National Fertilizers Q2 FY26: Losses Deepen Amid Margin Pressure

The stock, currently trading at ₹93.19 with a market capitalisation of ₹4,571.70 crores, has significantly underperformed the broader market, declining 18.25% over the past year whilst the Sensex gained 7.19%. Trading near its 52-week low of ₹70.94 and down 28.15% from its 52-week high of ₹129.70, the small-cap fertiliser maker faces mounting concerns about its operational efficiency and profitability trajectory.

The quarterly results underscore the structural challenges facing National Fertilizers, as the company struggles to translate revenue growth into bottom-line profitability. The operating margin excluding other income contracted to 1.90% in Q2 FY26 from 2.85% in Q2 FY25, reflecting deteriorating operational efficiency. The company's inability to control costs despite higher sales volumes raises serious questions about its competitive positioning in the highly regulated fertiliser sector.

Financial Performance: Revenue Surge Masks Profitability Crisis

National Fertilizers' Q2 FY26 revenue of ₹6,763.07 crores represented a remarkable 91.36% sequential increase from Q1 FY26's ₹3,534.17 crores and a 54.04% year-on-year jump from ₹4,390.36 crores in Q2 FY25. This surge positioned the quarter as the company's highest revenue quarter in recent history, driven by increased fertiliser demand during the kharif season and higher realisations.

However, the revenue expansion failed to translate into profitability. The standalone net loss stood at ₹10.21 crores in Q2 FY26, compared to a loss of ₹10.64 crores in the year-ago quarter. On a consolidated basis, the loss deepened significantly to ₹35.81 crores from a profit of ₹12.07 crores last year, representing a staggering 396.69% decline. The profit before tax excluding other income plummeted to ₹-51.18 crores, falling 897.66% from the previous quarter.

The margin compression story is particularly concerning. Operating profit excluding other income stood at ₹128.19 crores in Q2 FY26, yielding a margin of just 1.90%. This represents a significant deterioration from the 2.85% margin in Q2 FY25 and remains far below the 7.18% margin achieved in Q4 FY24. The PAT margin turned negative at -0.53%, down from 0.27% in the year-ago quarter.

Interest costs declined to ₹54.75 crores from ₹59.95 crores year-on-year, providing some relief. However, this was insufficient to offset the operational headwinds. Depreciation remained elevated at ₹99.02 crores, up from ₹92.83 crores in Q2 FY25, reflecting the company's capital-intensive operations.

Operational Challenges: Weak Returns Highlight Capital Inefficiency

National Fertilizers' operational metrics paint a troubling picture of capital inefficiency and deteriorating returns. The company's return on equity (ROE) stood at just 6.77% as of the latest quarter, significantly below industry standards and peer averages. This weak ROE reflects the company's struggle to generate adequate returns for shareholders from the capital deployed in the business.

The return on capital employed (ROCE) fared marginally better at 8.43% on an average basis, but the latest ROCE of 5.10% represents a concerning decline. For a capital-intensive fertiliser manufacturer, such low returns indicate structural inefficiencies in asset utilisation and pricing power. The half-yearly ROCE for H1 FY26 hit a low of 4.41%, marking the weakest performance in recent periods.

The balance sheet reveals moderate leverage with a debt-to-equity ratio of 0.72, though the company has successfully eliminated long-term debt, which stood at zero as of March 2025 compared to ₹534.71 crores in March 2023. Current liabilities declined to ₹4,908.87 crores from ₹6,779.59 crores year-on-year, providing some breathing room. However, the debt-to-EBITDA ratio of 4.45 times remains elevated, indicating that the company would require over four years of current EBITDA to repay its debt obligations.

The EBIT-to-interest coverage ratio of 1.66 times is particularly concerning, as it leaves minimal cushion for any further deterioration in operating profitability. This weak coverage suggests that the company is vulnerable to interest rate fluctuations and operational shocks.

Industry Context: Regulatory Headwinds and Competitive Pressures

The fertiliser sector in India operates under a complex regulatory framework with government-controlled pricing and subsidy mechanisms. National Fertilizers, like its peers, faces the twin challenges of managing volatile input costs whilst navigating subsidy disbursement delays from the government. The company's margin compression reflects these structural industry headwinds, which have intensified in recent quarters.

