Narbada Gems & Jewellery Q3 FY26: Profit Slips 39% QoQ Despite Revenue Resilience

The quarter's performance highlighted a concerning divergence between revenue trends and profitability. Whilst net sales declined moderately by 14.94% QoQ to ₹22.37 crores from ₹26.30 crores in Q2 FY26, the profit compression was far more severe, indicating margin pressures that warrant close scrutiny. On a year-on-year basis, revenue grew 4.00% from ₹21.51 crores in Q3 FY25, suggesting the company maintained market share despite challenging conditions.

Financial Performance: Margin Compression Overshadows Revenue Growth

Narbada Gems' Q3 FY26 results revealed significant profitability challenges despite reasonable revenue performance. Net sales for the quarter stood at ₹22.37 crores, down 14.94% QoQ from ₹26.30 crores in Q2 FY26, but up 4.00% YoY from ₹21.51 crores in Q3 FY25. The sequential decline reflects typical seasonality in the gems and jewellery sector, where Q2 often benefits from festive demand.

The most concerning aspect of Q3 FY26 was the sharp margin contraction. Operating profit margin (excluding other income) declined 386 basis points QoQ to 14.08% from 17.98% in Q2 FY26, whilst PAT margin compressed 323 basis points to 8.18% from 11.41%. This margin erosion was driven by multiple factors, including higher employee costs of ₹1.19 crores (up 19.00% QoQ) and elevated interest expenses of ₹0.67 crores (up 11.67% QoQ). The tax rate also increased to 26.80% from 25.44% in the previous quarter, adding to the profitability pressure.

On a half-yearly basis for H1 FY26 (April-September 2025), the company reported net sales of ₹47.04 crores and net profit of ₹5.33 crores, demonstrating stronger performance in the first half. However, the Q3 slowdown raises questions about sustainability of margins heading into the final quarter of the fiscal year.

Operational Challenges: Weak Returns on Capital

Narbada Gems' operational efficiency metrics reveal fundamental challenges that extend beyond quarterly fluctuations. The company's average return on equity (ROE) of 10.22% over recent periods, whilst positive, remains modest for a capital-intensive jewellery business. The latest ROE of 12.68% shows improvement but still lags behind industry leaders like Golkunda Diamond, which boasts an ROE of 18.85%.

The return on capital employed (ROCE) presents a similar picture, with an average of 9.98% and latest reading of 14.27%. These returns, whilst acceptable, indicate that the company struggles to generate superior returns on the capital deployed in its business. The half-yearly ROCE of 14.20%, though representing the highest level in recent periods, still suggests room for improvement in capital allocation and operational efficiency.

The balance sheet reveals moderate leverage with a debt-to-equity ratio of 0.47 and debt-to-EBITDA of 3.26 times. Long-term debt stands at a minimal ₹0.05 crores as of March 2025, indicating the company relies primarily on working capital financing. Current assets of ₹86.25 crores against current liabilities of ₹36.97 crores provide a comfortable current ratio of 2.33, suggesting adequate liquidity to meet short-term obligations.

A concerning trend is the deterioration in working capital management. The debtors turnover ratio for the half-year fell to its lowest level at 3.59 times, indicating slower collection cycles. Additionally, cash and cash equivalents for the half-year dropped to just ₹0.08 crores, the lowest on record, raising questions about liquidity management despite the comfortable current ratio.

Industry Context: Underperforming Peers Amid Sector Headwinds

The gems and jewellery sector has faced a challenging environment over the past year, with volatile gold prices, changing consumer preferences, and intense competition from organised players. Narbada Gems' one-year stock return of -3.81% significantly underperformed the sector average return of 13.09%, resulting in a 16.90 percentage point underperformance versus peers.

The company's market capitalisation of ₹127.00 crores positions it as the fifth-largest player amongst its peer group, firmly in micro-cap territory. This size disadvantage limits economies of scale, bargaining power with suppliers, and access to institutional capital compared to larger competitors.

Relative to peers, Narbada Gems trades at a P/E multiple of 16.17x, which sits in the middle of the pack—higher than Ashapuri Gold (9.52x) and Ausom Enterprise (5.30x), but significantly below Mini Diamonds (64.46x). The company's ROE of 10.22% exceeds most peers except Golkunda Diamond, whilst its price-to-book ratio of 2.05x appears reasonable compared to the peer average of approximately 3.30x. The moderate debt-to-equity ratio of 0.47 provides financial flexibility, though the absence of dividend payments limits income appeal for investors.

Valuation Analysis: Attractive Entry Point With Caveats

At the current price of ₹58.10, Narbada Gems trades at a P/E ratio of 16.17x, representing a significant discount to the industry P/E of 57x. The price-to-book value of 2.05x compares favourably to the stock's book value per share of ₹25.74, suggesting the market is pricing in moderate growth expectations.

