Permanent Magnets Q3 FY26: Profit Growth Masks Margin Pressure and Valuation Concerns

The quarter presented a mixed bag of results, with revenue reaching its highest quarterly level at ₹57.02 crores, marking a robust 16.06% sequential growth. However, profitability metrics revealed underlying challenges, as the PAT margin compressed to 3.95% from 4.13% in the corresponding quarter last year. The company's financial performance reflects the broader challenges facing the electrical equipment sector, where raw material cost volatility and competitive pressures continue to weigh on margins.

Financial Performance: Revenue Growth Offset by Tax Burden

Permanent Magnets' Q3 FY26 revenue of ₹57.02 crores represented the company's strongest quarterly sales performance in recent periods, driven by a 15.54% year-on-year improvement and a 16.06% sequential uptick from Q2 FY26's ₹49.13 crores. This growth trajectory suggests improving demand conditions in the electrical equipment and electric vehicle components segments where the company operates.

The operating profit excluding other income stood at ₹10.51 crores in Q3 FY26, yielding an operating margin of 18.43%, a significant improvement from 12.75% in Q3 FY25. This margin expansion of 568 basis points year-on-year demonstrates improved operational efficiency and better cost management. However, the quarter's profitability was severely impacted by an exceptionally high tax rate of 51.82%, which eroded the bottom line significantly. This elevated tax burden, compared to the normalised rate of 28.84% in Q1 FY26, remains a concern that requires management clarification.

On a half-yearly basis for H1 FY26 (April-September 2025), the company reported net sales of ₹102.68 crores and net profit of ₹8.54 crores. However, the nine-month performance for FY26 (April-December 2025) shows accumulated net profit of ₹10.79 crores on revenues of ₹159.70 crores, indicating that the company's profitability trajectory has been uneven throughout the fiscal year.

Operational Challenges: Margin Volatility and Profitability Concerns

Despite the revenue growth, Permanent Magnets faces persistent challenges in translating top-line expansion into consistent bottom-line performance. The company's return on equity (ROE) stands at a modest 10.61% on an average basis, which is below industry standards and significantly weaker than its return on capital employed (ROCE) of 29.26%. This divergence suggests that whilst the company generates reasonable returns on its operational assets, shareholder returns are diluted by capital structure inefficiencies.

The company's profitability margins have exhibited considerable volatility across recent quarters. The PAT margin of 3.95% in Q3 FY26, whilst marginally better than the 3.49% recorded in Q4 FY25, remains substantially below the 11.52% achieved in Q1 FY26. This inconsistency raises questions about the sustainability of margins and the company's ability to manage cost pressures effectively. The gross profit margin of 14.42% in Q3 FY26 also reflects compression from the 21.12% achieved in Q1 FY26, indicating potential challenges in pricing power or input cost management.

The balance sheet presents a relatively healthy picture with minimal leverage. Long-term debt stood at ₹8.11 crores as of March 2025, translating to a debt-to-equity ratio of just 0.10 and a debt-to-EBITDA ratio of 0.41. The company's interest coverage ratio of 6.99 times provides adequate cushion for debt servicing. Fixed assets increased substantially to ₹50.10 crores in FY25 from ₹29.38 crores in FY24, suggesting ongoing capacity expansion initiatives that could support future growth.

Industry Context: Navigating a Challenging Landscape

The electrical equipment sector has faced headwinds over the past year, with the broader "Other Electrical Equipment" segment delivering negative returns of 8.38% over the 12-month period. Permanent Magnets has outperformed this sector benchmark by 6.76 percentage points, posting a one-year return of -1.62%, though this still represents a loss for investors. The company's stock has significantly underperformed the broader Sensex, which gained 7.97% over the same period, resulting in a negative alpha of 9.59%.

The company operates in a niche segment manufacturing cast alloy Permanent Magnets and electric vehicle components, a space that should theoretically benefit from India's electric vehicle adoption drive and the government's focus on clean energy. However, the company's financial performance suggests it has yet to capitalise fully on these structural tailwinds. The modest 15.07% five-year sales compound annual growth rate (CAGR) is reasonable but not exceptional, whilst the anaemic 3.09% EBIT growth over the same period highlights persistent margin pressures.

Peer Comparison: Premium Valuation Despite Weaker Fundamentals

When benchmarked against industry peers, Permanent Magnets' valuation appears stretched relative to its operational performance. The company trades at a price-to-earnings ratio of 63.64 times trailing twelve-month earnings, significantly higher than the industry average of approximately 31 times and well above most direct comparables.

The comparison reveals that Permanent Magnets trades at a premium multiple despite delivering an ROE of 10.61%, substantially lower than peers such as Prostarm Info (26.01%), Mangal Electrica (25.51%), and Kirloskar Electric (30.21%). The company's price-to-book ratio of 5.13 times also appears elevated given its modest return profile. Whilst the company maintains a conservative balance sheet with minimal leverage (debt-to-equity of 0.10), this advantage is already reflected in the peer group, with several competitors maintaining similarly low debt levels.