The five-year sales CAGR of 6.40% appears modest, but the -21.79% EBIT CAGR over the same period reveals the sector's profitability challenges. Rising natural gas prices, which constitute a significant portion of production costs for urea manufacturers, have squeezed margins across the industry. National Fertilizers' inability to pass through these cost increases fully, due to regulated pricing, has resulted in the sustained pressure on operating margins.

The company's sales-to-capital-employed ratio of 3.73 times indicates moderate asset turnover, but this metric has failed to translate into profitability given the margin pressures. The tax ratio of 15.34% remains below standard corporate tax rates, providing some relief, though the company's loss-making position in recent quarters has rendered this advantage largely academic.

Peer Comparison: Valuation Premium Without Performance Justification

National Fertilizers trades at a significant premium to most of its fertiliser sector peers on valuation metrics, despite delivering inferior operational performance. This valuation disconnect raises serious questions about the stock's risk-reward profile at current levels.

National Fertilizers' P/E ratio of 29.56 times ranks amongst the highest in the peer group, trailing only RCF at 28.76 times. However, whilst RCF delivers an ROE of 11.13%, National Fertilizers manages just 8.35%. Paradeep Phosphates trades at a much more reasonable 13.28 times earnings whilst delivering superior ROE of 9.65%. GNFC and GSFC trade at even lower multiples of 12.91 times and 11.44 times respectively, with GNFC delivering the best ROE in the group at 12.40%.

The price-to-book value of 1.67 times also appears stretched compared to peers like GSFC (0.61 times) and GNFC (0.85 times), especially considering National Fertilizers' below-average ROE. The company's dividend yield of 1.62% is lower than GSFC (2.71%) and GNFC (3.65%), providing less income cushion for investors.

National Fertilizers' debt-to-equity ratio of 0.72 is higher than most peers, with GSFC and GNFC actually maintaining negative net debt positions. This higher leverage, combined with weaker profitability, suggests that National Fertilizers carries more financial risk than several of its competitors whilst trading at a valuation premium.

Valuation Analysis: Premium Pricing for Below-Average Quality

At the current market price of ₹93.19, National Fertilizers trades at valuations that appear difficult to justify given its operational performance and quality metrics. The company's P/E ratio of 30 times exceeds the fertiliser industry average of 24 times, despite delivering below-average returns and negative earnings momentum.

The price-to-book value of 1.67 times implies that investors are paying a 67% premium over the company's book value of ₹55.36 per share. This premium typically requires strong ROE to justify, yet National Fertilizers' ROE of 6.77% falls well short of the minimum 15% threshold that would warrant such a valuation multiple.

The EV/EBITDA multiple of 10.95 times appears reasonable on an absolute basis, but the EV/EBIT ratio of 30.12 times reveals the extent of the company's margin challenges. The wide gap between these two multiples reflects the high depreciation burden relative to operating profits. The EV/capital employed ratio of 1.39 times suggests limited value creation, as the market values the company's assets at barely 39% above their deployment cost despite years of operations.

The valuation has recently been downgraded to "Fair" from "Attractive" as of September 23, 2025, reflecting deteriorating fundamentals. The stock's distance from its 52-week high of ₹129.70 (currently down 28.15%) indicates significant value destruction for investors who entered at higher levels. With the stock trading just 31.36% above its 52-week low of ₹70.94, downside protection appears limited given the negative earnings trajectory.

Shareholding Pattern: Government Dominance with Minimal Institutional Interest

National Fertilizers' shareholding structure reflects its origins as a government-promoted entity, with the President of India maintaining a dominant 74.71% stake. This promoter holding has remained unchanged across recent quarters, providing stability but also limiting free float availability for market participants.

The institutional holding of just 6.90% is remarkably low, reflecting weak confidence from sophisticated investors. Foreign institutional investors hold a mere 0.91%, though this represents an increase of 42 basis points from the previous quarter. The presence of 45 FIIs suggests some diversified interest, but the aggregate holding remains negligible.

Mutual fund participation is virtually non-existent at 0.09%, with only five funds holding positions. This minimal mutual fund interest is particularly telling, as these institutions typically conduct thorough fundamental analysis before investing. The gradual increase from 0.07% in March 2025 to 0.09% in September 2025 suggests some tentative interest, but the absolute levels remain inconsequential.

