Power & Instrumentation (Gujarat) Q2 FY26: Strong Profit Surge Masks Margin Pressure

The company's shares traded at ₹160.90 on November 17, reflecting a modest 2.06% single-day gain, though the stock remains significantly below its 52-week high of ₹416.40, down 61.36% from peak levels. The quarter's financial performance showcased impressive volume growth, with revenue advancing 27.93% year-on-year, yet the narrative is complicated by margin pressures that warrant closer examination.

The quarter's financial results reveal a company navigating significant growth opportunities whilst grappling with operational efficiency challenges. The sharp sequential revenue jump of 70.15% from Q1 FY26's ₹41.30 crores to ₹70.27 crores demonstrates strong order execution and market demand, positioning Power & Instrumentation as a beneficiary of India's infrastructure and electrical equipment expansion cycle.

Financial Performance: Volume-Driven Growth with Margin Volatility

Power & Instrumentation's Q2 FY26 performance showcased impressive top-line expansion, with net sales reaching ₹70.27 crores, representing the highest quarterly revenue in the company's recent history. The 70.15% sequential jump from Q1 FY26 and 27.93% year-on-year growth underscore robust demand for the company's electrical equipment and instrumentation solutions. This revenue surge translated into consolidated net profit of ₹4.71 crores, up 79.77% quarter-on-quarter and 21.08% year-on-year, demonstrating strong operating leverage when volumes expand.

However, the margin narrative presents a more nuanced picture. Operating profit margin (excluding other income) stood at 9.41% in Q2 FY26, declining 35 basis points sequentially from 9.76% in Q1 FY26, though marginally improving from 9.52% in the year-ago quarter. The PAT margin of 6.75% showed improvement from Q1's 6.25% but remained below the peak 8.63% achieved in December 2024, indicating that scale benefits are being partially offset by cost pressures.

The company's profitability metrics reveal significant quarterly volatility, with operating margins ranging from 9.33% to 12.25% over the past seven quarters. This inconsistency suggests the business faces challenges in maintaining pricing power or controlling input costs as volumes fluctuate. Interest costs of ₹0.80 crores in Q2 FY26 increased from ₹0.73 crores sequentially, reflecting higher working capital requirements to support the revenue surge, whilst tax expenses of ₹1.60 crores represented a 25.24% effective tax rate.

Operational Dynamics: Working Capital Intensity Pressures Cash Generation

Beneath the headline profit growth lies a more concerning operational reality centred on working capital management. The company's FY25 cash flow statement reveals a stark deterioration in cash generation, with cash flow from operations turning negative at ₹39.00 crores, a dramatic reversal from the positive ₹8.00 crores in FY24. This ₹54.00 crores adverse movement in working capital absorbed significant resources, reflecting the capital-intensive nature of the business and potential challenges in collections or inventory management.

The balance sheet as of March 2025 shows current assets of ₹139.86 crores against current liabilities of ₹58.10 crores, providing a comfortable current ratio of 2.41x. However, trade payables of ₹30.48 crores and other current liabilities of ₹13.45 crores highlight the company's reliance on supplier credit to fund operations. The sharp increase in current assets from ₹86.02 crores in FY24 to ₹139.86 crores in FY25 suggests either inventory build-up or extended receivables cycles, both of which tie up precious capital.

Return on equity of 11.29% and return on capital employed of 11.38% position Power & Instrumentation in the moderate performance category for capital efficiency. Whilst these returns exceed the cost of capital, they remain below the 15-20% threshold typically associated with high-quality compounders. The company's ability to generate a 13.17% ROCE in the latest period represents an improvement, but consistency will be crucial for re-rating the stock's valuation multiples.

Balance Sheet Structure: Equity Infusion Strengthens Capital Base

Power & Instrumentation's balance sheet underwent significant transformation during FY25, with shareholder funds expanding from ₹51.22 crores to ₹110.57 crores, driven by both equity capital increase and reserve accumulation. Share capital rose from ₹12.63 crores to ₹17.48 crores, indicating a fresh equity issuance, whilst reserves and surplus more than doubled from ₹37.88 crores to ₹84.63 crores, reflecting retained earnings and premium from the capital raise.

