The quarter's performance represents a dramatic deterioration from the previous period, with the company's core lending business appearing to have virtually stalled. Revenue declined 83.96% year-on-year as well, suggesting systemic challenges rather than temporary disruptions. The company's operating profit before depreciation, interest, and tax (excluding other income) turned sharply negative at ₹-0.43 crores, reflecting a margin of -252.94%, compared to a positive ₹0.44 crores and 40.37% margin in Q1 FY26.
What prevented a complete disaster was the company's heavy reliance on other income, which contributed ₹1.34 crores in Q2 FY26, accounting for a staggering 157.65% of profit before tax. This dependency on non-operating income raises fundamental questions about the quality and sustainability of earnings, a critical red flag for investors evaluating NBFCs where core lending profitability should drive performance.
Financial Performance: A Quarter of Severe Contraction
The sequential quarterly comparison reveals the severity of Paragon Finance's operational challenges. Net sales plummeted from ₹1.09 crores in Q1 FY26 to just ₹0.17 crores in Q2 FY26, an 84.40% decline that suggests either a dramatic reduction in lending activity, significant loan repayments without fresh disbursements, or potential recognition issues. Employee costs remained relatively stable at ₹0.37 crores, unchanged from the previous quarter, indicating that the company maintained its workforce despite the revenue collapse.
| Quarter | Revenue (₹ Cr) | QoQ Change | Net Profit (₹ Cr) | QoQ Change | PAT Margin |
|---|---|---|---|---|---|
| Sep'25 (Q2) | 0.17 | -84.40% | 0.56 | -60.00% | 329.41% |
| Jun'25 (Q1) | 1.09 | +319.23% | 1.40 | +270.73% | 128.44% |
| Mar'25 (Q4) | 0.26 | -218.18% | -0.82 | +173.33% | -315.38% |
| Dec'24 (Q3) | -0.22 | -120.75% | -0.30 | -171.43% | 136.36% |
| Sep'24 (Q2) | 1.06 | -3.64% | 0.42 | -58.42% | 39.62% |
| Jun'24 (Q1) | 1.10 | +41.03% | 1.01 | +124.44% | 91.82% |
| Mar'24 (Q4) | 0.78 | — | 0.45 | — | 57.69% |
The tax rate in Q2 FY26 stood at 34.12%, significantly higher than the 6.04% in Q1 FY26, further pressuring net profitability. Profit before tax declined from ₹1.49 crores to ₹0.85 crores, a 42.95% sequential drop. The pattern of extreme volatility across recent quarters – with losses in Q3 and Q4 FY25, followed by strong Q1 FY26 results, and now this sharp decline – suggests fundamental instability in the business model rather than normal cyclical variations.
Critical Concern: Other Income Dependency
In Q2 FY26, other income of ₹1.34 crores constituted 157.65% of profit before tax, meaning the company would have reported significant losses without non-operating income. For an NBFC, such heavy reliance on other income rather than core lending operations is a major red flag, indicating that the primary business is not generating sustainable profits. This pattern has persisted across recent quarters, with other income consistently propping up reported profitability.
Operational Challenges: Weak Return Metrics Signal Deeper Issues
Paragon Finance's return on equity (ROE) of just 2.58% ranks among the weakest in the financial services sector, reflecting poor capital efficiency and the company's inability to generate meaningful returns for shareholders. The five-year average ROE of 4.38% is similarly anaemic, well below the double-digit returns expected from well-managed NBFCs. Return on capital employed (ROCE) stands at a negative 3.58%, indicating that the company is actually destroying value rather than creating it.
The company's balance sheet shows minimal leverage with a debt-to-equity ratio of just 0.02, which might appear conservative but actually reflects the company's inability to scale operations or secure meaningful borrowing capacity. For an NBFC, which typically operates with higher leverage to drive returns, this low debt level combined with weak profitability suggests limited access to wholesale funding markets or a deliberate strategy to avoid expansion given operational challenges.
The five-year sales growth rate of -18.96% and EBIT growth of -14.12% paint a picture of sustained contraction rather than growth, with the business shrinking over time. This long-term decline, combined with the current quarter's dramatic revenue collapse, suggests fundamental challenges in loan origination, customer acquisition, or portfolio quality that management has been unable to address over multiple years.
Quality Assessment: Below Average Company with Deteriorating Fundamentals
Paragon Finance currently holds a "Below Average" quality grade, reflecting its weak long-term financial performance across multiple parameters. The company has maintained this below-average status since November 2025, having previously failed to qualify for quality assessment altogether prior to April 2023. With negative sales growth, declining EBIT, and minimal institutional interest (0.0% institutional holdings), the company lacks the fundamental strengths typically associated with investment-grade NBFCs.
