew to ₹52.27 crores by March 2025 from ₹29.87 crores a year earlier—primarily through equity infusion rather than retained earnings—long-term debt decreased to ₹2.52 crores from ₹7.10 crores. However, this debt reduction appears to have been replaced by increased working capital financing, as evidenced by the surge in current liabilities and negative operating cash flows. The company's debt-to-EBITDA ratio of 1.82 and net debt-to-equity of 0.50 appear manageable on the surface, but the underlying cash generation weakness raises sustainability concerns.
Interest coverage, measured by EBIT to interest, stands at a precarious 1.53 times on average. With interest costs at record highs of ₹1.05 crores in Q2 FY26, the company's ability to service debt from operating profits has deteriorated significantly. This squeeze on interest coverage, combined with margin compression, creates a dangerous dynamic where profitability is increasingly vulnerable to any adverse operational or market developments.
Industry Context: Garment Sector Headwinds
Nandani Creation operates in the highly competitive and fragmented garments and apparels sector, where pricing power is limited and margins are perpetually under pressure. The company's 12.68% decline in stock price over the past year significantly underperformed the sector's 1.03% return, resulting in a 13.71 percentage point underperformance. This relative weakness reflects investor concerns about the company's specific operational challenges rather than broader sector trends.
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | -7.06% | +1.25% | -8.31% |
| 1 Month | -7.88% | +2.43% | -10.31% |
| 3 Month | -16.16% | +5.32% | -21.48% |
| 6 Month | -21.49% | +2.52% | -24.01% |
| 1 Year | -12.68% | +7.41% | -20.09% |
| 2 Years | -56.15% | +29.49% | -85.64% |
| 3 Years | -68.04% | +36.75% | -104.79% |
The garment manufacturing sector faces multiple structural challenges including intense competition from organised and unorganised players, volatile raw material costs, thin operating margins, and limited pricing power. For smaller players like Nandani Creation, these challenges are amplified by scale disadvantages and limited bargaining power with both suppliers and customers. The company's five-year sales CAGR of 10.64% demonstrates some growth momentum, but the EBIT growth of just 5.86% over the same period highlights the margin pressure that has persisted across cycles.
Peer Comparison: Valuation Disconnect
When benchmarked against industry peers, Nandani Creation's metrics reveal a company trading at a premium valuation despite inferior operational performance. The stock's P/E ratio of 20.13x is higher than the peer average of approximately 18x, whilst its ROE of 3.10% trails significantly behind competitors. This valuation-quality disconnect suggests the market may not have fully priced in the company's operational challenges.
| Company | P/E Ratio | ROE % | Debt/Equity | Price/Book |
|---|---|---|---|---|
| Nandani Creation | 20.13 | 3.10% | 0.50 | 1.26 |
| Jakharia Fabric | 22.56 | 3.31% | 0.28 | 3.33 |
| Bang Overseas | 18.50 | 1.56% | 0.26 | 0.83 |
| Shekhawati Inds | 11.14 | 39.41% | -0.46 | 3.76 |
| Celebrity Fashion | NA (Loss Making) | 30.51% | 4.20 | 6.14 |
| Titaanium Ten | 18.72 | N/A | N/A | N/A |
The comparison reveals that Nandani Creation's ROE of 3.10% places it near the bottom of the peer group, with only Bang Overseas performing worse at 1.56%. Meanwhile, Shekhawati Industries demonstrates what is possible in the sector with an impressive 39.41% ROE, albeit likely operating in different product segments or markets. The company's Price-to-Book ratio of 1.26x is lower than the peer average of approximately 3.50x, suggesting some valuation discount, but this appears insufficient given the operational underperformance and deteriorating financial trends.
Valuation Analysis: Attractive Pricing, Weak Fundamentals
Despite the operational challenges, Nandani Creation's valuation metrics present an interesting paradox. The stock trades at a P/E ratio of 20.13x based on trailing twelve months earnings, which appears reasonable in isolation. The Price-to-Book ratio of 1.26x suggests the stock trades at a modest premium to its book value of ₹30.28 per share. The company's valuation grade has fluctuated between "Very Attractive" and "Attractive" over recent months, currently standing at "Very Attractive" as of August 2025.
However, these seemingly attractive valuation metrics must be viewed in the context of rapidly deteriorating fundamentals. The company's earnings quality is questionable given the sharp margin compression and negative operating cash flows. With Q2 FY26 net profit at just ₹0.28 crores, the trailing earnings base is weak and likely unsustainable at current operational efficiency levels. The EV/EBITDA multiple of 10.67x and EV/Sales of 1.17x appear reasonable, but these metrics fail to capture the working capital intensity and cash generation challenges that plague the business model.
Shareholding Pattern: Stable Base, Limited Institutional Interest
The shareholding pattern reveals a stable promoter base but concerning lack of institutional validation. Promoter holding has remained steady at 40.58% over the past five quarters, with 40.58% of shares pledged—a significant concern that suggests promoters may be facing liquidity constraints or using their holdings to secure financing for the business or personal needs.
| Quarter | Promoter | FII | MF | Insurance | Non-Inst |
|---|---|---|---|---|---|
| Sep'25 | 40.58% | 2.21% | 0.00% | 0.00% | 56.48% |
| Jun'25 | 40.58% | 2.71% | 0.00% | 0.00% | 51.60% |
| Apr'25 | 40.58% | 2.45% | 0.00% | 0.00% | 56.24% |
| Mar'25 | 40.58% | 2.71% | 0.00% | 0.00% | 51.60% |
| Dec'24 | 40.58% | 2.71% | 0.00% | 0.00% | 51.60% |
Foreign Institutional Investor (FII) holding declined marginally to 2.21% in September 2025 from 2.71% in June 2025, representing a 0.50 percentage point reduction. More concerning is the complete absence of mutual fund and insurance company holdings, suggesting domestic institutional investors see insufficient merit in the company's investment case. The non-institutional shareholding has fluctuated between 51.60% and 56.48%, indicating retail investor activity but no sustained institutional accumulation.