The valuation premium appears difficult to justify based on fundamental metrics alone. Permanent Magnets' dividend yield of 0.22% is negligible, offering little income support for investors. With a market capitalisation of ₹773 crores, the company ranks as the second-largest in its immediate peer group, suggesting some liquidity premium may be embedded in the valuation.

Valuation Analysis: Expensive on All Metrics

Permanent Magnets' valuation has been consistently assessed as "Very Expensive" based on historical parameters, with the stock trading at significant premiums across multiple metrics. The P/E ratio of 63.64 times represents a 105% premium to the industry average of 31 times, whilst the EV/EBITDA multiple of 28.15 times and EV/EBIT multiple of 50.97 times both signal elevated valuations that leave limited margin of safety for investors.

The stock's current price of ₹897.85 represents a 27% decline from its 52-week high of ₹1,229.90 achieved in recent months, but remains 49.64% above its 52-week low of ₹600. This positioning suggests the stock has corrected from peak valuations but still trades at historically expensive levels. The valuation grade has oscillated between "Expensive" and "Very Expensive" throughout the past year, reflecting market uncertainty about the company's growth prospects and profitability sustainability.

Based on the company's current earnings trajectory and industry comparables, a more reasonable valuation would suggest a fair value closer to ₹550-650 per share, implying potential downside of 27-39% from current levels. This fair value estimate assumes normalised earnings, sustainable margins, and a P/E multiple of 35-40 times, which would still represent a premium to the sector but account for the company's debt-free status and niche market position.

Shareholding Pattern: Stable Promoter Base, Negligible Institutional Interest

The shareholding structure of Permanent Magnets has remained remarkably stable over recent quarters, with promoter holding consistently maintained at 58.01% across the last five quarters. This stability provides governance comfort, though the absence of any significant increase in promoter stake despite the stock's correction from highs raises questions about management confidence in near-term prospects.

The most striking aspect of the shareholding pattern is the near-complete absence of institutional investor interest. Foreign institutional investors (FIIs) reduced their minimal holding from 0.03% in September 2025 to 0.00% by December 2025, whilst mutual funds and insurance companies maintain zero exposure to the stock. Domestic institutional investors (DIIs) hold a negligible 0.01% stake. This lack of institutional participation, with total institutional holdings at just 0.01%, signals limited conviction from sophisticated investors and raises concerns about the stock's investment merit at current valuations.

The non-institutional category, comprising retail and other investors, holds 41.98% of the company, showing a marginal sequential increase of 0.05% in Q3 FY26. This suggests that retail investors have been accumulating shares even as institutional investors remain absent, a pattern that often precedes valuation corrections when fundamentals fail to support elevated prices.

Stock Performance: Underperformance Across Timeframes

Permanent Magnets' stock performance has been disappointing across most relevant investment horizons, with the company generating negative alpha relative to the Sensex benchmark in recent periods. Over the past year, the stock declined 1.62% whilst the Sensex gained 7.97%, resulting in a negative alpha of 9.59 percentage points. The underperformance extends to the two-year timeframe, where the stock has fallen 33.94% against the Sensex's 17.42% gain, producing a substantial negative alpha of 51.36 percentage points.

Recent momentum has shown some improvement, with the stock gaining 5.42% over the past week and 4.28% over the past month, outperforming the Sensex in both periods. The year-to-date return of 3.44% also beats the Sensex's negative return of 1.36%. However, these short-term gains must be viewed in the context of the stock's 27% decline from its 52-week high and the concerning medium-term underperformance.

From a risk perspective, the stock exhibits high volatility with a beta of 1.50, indicating it tends to move 50% more than the broader market. The stock's 51.32% volatility over the past year places it in the "High Risk, Low Return" category, an unfavourable combination for investors. The negative risk-adjusted return of -0.03 over one year, compared to the Sensex's positive 0.69, further underscores the poor risk-reward profile.

Investment Thesis: Multiple Red Flags Outweigh Limited Positives

The investment case for Permanent Magnets presents significant challenges across multiple dimensions. The company's Mojo Score of 35 out of 100 places it firmly in "SELL" territory, reflecting concerns about valuation, financial trends, and technical positioning. The current advisory rating of "SELL" has been in place since late October 2025, when the score deteriorated from "HOLD" to "SELL" territory.

The valuation remains the most glaring concern, with the stock graded as "Very Expensive" and trading at multiples that leave no margin of safety. The quality assessment of "Average" reflects the company's reasonable ROCE of 29.26% but weak ROE of 10.61%, alongside concerns about inconsistent profitability. The financial trend is classified as "Flat" for Q3 FY26, with the half-yearly performance showing a troubling 37.70% decline in PAT. Technical indicators turned "Mildly Bearish" on February 6, 2026, adding to the negative sentiment.

Key Strengths and Risk Factors

Outlook: What to Watch

The outlook for Permanent Magnets remains challenging, with multiple factors requiring close monitoring. Investors should track whether the company can sustain its revenue momentum whilst addressing the persistent margin pressures that have plagued recent quarters. The management's ability to normalise tax rates and improve return on equity will be critical in determining whether the current valuation premium can be justified.