Nandani Creation Q3 FY26: Revenue Surge Masks Profitability Concerns

The ₹74 crore market capitalisation company, trading at ₹41.13 per share, finds itself navigating a challenging environment where top-line expansion has come at the cost of profitability. Whilst net sales surged to ₹26.87 crores in Q3 FY26 from ₹13.42 crores in Q3 FY25, margins across all levels compressed dramatically, raising questions about the sustainability of the growth strategy and pricing power in an increasingly competitive garment manufacturing landscape.

Financial Performance: Growth at What Cost?

The quarter's financial performance presents a study in contrasts. On the revenue front, Nandani Creation delivered exceptional growth, with net sales reaching ₹26.87 crores in Q3 FY26, marking a robust 100.22% year-on-year expansion. However, this impressive top-line momentum conceals significant operational challenges. On a sequential basis, revenue declined 5.22% from ₹28.35 crores in Q2 FY26, suggesting potential demand volatility or seasonal fluctuations in the garment sector.

The profitability picture deteriorated sharply across all metrics. Operating profit excluding other income stood at ₹1.81 crores with a margin of just 6.74%, representing the lowest operating margin in the trailing seven quarters. This compares unfavourably to the 15.13% margin achieved in Q3 FY25, indicating severe pricing pressure or substantial cost inflation. The net profit of ₹0.23 crores translated to a wafer-thin PAT margin of 0.86%, down from 4.92% in the year-ago quarter.

Interest costs surged to ₹0.96 crores, up 31.51% year-on-year, reflecting higher working capital requirements to support the revenue expansion. The tax rate normalised to 36.11% in Q3 FY26 from an unusually low 16.46% in the corresponding quarter last year, further pressuring bottom-line growth. On a nine-month basis for FY2026, the company reported net profit of ₹1.23 crores, down a concerning 59.27% compared to the same period in FY2025.

Operational Challenges: Margin Compression Under the Microscope

The dramatic margin compression represents the most significant red flag in Nandani Creation's recent performance. The company's gross profit margin collapsed to 3.31% in Q3 FY26 from 9.91% in Q3 FY25, suggesting either aggressive pricing to win market share or substantial raw material cost inflation that could not be passed through to customers. Employee costs rose to ₹1.96 crores from ₹1.33 crores year-on-year, though as a percentage of sales, this improved to 7.30% from 9.91%, indicating some operational leverage despite the overall margin pressure.

The company's return on equity stands at a modest 7.18% on an average basis, with the latest annual ROE at just 3.59%, placing it in the lower quartile of profitability metrics. Return on capital employed fared marginally better at 7.80% on average, though the latest figure of 6.37% suggests deteriorating capital efficiency. These weak returns on invested capital raise questions about whether the aggressive revenue growth strategy is creating sustainable shareholder value or merely chasing scale at the expense of profitability.

From a balance sheet perspective, the company maintained shareholder funds of ₹52.27 crores as of March 2025, with long-term debt reduced to ₹2.52 crores from ₹7.10 crores in the previous year. The debt-to-EBITDA ratio of 2.03 and net debt-to-equity of 0.43 suggest moderate leverage levels. However, current assets of ₹84.07 crores against current liabilities of ₹32.06 crores provide adequate liquidity coverage, though the significant working capital build-up has resulted in negative operating cash flows.

Cash Flow Dynamics: The Working Capital Trap

Perhaps the most concerning aspect of Nandani Creation's financial profile lies in its cash flow generation capability. For FY2025, the company reported negative operating cash flow of ₹16.00 crores, driven by a substantial ₹26.00 crore increase in working capital. This suggests that the revenue growth has been achieved by extending credit to customers or building inventory, both of which tie up precious cash resources and increase business risk.

The company has relied on financing activities to fund operations, raising ₹17.00 crores through financing cash flows in FY2025, which included equity capital expansion from ₹11.48 crores to ₹17.26 crores. This dilution of existing shareholders, combined with negative operating cash flows, presents a troubling picture of a business that is consuming rather than generating cash despite revenue growth. The closing cash position stood at nil as of March 2025, indicating tight liquidity management.

Industry Context: Navigating a Competitive Landscape

The garment and apparel sector in India has witnessed significant consolidation and competitive intensity, with manufacturers facing pressure from both organised retail players demanding lower prices and rising input costs. Nandani Creation's margin compression mirrors broader industry challenges, though the magnitude of the decline suggests company-specific issues beyond sector-wide trends.

The company's five-year sales CAGR of 12.06% demonstrates consistent top-line growth capability, though the five-year EBIT growth of just 0.38% reveals that this revenue expansion has not translated into proportionate profit growth. The average EBIT-to-interest coverage ratio of 1.52 times indicates limited headroom for debt servicing, particularly concerning given the working capital-intensive nature of the garment business.