Quality Grade Breakdown
Current Assessment: Below Average – Based on sustained negative growth, weak profitability metrics, and absence of institutional investor confidence. The company's average ROE of 4.38% falls well short of the 15%+ returns generated by quality NBFCs, whilst the negative five-year growth rates indicate a shrinking business rather than expansion.
Peer Comparison: Lagging on Valuation and Returns
Within the NBFC peer group, Paragon Finance presents a mixed valuation picture. Trading at a P/E ratio of 25.32x, the company commands a significant premium to peers like KJMC Corporate (19.26x) and Gilada Finance (8.94x), despite delivering inferior returns. The company's price-to-book ratio of 0.65x appears attractive on the surface, suggesting the stock trades below its book value, but this discount likely reflects market scepticism about the quality of assets and future earnings potential.
| Company | P/E Ratio | P/BV Ratio | ROE (%) | Debt/Equity |
|---|---|---|---|---|
| Paragon Finance | 25.32 | 0.65 | 4.38% | 0.02 |
| KJMC Corporate | 19.26 | 0.32 | 1.93% | 0.08 |
| Abhishek Finlease | NA (Loss Making) | 3.22 | 2.43% | 0.00 |
| TCI Finance | 6.06 | -0.28 | 0.0% | -0.02 |
| Gilada Finance | 8.94 | 0.76 | 7.99% | 0.38 |
Paragon Finance does demonstrate higher ROE (4.38%) compared to most peers in this microcap segment, though Gilada Finance's 7.99% ROE shows that better returns are achievable. The company's minimal leverage (0.02 debt-to-equity) contrasts with Gilada's 0.38, suggesting Paragon is either unable or unwilling to use debt to drive growth, a significant disadvantage in the capital-intensive NBFC business where leverage is essential for competitive returns.
Valuation Analysis: Fair Price Masks Fundamental Weakness
At ₹50.05, Paragon Finance carries a "Fair" valuation grade, having transitioned from "Very Expensive" in early November 2025. The P/E ratio of 25.32x appears reasonable for a financial services company, though it represents a premium given the weak operational performance. The price-to-book ratio of 0.65x suggests the market is pricing in significant uncertainty about asset quality and future profitability, with investors unwilling to pay even book value for the company's equity.
The enterprise value metrics present concerning readings, with EV/EBITDA at -20.58x and EV/EBIT at -18.28x, both negative due to the company's operating losses when excluding other income. The EV/Sales ratio of 16.31x appears elevated for a company experiencing revenue contraction, though the microcap nature and illiquidity of the stock may contribute to valuation anomalies. With no dividend yield and a PEG ratio marked as not applicable due to negative growth, traditional valuation metrics offer limited comfort.
Shareholding Pattern: Promoter Consolidation Amid Retail Exit
Promoter holding has increased from 70.45% in December 2024 to 72.31% in December 2025, with a notable 1.45 percentage point increase in the most recent quarter alone. This consolidation suggests promoters are either supporting the stock or taking advantage of low valuations to increase their stake. The promoter group includes entities such as Mahant Vanijya Pvt Ltd (19.24%), Shreya Gupta (9.09%), and Basera Abasan LLP (8.25%), with no pledging of shares reported.
| Quarter | Promoter % | Change | FII % | MF % | Non-Institutional % |
|---|---|---|---|---|---|
| Dec'25 | 72.31% | +1.45% | 0.00% | 0.00% | 27.69% |
| Sep'25 | 70.86% | — | 0.00% | 0.00% | 29.14% |
| Jun'25 | 70.86% | +0.13% | 0.00% | 0.00% | 29.14% |
| Mar'25 | 70.73% | +0.28% | 0.00% | 0.00% | 29.27% |
| Dec'24 | 70.45% | — | 0.00% | 0.00% | 29.55% |
The complete absence of foreign institutional investors (FIIs), mutual funds, insurance companies, and other domestic institutional investors (DIIs) is particularly telling. Zero institutional participation signals that professional investors see insufficient value or excessive risk in the company, limiting liquidity and price discovery. Non-institutional holdings have declined from 29.55% to 27.69% over the past year, suggesting retail investors are gradually exiting as promoters accumulate.
Stock Performance: Sustained Underperformance Across Timeframes
Paragon Finance shares have declined 11.57% over the past year, significantly underperforming the Sensex's 9.01% gain and generating a negative alpha of 20.58 percentage points. The stock has also underperformed its NBFC sector peers, which delivered 23.56% returns over the same period, resulting in a 35.13 percentage point underperformance versus the sector. This sustained underperformance reflects deteriorating fundamentals and lack of investor confidence.