The company maintains a relatively modest debt profile, with long-term debt of ₹4.29 crores representing just 3.88% of total capital employed. This conservative leverage approach, reflected in a debt-to-equity ratio of 0.16x, provides financial flexibility and insulates the business from interest rate volatility. However, the average EBIT-to-interest coverage of 3.97x, whilst adequate, suggests limited headroom for margin deterioration before debt servicing becomes strained.

Fixed assets of just ₹0.49 crores highlight the asset-light nature of the business, with the company likely operating through outsourced manufacturing or assembly models. This capital efficiency on the fixed asset side is offset by the working capital intensity discussed earlier, creating a business model that requires less infrastructure investment but more operational capital to sustain growth.

Industry Context: Riding India's Electrical Equipment Expansion Wave

Power & Instrumentation operates in the Other Electrical Equipment sector, a segment benefiting from India's infrastructure modernisation, renewable energy expansion, and industrial capacity additions. The company's 34.22% five-year sales CAGR significantly outpaces the sector average, indicating market share gains or exposure to faster-growing sub-segments within the electrical equipment value chain.

The sector's outlook remains constructive, supported by government initiatives including the Production Linked Incentive scheme for advanced manufacturing, grid modernisation programmes, and the renewable energy capacity addition targets. Power & Instrumentation's ability to deliver 73.20% revenue growth in FY25 suggests strong positioning to capture this sectoral tailwind, though the company's micro-cap status and limited institutional ownership indicate it remains under the radar of mainstream investors.

Competition in the fragmented electrical equipment space remains intense, with pricing pressure evident in the company's margin volatility. The ability to maintain operating margins above 9% whilst scaling revenue demonstrates some competitive moat, likely derived from technical capabilities, customer relationships, or niche product positioning. However, the lack of sustained margin expansion despite volume growth raises questions about pricing power and competitive intensity.

Valuation Analysis: Attractive Entry Point Despite Recent Underperformance

Trading at a P/E ratio of 21.57x, Power & Instrumentation commands a 32.72% discount to the sector average P/E of 32x, suggesting the market is pricing in execution risks or scepticism about earnings sustainability. The price-to-book ratio of 2.59x appears reasonable given the 11.29% return on equity, implying a P/E-to-ROE ratio of approximately 1.91x, which sits in fair value territory for a company with moderate growth prospects.

The company's enterprise value-to-EBITDA multiple of 15.61x and EV-to-capital employed ratio of 2.36x indicate the market is assigning moderate premium to the business, acknowledging growth potential whilst remaining cautious about operational volatility. The PEG ratio of 9.43x appears elevated, suggesting the current valuation may not adequately compensate for the growth rate, though this metric can be distorted in micro-cap stocks with lumpy earnings patterns.

The stock's 61.36% decline from its 52-week high of ₹416.40 to the current ₹160.90 has created a significant valuation reset. The proprietary Mojo Score assessment rates the stock at an "Attractive" valuation grade, down from "Very Attractive" earlier in the year, suggesting the recent price recovery has eroded some margin of safety. However, at 2.59x book value for a business generating 11.29% ROE with 34.22% sales CAGR, the valuation appears to offer reasonable value for patient investors willing to tolerate volatility.

Shareholding Pattern: Stable Promoter Base, Limited Institutional Interest

The company's shareholding structure reveals a stable promoter holding of 46.09% as of September 2025, unchanged from the previous quarter but up from 45.71% in June 2025 and 42.90% in February 2025. This gradual increase in promoter stake from 42.90% to 46.09% over the past three quarters demonstrates management confidence in the business trajectory, a positive signal for minority shareholders assessing alignment of interests.