Peer Comparison: Valuation Premium Without Performance

When benchmarked against peers in the garment and apparel sector, Nandani Creation presents a mixed valuation picture. The company trades at a P/E ratio of 33.33 times trailing twelve-month earnings, significantly higher than competitors such as Siddhi Cotspin (5.67x), Damodar Industries (8.45x), and Jakharia Fabric (22.56x). This valuation premium appears unjustified given the company's deteriorating margins and weak return ratios.

On a price-to-book basis, Nandani Creation trades at 1.20 times book value, which appears reasonable compared to Jakharia Fabric's 3.03 times but represents a premium to Damodar Industries' 0.44 times. The company's ROE of 7.18% marginally edges out Damodar's 7.22% but significantly trails the returns that would justify the current valuation multiples. The debt-to-equity ratio of 0.43 remains conservative compared to Damodar's 1.22, providing some financial flexibility.

Valuation Analysis: Premium Pricing for Deteriorating Fundamentals

At the current market price of ₹41.13, Nandani Creation commands a market capitalisation of ₹74.00 crores. The stock trades at 33 times trailing earnings, which appears stretched given the company's weak profitability metrics and deteriorating margin profile. The enterprise value-to-EBITDA multiple of 13.51 times and EV-to-sales of 1.20 times suggest the market is pricing in significant operational improvement that has yet to materialise.

The price-to-book ratio of 1.20 times compares to a book value per share of ₹30.28, implying a modest premium to net asset value. However, given the company's ROE of just 3.59% in the latest fiscal year, this premium appears unwarranted. The stock has been classified as having "Very Attractive" valuation by proprietary metrics, though this assessment appears to rely more on historical valuation compression than fundamental improvement.

Shareholding Pattern: Promoter Stability Amidst Institutional Absence

The shareholding structure of Nandani Creation reveals promoter holding of 41.31% as of December 2025, which has remained stable over the recent quarters after fluctuating between 41.31% and 45.69% during the year. The promoter group, led by Anuj Mundhra (21.41%), Vandana Mundhra (11.68%), and Sunita Devi Mundhra (7.60%), maintains controlling interest, though the presence of 40.58% pledged shares raises governance concerns and suggests potential financial stress at the promoter level.

Institutional participation remains minimal, with FII holding at 2.21% and no presence from mutual funds or insurance companies. This absence of institutional investors signals limited conviction from sophisticated market participants who typically conduct rigorous due diligence. The non-institutional holding of 56.48% comprises largely retail investors, making the stock susceptible to higher volatility and limited liquidity.

Stock Performance: Short-Term Momentum Masks Long-Term Underperformance

Nandani Creation's stock has delivered contrasting returns across different time horizons. The recent momentum has been strong, with the stock surging 16.65% over the past week and 13.56% over the past month, significantly outperforming the Sensex. The year-to-date return of 54.86% appears impressive, generating alpha of 56.22% versus the Sensex's -1.36% decline.

However, the longer-term picture remains deeply troubling. Over the past year, the stock has declined 27.75%, underperforming the Sensex by 35.72 percentage points. The two-year return of -38.38% and three-year return of -56.22% reveal systematic value destruction, with the stock underperforming the Sensex by 55.80 and 94.47 percentage points respectively. The stock currently trades 29.09% below its 52-week high of ₹58.00, though it has recovered 58.19% from its 52-week low of ₹26.00.

From a technical perspective, the stock has recently turned "Mildly Bullish" on February 4, 2026, after an extended period of bearish and sideways movement. The stock trades above all key moving averages (5-day, 20-day, 50-day, 100-day, and 200-day), suggesting near-term momentum, though the high beta of 1.50 indicates significantly higher volatility than the broader market. The risk-adjusted return of -0.50 over the past year, combined with volatility of 55.54%, places the stock in the "High Risk Low Return" category.

Investment Thesis: Weak Fundamentals Outweigh Valuation Appeal

The investment case for Nandani Creation rests on shaky foundations. Whilst the company has demonstrated ability to grow revenue at a healthy pace, this expansion has come at the cost of profitability, cash generation, and returns on capital. The current Mojo score of 47 out of 100, with a "SELL" rating, reflects these fundamental weaknesses despite the stock's recent price momentum and "Very Attractive" valuation classification.

The quality assessment of "Below Average" stems from weak return ratios (ROE of 7.18%, ROCE of 7.80%), poor EBIT-to-interest coverage of 1.52 times, and concerning cash flow dynamics. The financial trend classification of "Flat" reflects the deteriorating profitability despite revenue growth. Only the technical trend provides a mildly positive signal, though this appears driven more by short-term momentum than fundamental improvement.

Key Strengths & Risk Factors

Outlook: Critical Monitoring Points Ahead

The path forward for Nandani Creation requires urgent focus on margin recovery and cash flow generation. The company must demonstrate that its revenue growth can translate into sustainable profits and positive cash flows, rather than continuing to consume capital through working capital expansion. Until such improvement materialises, the stock remains a value trap despite appearing statistically cheap on certain valuation metrics.