Stock Performance: Persistent Underperformance
Nandani Creation's stock performance has been dismal across all meaningful timeframes, with the stock trading at ₹34.49 as of November 12, 2025—down 41.54% from its 52-week high of ₹59.00 and barely 8.09% above its 52-week low of ₹31.91. The stock currently trades below all major moving averages, including the 5-day (₹35.53), 20-day (₹35.79), 50-day (₹36.95), 100-day (₹39.42), and 200-day (₹42.25) moving averages, signalling persistent bearish momentum.
The technical picture is uniformly negative, with the overall trend classified as "Mildly Bearish" as of November 3, 2025. Key technical indicators paint a concerning picture: MACD shows bearish signals on weekly charts, Bollinger Bands indicate bearish trends on both weekly and monthly timeframes, and moving averages remain firmly bearish. The stock's beta of 1.50 suggests it is significantly more volatile than the broader market, amplifying both gains and losses—though recent performance has been exclusively on the downside.
"With margins collapsing, cash flows negative, and institutional investors absent, Nandani Creation faces an existential challenge to restore operational efficiency before investor patience runs out entirely."
Investment Thesis: Quality Deficit Overshadows Valuation Appeal
The investment case for Nandani Creation is severely compromised by deteriorating fundamentals that overshadow any perceived valuation attractiveness. The company's Mojo Score of 23 out of 100 places it firmly in "Strong Sell" territory, reflecting the confluence of negative factors across multiple dimensions. The quality assessment rates the company as "Below Average," acknowledging that whilst it demonstrates some long-term sales growth (10.64% CAGR), the profitability metrics and capital efficiency remain deeply inadequate.
The financial trend is classified as "Negative" based on the September 2025 quarter results, with multiple red flags including the lowest operating profit to net sales ratio (6.88%), highest interest costs (₹1.05 crores), and lowest EPS (₹0.15). The technical trend remains "Mildly Bearish," providing no support for contrarian positioning. This combination of negative quality, deteriorating financials, and bearish technicals creates a high-risk scenario where even the "Very Attractive" valuation grade fails to justify investment.
Key Strengths & Risk Factors
Key Strengths
- Revenue Momentum: Strong top-line growth of 54.08% YoY in Q2 FY26, indicating market share gains or category expansion.
- Long-Term Growth: Five-year sales CAGR of 10.64% demonstrates sustained business expansion capability.
- Manageable Leverage: Debt-to-equity ratio of 0.50 and debt-to-EBITDA of 1.82 remain within acceptable ranges.
- Valuation Appeal: Trading at P/BV of 1.26x and classified as "Very Attractive" on valuation metrics.
- Stable Promoter Base: Consistent 40.58% promoter holding provides management continuity.
Key Concerns
- Margin Collapse: Operating margin crashed to 6.88% from 14.73% YoY; PAT margin at just 0.99%.
- Profit Destruction: Net profit plunged 77.05% YoY despite 54% revenue growth—severe operational inefficiency.
- Cash Flow Crisis: Negative operating cash flow of ₹16.94 crores in FY25; working capital drain unsustainable.
- Weak Returns: ROE of 3.10% and ROCE of 7.96% indicate poor capital efficiency and value destruction.
- High Pledging: 40.58% of promoter shares pledged raises concerns about financial stress.
- No Institutional Support: Zero mutual fund and insurance holdings; declining FII interest.
- Technical Weakness: Stock below all moving averages; persistent bearish trend across timeframes.
Outlook: What to Watch
Positive Catalysts
- Margin Recovery: Any signs of operating margin stabilisation above 10% would signal operational improvement.
- Cash Flow Turnaround: Positive operating cash flow generation would address sustainability concerns.
- Interest Cost Control: Reduction in quarterly interest expenses below ₹0.80 crores would improve profitability.
- Institutional Entry: Mutual fund or insurance company stake-building would validate investment case.
Red Flags
- Further Margin Erosion: Operating margins falling below 6% would signal deepening crisis.
- Continued Cash Burn: Another year of negative operating cash flows would threaten viability.
- Promoter Selling: Any reduction in promoter stake or increase in pledging would be alarming.
- Debt Increase: Rising debt levels to fund working capital would compound financial stress.
- Revenue Slowdown: Loss of top-line momentum would eliminate the sole remaining positive narrative.
The Verdict: Operational Crisis Demands Exit
Score: 23/100
For Fresh Investors: Avoid entirely. The combination of collapsing margins, negative cash flows, weak return ratios, and high promoter pledging creates an unacceptable risk profile. Even the seemingly attractive valuation cannot compensate for the fundamental operational deterioration and lack of institutional validation.
For Existing Holders: Exit on any price recovery towards ₹38-40 levels. The Q2 FY26 results represent a continuation and acceleration of negative trends, not a temporary aberration. With margins at record lows, cash flows deeply negative, and no clear path to improvement visible, the risk-reward is heavily skewed to the downside. The 77% profit decline despite 54% revenue growth demonstrates a broken business model that requires fundamental restructuring.
Fair Value Estimate: ₹28-30 (18-13% downside from current levels), based on normalised earnings of ₹0.80-1.00 crores quarterly and a P/E multiple of 15-16x reflecting below-average quality and negative momentum.
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.
