National Fittings Ltd Q2 FY26: Strong Revenue Growth Amid Margin Pressures

The stock has responded positively to recent operational momentum, trading at ₹196.20 as of 15 October 2025, down 1.41% on the day but maintaining gains of 45.77% over the past year. With a price-to-earnings ratio of 22.47x and a modest dividend yield of 0.46%, the company presents a balanced risk-reward profile for investors seeking exposure to India's industrial manufacturing sector.

The company's quarterly performance reveals a business navigating the complexities of industrial demand cycles whilst managing cost pressures. Revenue momentum remained robust, driven by improved capacity utilisation and order book execution, though profitability faced headwinds from margin compression. The sequential decline in net profit, despite higher revenue, underscores the challenges of maintaining pricing power in a competitive manufacturing environment.

Financial Performance: Revenue Strength Masks Margin Erosion

National Fittings demonstrated commendable top-line growth in Q2 FY26, with net sales reaching ₹23.64 crores, marking a 14.87% increase from Q1 FY26's ₹20.58 crores and a substantial 26.55% surge over Q2 FY25's ₹18.68 crores. This revenue acceleration reflects improving demand conditions in the castings and forgings segment, as well as the company's success in securing new orders and expanding its customer base.

However, profitability metrics painted a more nuanced picture. Operating profit (excluding other income) stood at ₹2.44 crores in Q2 FY26, generating an operating margin of 10.32% — a sharp contraction from Q1 FY26's 17.35%. This 703-basis-point sequential decline suggests rising input costs and competitive pricing pressures eroded the company's ability to protect margins despite higher volumes. Year-on-year, operating margins improved from 7.44% in Q2 FY25, indicating that the business has made progress in operational efficiency, though recent quarter trends warrant close monitoring.

Net profit of ₹1.84 crores in Q2 FY26 represented a PAT margin of 7.78%, down from 12.73% in the previous quarter but significantly improved from 4.50% a year earlier. The sequential profit decline stemmed primarily from margin compression rather than revenue weakness, highlighting the importance of cost management in sustaining profitability. Employee costs remained relatively stable at ₹2.46 crores, whilst interest expenses declined to ₹0.12 crores from ₹0.17 crores quarter-on-quarter, reflecting improved financial leverage.

Other income contributed ₹1.17 crores in Q2 FY26, up from ₹0.91 crores in Q1 FY26, representing 42.24% of profit before tax — a material proportion that raises questions about the sustainability of core operating profitability. This heavy reliance on non-operating income, likely from treasury operations or asset monetisation, suggests that underlying business margins require strengthening to support consistent earnings growth.

Operational Dynamics: Balancing Growth and Efficiency

National Fittings' operational performance reveals a company striving to scale operations whilst navigating cost inflation and competitive pressures. The return on equity of 9.93% in Q2 FY26 demonstrates adequate capital efficiency, positioning the company slightly above its five-year average ROE of 6.49%. This improvement reflects better asset utilisation and working capital management, though the metric remains modest by industrial standards and suggests room for further operational enhancement.

Return on capital employed stood at 13.51% in the latest quarter, significantly above the five-year average of 7.96%, indicating that management has successfully deployed capital into productive assets. The company's debt-to-equity ratio of 0.10 reflects conservative financial leverage, with total debt of just ₹5 crores against shareholder funds of ₹80.98 crores as of March 2025. More impressively, National Fittings maintains a net cash position of negative ₹45 crores — meaning the company holds ₹45 crores more in cash than debt — providing substantial financial flexibility for growth investments or weathering industry downturns.

Working capital management showed mixed signals. Current assets surged to ₹68.49 crores in FY25 from ₹33.96 crores in FY24, whilst current liabilities declined to ₹16.72 crores from ₹23.53 crores, resulting in a substantial improvement in liquidity position. However, this working capital build-up requires efficient deployment to generate returns. Cash flow from operations reached ₹8 crores in FY25, down from ₹9 crores in FY24, suggesting that whilst the business generates positive operating cash, growth is consuming working capital.