Insurance companies hold 5.90%, down from 6.48% in March 2025, indicating a steady reduction in exposure. This declining trend, with a 14 basis point drop in Q2 FY26 alone, signals waning confidence from long-term institutional investors. The complete exit of other domestic institutional investors (DII), whose holdings fell from 0.28% to 0.00%, further reinforces the negative sentiment amongst professional investors.

The non-institutional shareholding of 18.39% comprises largely retail and high-net-worth investors, who may lack the resources for detailed fundamental analysis. The slight decline from 18.58% in the previous quarter suggests even retail investors are reducing exposure, likely in response to the deteriorating financial performance.

Stock Performance: Significant Underperformance Across Timeframes

National Fertilizers' stock performance has been disappointing across most timeframes, significantly underperforming both the broader market and its fertiliser sector peers. The stock's negative alpha across multiple periods reflects fundamental weakness rather than temporary market volatility.

The one-year return of -18.25% compared to the Sensex's +7.19% gain translates to a negative alpha of 25.44 percentage points. The year-to-date performance is even worse, with the stock down 19.56% whilst the Sensex has gained 7.93%, resulting in a negative alpha of 27.49 percentage points. This underperformance is particularly stark given that the fertiliser sector as a whole gained 11.23% over the past year, meaning National Fertilizers lagged its sector by 29.48 percentage points.

The stock's risk-adjusted return of -0.49 over the past year, combined with high volatility of 36.89%, places it firmly in the "high risk, low return" category. The beta of 1.35 indicates that the stock is 35% more volatile than the market, amplifying losses during market downturns without providing commensurate upside during rallies.

Technical indicators paint a bearish picture, with the stock in a "mildly bearish" trend since November 6, 2025. The stock trades below all key moving averages—5-day (₹93.15), 20-day (₹94.00), 50-day (₹95.45), 100-day (₹96.43), and 200-day (₹93.75)—indicating sustained selling pressure. The MACD shows bearish signals on both weekly and monthly timeframes, whilst the KST indicator confirms bearish momentum across both periods.

Delivery volumes have increased 13.32% over the past month, with recent delivery at 47.03% of total volume compared to a five-day average of 45.27%. This rising delivery participation amidst falling prices suggests genuine selling pressure rather than speculative trading, a negative sign for near-term price action.

Investment Thesis: Below-Average Quality Meets Negative Momentum

National Fertilizers' investment case is severely compromised by the convergence of multiple negative factors: deteriorating financials, weak operational metrics, stretched valuations, and bearish technical trends. The company's Mojo Score of 17 out of 100 with a "Strong Sell" rating reflects this comprehensive weakness across all evaluation parameters.

The company's quality grade has deteriorated to "below average" since August 2025, reflecting sustained weakness in fundamental performance. The five-year EBIT CAGR of -21.79% is particularly damning, indicating that operating profitability has been in structural decline for an extended period. The weak EBIT-to-interest coverage of 1.66 times leaves minimal margin for error, whilst the high debt-to-EBITDA ratio of 4.45 times constrains financial flexibility.

The financial trend turned "negative" in Q2 FY26, driven by the deepening losses and lowest-ever ROCE of 4.41% on a half-yearly basis. The debtors turnover ratio falling to 4.09 times signals working capital pressures that could further strain liquidity. These deteriorating operational metrics suggest the company is losing ground competitively within the fertiliser sector.

Outlook: Limited Catalysts for Near-Term Recovery

The outlook for National Fertilizers remains challenging, with limited visible catalysts for near-term improvement. The company operates in a highly regulated environment where pricing power is constrained, making it difficult to pass through rising input costs. The structural margin pressures are unlikely to abate unless there is significant policy reform or a sustained decline in natural gas prices.

The company's ability to return to profitability hinges largely on factors outside its control—subsidy policy, input costs, and regulated pricing. The absence of meaningful operational improvements despite several quarters of effort suggests that management has limited levers to pull. The declining institutional interest and bearish technical setup indicate that the market has lost patience with the turnaround story.

Investors should monitor quarterly results closely for any signs of margin stabilisation or improvement in return ratios. A return to positive territory in net profit, coupled with ROCE exceeding 8%, would be minimum requirements to reconsider the investment case. Until such improvements materialise, the risk-reward equation remains unfavourable.