The company's valuation grade stands at "Attractive" as of February 03, 2026, having oscillated between "Attractive" and "Very Attractive" over the past nine months. The EV/EBITDA multiple of 11.43x and EV/Sales of 1.67x appear reasonable for a profitable micro-cap in the gems sector, though these multiples don't account for the recent margin compression.

The PEG ratio of 0.25 suggests the stock may be undervalued relative to its growth rate, though this metric should be viewed cautiously given the company's inconsistent quarterly performance. The stock currently trades 24.55% below its 52-week high of ₹77.00 but 20.92% above its 52-week low of ₹48.05, indicating it sits in the middle of its recent trading range.

From a fair value perspective, considering the company's modest ROE of 10.22%, volatile margins, and limited scale, a P/E multiple of 12-14x appears more appropriate than the current 16.17x. This would imply a fair value range of ₹43-50 per share, suggesting the stock carries 16-26% downside risk from current levels of ₹58.10.

Shareholding: Stable Promoter Base, Zero Institutional Interest

The shareholding pattern of Narbada Gems has remained remarkably stable over the past five quarters, with promoter holding steady at 74.99% and non-institutional investors holding the remaining 25.01%. This stability, whilst providing ownership continuity, also highlights a concerning absence of institutional participation.

The complete absence of foreign institutional investors (FIIs), mutual funds, insurance companies, and other domestic institutional investors (DIIs) reflects the stock's micro-cap status, limited liquidity, and lack of research coverage. The number of FIIs and mutual funds invested in the company stands at zero, indicating the stock remains off the radar of professional fund managers.

On a positive note, promoter holding of 74.99% demonstrates strong insider confidence, with no pledging of shares reported. Key promoters include Ritesh Kumar Sanghi (11.86%), Sanjay Kumar Sanghi (11.73%), Uday Sanghi (10.19%), and Tejas Sanghi (10.19%), amongst others from the Sanghi family. The absence of pledging reduces financial risk, though the lack of institutional validation remains a concern for potential investors.

Stock Performance: Underperformance Across Timeframes

Narbada Gems' stock performance has been disappointing across most recent timeframes, with the shares generating negative alpha versus the Sensex benchmark. Over the past year, the stock declined 3.81% compared to the Sensex's 8.49% gain, resulting in negative alpha of 12.30 percentage points.

The recent three-month performance has been particularly weak, with the stock declining 16.68% compared to the Sensex's marginal 0.29% decline, translating to negative alpha of 16.39 percentage points. Year-to-date, the stock is down 10.34% versus the Sensex's 1.74% decline, indicating accelerating underperformance in early 2026.

The six-month return of 15.51% (versus Sensex's 3.89%) represents the only bright spot, generating positive alpha of 11.62 percentage points. However, this outperformance appears to have reversed sharply in recent months, with the stock entering a "mildly bearish" technical trend since January 22, 2026.

From a risk perspective, the stock exhibits high volatility of 51.41% compared to the Sensex's 11.41%, with a beta of 1.50 indicating it's 50% more volatile than the broader market. The risk-adjusted return of -0.07 for the one-year period, combined with a negative Sharpe ratio, classifies the stock as "high risk, low return"—an unfavourable combination for most investors.

Investment Thesis: Mixed Signals With Bearish Undertones

The investment case for Narbada Gems presents a complex picture with conflicting indicators across the four key parameters of near-term drivers, quality, valuation, and technical trends.

The company's near-term drivers present a mixed outlook. Whilst the quarterly financial trend is classified as "Positive" based on six-month sales growth of 21.19% and higher PAT of ₹4.83 crores for H1 FY26, the technical indicators flash "Mildly Bearish" signals. The MACD shows bearish trends on both weekly and monthly timeframes, Bollinger Bands indicate mildly bearish momentum, and the stock trades below all major moving averages (5-day, 20-day, 50-day, 100-day, and 200-day).

The quality assessment reveals an "Average" grade, reflecting the company's modest return ratios (ROE of 10.22%, ROCE of 9.98%), weak EBIT-to-interest coverage of 4.80x, and moderate debt levels (debt-to-EBITDA of 3.26x). Positive factors include healthy long-term sales growth of 22.03% and zero promoter pledging, but these are offset by the absence of institutional holdings and inconsistent profitability.

Key Strengths & Risk Factors

Outlook: What Lies Ahead

The road ahead for Narbada Gems hinges critically on management's ability to stabilise margins and demonstrate consistent quarter-on-quarter improvement. The Q4 FY26 results will be particularly important in determining whether Q3's margin compression was a temporary aberration or the beginning of a more troubling trend. Investors should closely monitor the company's ability to convert sales growth into sustainable bottom-line expansion whilst maintaining working capital discipline.