The company's asset base underwent significant transformation in FY25, with fixed assets declining to ₹27.05 crores from ₹45.02 crores in FY24. This reduction, coupled with a dramatic cash flow from investing activities of ₹37 crores (likely from asset sales), explains the exceptional profit of ₹14.49 crores recorded in Q4 FY25. Whilst asset monetisation strengthened the balance sheet, it also raises questions about the company's growth strategy and whether it will reinvest in capacity expansion or return capital to shareholders.

Industry Context: Navigating Manufacturing Headwinds

The castings and forgings sector faces a challenging operating environment characterised by volatile raw material prices, particularly steel and alloy inputs, alongside intense competition from both domestic and imported products. National Fittings operates in a fragmented industry where pricing power remains limited, and customers increasingly demand customised solutions at competitive rates. The company's ability to grow revenue by 26.55% year-on-year suggests it has successfully differentiated its offerings or expanded into new market segments, though margin pressures indicate these gains have come at the cost of profitability.

India's manufacturing sector has shown resilience despite global economic uncertainties, with government initiatives such as 'Make in India' and infrastructure spending supporting demand for industrial components. National Fittings' exposure to automotive, engineering, and industrial machinery segments positions it to benefit from domestic manufacturing growth, though cyclical demand patterns and working capital intensity characteristic of the sector require careful management.

Peer Comparison: Valuation and Competitive Positioning

National Fittings' valuation metrics present an interesting contrast when compared with peers in the castings and forgings sector. At a P/E ratio of 22.47x, the company trades at a premium to most comparable businesses, reflecting market expectations of earnings growth and quality. The price-to-book ratio of 2.23x appears reasonable given the company's improving return on equity, though it trades above peers like Shri Bajrang Alloys (P/BV of 0.52x) and below Remi Edelstahl Tubulars (P/BV of 3.65x).

National Fittings demonstrates superior return on equity (9.93%) compared to the peer average of approximately 7%, justifying its valuation premium to some extent. The company's negative debt-to-equity ratio (indicating net cash position) provides a significant competitive advantage over leveraged peers, offering financial resilience during industry downturns. However, the absence of dividend payments by most peers highlights sector-wide capital retention strategies, with National Fittings' 0.46% yield representing a modest but positive shareholder return.

The company ranks 25th out of 45 companies in the castings and forgings sector by market capitalisation, positioning it as a mid-sized player with growth potential. Its ₹177-crore market cap places it firmly in the micro-cap category, which typically commands lower valuations due to liquidity concerns and higher perceived risk, yet National Fittings maintains a premium multiple — suggesting investors recognise improving fundamentals or growth prospects.

Valuation Analysis: Fair Pricing with Selective Appeal

At the current price of ₹196.20, National Fittings trades at 2.23 times its book value of ₹89.15 per share, representing a reasonable premium for a company generating nearly 10% return on equity. The P/E ratio of 22.47x appears elevated compared to the sector average but aligns with the company's five-year EBIT growth CAGR of 51.27%, yielding a PEG ratio of 0.46x — a metric that suggests the stock may be undervalued relative to its growth trajectory.

The stock's 52-week range of ₹109.95 to ₹235.00 indicates significant volatility, with the current price positioned 16.51% below the high and 78.44% above the low. This wide trading range reflects the micro-cap nature of the stock and the market's evolving assessment of the company's prospects. The valuation grade recently shifted to 'Fair' from 'Attractive' on 26 September 2025 at ₹195, suggesting the current price level adequately reflects near-term fundamentals without offering a significant margin of safety.

Enterprise value metrics provide additional perspective. The EV/EBITDA multiple of 12.92x and EV/Sales ratio of 1.63x position National Fittings in the middle range of sector valuations, neither exceptionally cheap nor expensive. The EV/Capital Employed ratio of 3.74x suggests the market values the company's deployed capital at a reasonable premium, consistent with improving returns on capital employed.