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | +10.85% | +0.64% | +10.21% |
| 1 Month | -1.38% | +0.83% | -2.21% |
| 3 Months | -8.75% | +0.88% | -9.63% |
| 6 Months | -3.86% | +5.53% | -9.39% |
| 1 Year | -11.57% | +9.01% | -20.58% |
| 2 Years | +8.43% | +17.71% | -9.28% |
| 3 Years | +51.44% | +38.88% | +12.56% |
The stock currently trades in a bearish technical trend, having transitioned from mildly bearish on February 10, 2026. With a beta of 1.50, the stock exhibits 50% higher volatility than the broader market, classified as a high-beta stock that amplifies market movements in both directions. The risk-adjusted return over one year stands at -0.14 with volatility of 85.40%, placing it in the "high risk, low return" category – an unfavourable combination for investors.
Technical indicators across weekly and monthly timeframes show predominantly bearish signals, with MACD bearish on both timeframes, Bollinger Bands mildly bearish, and KST bearish. The stock trades below all major moving averages (5-day, 20-day, 50-day, 100-day, and 200-day), confirming the negative technical momentum. Immediate support lies at the 52-week low of ₹38.20, whilst resistance is clustered around the 20-day moving average at ₹49.39 and the 100-day moving average at ₹51.98.
Investment Thesis: Multiple Red Flags Warrant Caution
The investment case for Paragon Finance is severely compromised by multiple structural weaknesses. The company's Mojo Score of just 26 out of 100 places it firmly in "Strong Sell" territory, reflecting poor performance across all four key parameters: valuation (Fair), quality (Below Average), financial trend (Positive but inconsistent), and technicals (Bearish). This combination of weak fundamentals, deteriorating operations, and negative technical momentum leaves little room for optimism.
KEY STRENGTHS ✓
- Low Leverage: Debt-to-equity ratio of 0.02 provides financial flexibility, though it also reflects inability to scale
- Promoter Commitment: Increasing promoter stake from 70.45% to 72.31% shows confidence, with no pledging
- Positive Q1 FY26: Previous quarter showed strong recovery with ₹1.40 crores profit, though sustainability is questionable
- Long-Term Gains: Three-year returns of 51.44% outpaced Sensex, though recent performance has deteriorated
- Microcap Opportunity: ₹22 crore market cap could appeal to turnaround specialists if management addresses core issues
KEY CONCERNS ⚠️
- Revenue Collapse: Q2 FY26 revenue plunged 84.40% QoQ to just ₹0.17 crores, indicating severe operational disruption
- Other Income Dependency: 157.65% of PBT came from other income; core operations loss-making
- Weak Returns: ROE of 2.58% and negative ROCE of -3.58% signal poor capital efficiency and value destruction
- Sustained Decline: Five-year sales growth of -18.96% shows long-term contraction, not temporary issues
- Zero Institutional Interest: Complete absence of FII, MF, and DII holdings reflects professional investor scepticism
- Extreme Volatility: Quarterly results swing wildly between profits and losses, indicating unstable business model
- Bearish Technicals: Stock in bearish trend, trading below all moving averages with negative momentum
Outlook: What to Monitor Going Forward
POSITIVE CATALYSTS
- Sustained revenue growth for 3+ consecutive quarters demonstrating operational stability
- Reduction in other income dependency below 30% of PBT with core operations turning profitable
- ROE improvement above 10% and ROCE turning positive, indicating better capital deployment
- Entry of institutional investors (MFs or DIIs) signalling improved confidence
RED FLAGS TO WATCH
- Another quarter of revenue decline or stagnation below ₹0.50 crores
- Operating losses (excluding other income) persisting for two more quarters
- Promoter stake reduction or any pledging of shares
- Further deterioration in asset quality or emergence of stressed loan disclosures
- Stock breaking below ₹38.20 (52-week low) on high volumes
The Verdict: Exit Recommended for Existing Holders
Mojo Score: 26/100
For Fresh Investors: Avoid completely. The combination of collapsing revenues, unsustainable earnings quality, weak return metrics, and bearish technical trend presents unacceptable risk. The company's five-year track record of contraction and current operational challenges offer no compelling entry point.
For Existing Holders: Consider exiting positions on any price recovery towards ₹52-54 levels. The Q2 FY26 results represent a severe deterioration from already weak fundamentals, with core operations loss-making and heavy reliance on other income. The absence of institutional investors, sustained underperformance, and bearish technical setup suggest limited near-term upside potential.
Fair Value Estimate: ₹35-38 (30% downside risk from current levels), based on 0.5x price-to-book given weak ROE and negative growth trajectory. The current "Fair" valuation grade does not adequately reflect the deteriorating operational reality and earnings quality concerns.
Rationale: Paragon Finance exhibits multiple characteristics of a value trap – trading below book value but with fundamentally impaired operations. The dramatic Q2 FY26 revenue collapse, combined with long-term negative growth, weak returns (2.58% ROE), and complete absence of institutional validation, creates a highly unfavourable risk-reward profile. Until the company demonstrates sustained operational improvement and reduces dependency on other income, the investment case remains deeply compromised.
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. Past performance is not indicative of future results, and all investments carry inherent risks including the potential loss of principal.