Institutional participation remains conspicuously absent, with zero holdings from foreign institutional investors, mutual funds, and insurance companies. A marginal 0.08% holding by other domestic institutional investors in July 2025 has since been exited, highlighting the stock's micro-cap status and limited liquidity that keeps it off the radar of institutional money managers. The non-institutional category comprises 53.91% of the shareholder base, indicating a predominantly retail investor profile.

The absence of promoter pledging provides comfort on governance and financial stability, whilst the low institutional ownership presents both risk and opportunity. The risk lies in limited liquidity and potential for sharp price movements on modest volumes, whilst the opportunity exists for significant re-rating should the company's growth trajectory attract institutional attention as it scales towards small-cap territory.

Stock Performance: Severe Correction Creates Value Opportunity

Power & Instrumentation's stock performance presents a tale of two narratives: exceptional long-term wealth creation followed by sharp correction. The shares have delivered a remarkable 292.44% return over two years, vastly outperforming the Sensex's 29.12% gain by 263.32 percentage points. However, the one-year performance tells a starkly different story, with the stock declining 36.35% compared to the Sensex's 9.50% gain, resulting in 45.85 percentage points of underperformance.

The year-to-date performance is particularly brutal, with the stock down 51.44% against the Sensex's 8.72% gain, representing 60.16 percentage points of underperformance. This dramatic correction from the 52-week high of ₹416.40 to the current ₹160.90 reflects either excessive valuation at the peak or fundamental concerns that have emerged, or most likely a combination of both factors affecting micro-cap stocks in the current market environment.

Recent momentum shows signs of stabilisation, with the stock gaining 6.80% over the past week and 14.89% over three months, outperforming the Sensex by 5.11 and 9.49 percentage points respectively. The technical trend remains "Mildly Bearish" as of October 24, 2025, with the stock trading below all key moving averages except the 100-day MA, suggesting the recovery remains fragile and subject to broader market sentiment.

Investment Thesis: Quality Improving But Execution Consistency Required

The proprietary Mojo Score framework assigns Power & Instrumentation an overall score of 55 out of 100, placing it in the "HOLD" category. This assessment reflects a balanced view acknowledging the company's growth momentum and attractive valuation whilst recognising operational inconsistencies and technical weakness. The score breakdown reveals mixed signals across the four key parameters: valuation grades as "Attractive", quality as "Good", financial trend as "Positive", but technicals remain "Mildly Bearish".

The company's quality grade has improved from "Below Average" to "Good" over the past year, reflecting the sustained revenue growth trajectory and improving financial metrics. The 34.22% five-year sales CAGR and 48.31% EBIT growth rate demonstrate the company's ability to scale operations and capture market opportunities. However, the moderate returns on capital employed (11.38% ROCE) and equity (11.29% ROE) indicate the business has not yet achieved the capital efficiency levels associated with truly exceptional franchises.

The positive financial trend in Q2 FY26, marked by record quarterly sales and profits, provides near-term momentum, though investors must weigh this against the working capital intensity that turned operating cash flow negative in FY25. The company's ability to convert accounting profits into cash will be crucial for sustainable value creation, particularly given the capital-intensive nature of growth in this business model.

Key Strengths & Risk Factors

Outlook: Monitoring Points for Trajectory Assessment

The forward outlook for Power & Instrumentation hinges on management's ability to sustain the Q2 FY26 revenue momentum whilst addressing the working capital efficiency concerns that have plagued cash generation. The company's positioning in the electrical equipment sector provides structural tailwinds from India's infrastructure expansion, renewable energy buildout, and industrial capacity additions, creating a favourable demand environment for the next 3-5 years.

Investors should closely monitor quarterly margin trends to assess whether the company can stabilise operating margins above 10% on a sustained basis, which would signal improved pricing power or cost management capabilities. The working capital cycle, particularly days sales outstanding and inventory turnover, will be critical metrics to track, as improvement here would dramatically enhance cash generation and reduce the capital intensity of growth.