Shareholding Pattern: Stable Promoter Base with Limited Institutional Interest

National Fittings' shareholding structure has remained remarkably stable over the past five quarters, with promoter holding steady at 34.04% and non-institutional investors maintaining 65.95%. This consistency suggests a committed promoter group and a retail-dominated shareholder base, though the absence of meaningful institutional participation raises questions about the company's visibility and liquidity in the market.

The minimal institutional presence (0.01% mutual fund holding, zero FII and insurance participation) indicates that National Fittings operates largely off the radar of professional investors. This limited institutional ownership can be both a risk and opportunity — risk in terms of lower liquidity and potential volatility, but opportunity if improving fundamentals eventually attract institutional attention, potentially driving valuation re-rating.

The absence of promoter pledging (0.00%) provides comfort regarding corporate governance and financial stability of the controlling shareholders. The number of non-institutional shareholders declined marginally from 5,027 to 4,998, suggesting modest retail investor attrition, though this could simply reflect normal portfolio churn rather than fundamental concerns.

Stock Performance: Exceptional Long-Term Returns with Recent Consolidation

National Fittings has delivered extraordinary returns to long-term shareholders, with the stock generating a remarkable 697.56% return over five years compared to the Sensex's 107.95% gain — an outperformance of 589.61 percentage points. This exceptional performance reflects the company's transformation from a struggling manufacturer to a more stable operation, though recent price action suggests momentum has moderated.

The stock's beta of 1.50 indicates high volatility relative to the broader market, with the stock typically rising and falling by 50% more than the Sensex. This high-beta characteristic aligns with the micro-cap nature of the stock and its limited liquidity, making it suitable primarily for risk-tolerant investors with longer investment horizons.

Recent technical indicators present a bullish picture, with the stock trading above all major moving averages — 5-day (₹194.95), 20-day (₹191.92), 50-day (₹182.55), 100-day (₹179.41), and 200-day (₹154.14). The technical trend shifted to 'Bullish' on 9 October 2025 at ₹202, though the stock has since retreated slightly to ₹196.20. MACD indicators show bullish signals on both weekly and monthly timeframes, whilst Bollinger Bands suggest the stock remains in an uptrend.

Delivery volumes declined 65.38% versus the five-day average in the most recent trading session, suggesting reduced investor conviction in the current price action. However, the trailing one-month delivery volume increased 180.03% compared to the previous month, indicating growing retail investor interest in the stock over the medium term.

Investment Thesis: Selective Opportunity with Execution Risks

National Fittings presents a mixed investment case characterised by strong revenue momentum, improving capital efficiency, and a fortress balance sheet, offset by margin pressures, limited institutional following, and execution uncertainties. The company's proprietary investment score of 68 out of 100 places it in 'HOLD' territory, reflecting this balanced risk-reward profile.

The bull case rests on several pillars: accelerating revenue growth (26.55% YoY), improving return on equity (9.93% vs 6.49% five-year average), minimal financial leverage with net cash position, absence of promoter pledging, and exceptional long-term stock performance. The company operates in a sector poised to benefit from India's manufacturing expansion, and its micro-cap status offers potential for significant valuation re-rating if fundamentals continue improving and institutional investors take notice.

Conversely, the bear case highlights concerning margin compression (operating margin fell 703 bps QoQ), heavy reliance on other income (42.24% of PBT), limited institutional participation suggesting potential quality or governance concerns, high stock volatility (beta of 1.50), and modest dividend payouts indicating limited near-term cash returns. The company's average quality grade and inconsistent quarterly profitability raise questions about business model sustainability.

Outlook: Key Monitoring Points for Investors

The trajectory of National Fittings over the coming quarters will depend critically on management's ability to protect and expand operating margins whilst sustaining revenue growth. Investors should closely monitor several key indicators to assess whether the company can transition from a cyclical turnaround story to a sustainable growth business.

The manufacturing sector outlook remains constructive, supported by government infrastructure spending and 'Make in India' initiatives, though global economic uncertainties and commodity price volatility present ongoing challenges. National Fittings' success will ultimately depend on execution — converting revenue growth into sustainable profits, maintaining balance sheet strength, and gradually attracting institutional investor attention through consistent performance.