Precot Ltd Q2 FY26: Profit Plunge and Margin Pressure Test Investor Patience

The company, with a market capitalisation of ₹539.00 crores, operates in the highly competitive garments and apparels sector. Despite modest revenue growth on a sequential basis, Precot's profitability has been severely impacted by rising interest costs and operational headwinds. The quarter's performance highlights the challenges facing the textile industry, where demand volatility and cost pressures continue to squeeze margins.

With a current Mojo Score of just 34 out of 100 and a SELL rating, the investment thesis for Precot has deteriorated significantly. The company's financial trend has turned negative, technical indicators remain mildly bearish, and quality metrics lag industry peers. However, the stock's attractive valuation provides a sliver of hope for contrarian investors willing to bet on a turnaround.

Financial Performance: Margin Erosion Drives Profit Decline

In Q2 FY26, Precot posted net sales of ₹213.55 crores, marking a modest sequential increase of 3.47% from ₹206.38 crores in Q1 FY26. However, on a year-on-year basis, revenue contracted sharply by 15.79% from ₹253.58 crores in Q2 FY25, reflecting weaker demand conditions in the textile sector. For the half-year period (H1 FY26), total revenue stood at ₹419.93 crores compared to ₹461.39 crores in H1 FY25, representing a decline of approximately 9%.

The company's operating profit before depreciation, interest, and tax (PBDIT) excluding other income fell to ₹25.22 crores in Q2 FY26, the lowest in recent quarters, down from ₹28.55 crores in Q1 FY26. Operating margins (excluding other income) compressed to 12.32% from 14.50% in the previous quarter, a decline of 218 basis points. This margin pressure can be attributed to higher employee costs and operational inefficiencies that offset the modest revenue growth.

Net profit after tax plunged 37.79% sequentially to ₹7.03 crores, with PAT margins shrinking to 3.43% from 5.74% in Q1 FY26. The year-on-year comparison is equally concerning, with net profit down 33.11% from ₹10.51 crores in Q2 FY25. The quality of earnings has deteriorated, with interest costs surging to ₹9.94 crores in Q2 FY26, the highest level in recent quarters, compared to ₹8.11 crores in Q1 FY26. This spike in interest expenses has significantly eroded profitability, with the operating profit to interest coverage ratio falling to just 2.54 times, the lowest recorded.

Operational Challenges: Interest Burden and Weak Returns

Precot's operational performance in Q2 FY26 reveals deeper structural issues beyond cyclical demand weakness. The company's return on equity (ROE) stands at a modest 9.50%, significantly below industry leaders and indicative of suboptimal capital efficiency. With an average ROE of 9.50% over recent periods, Precot lags peers who typically generate returns in the 12-15% range. This weak profitability metric suggests the company is struggling to generate adequate returns for shareholders relative to the equity capital employed.

Return on capital employed (ROCE) tells a similar story, with the company posting an average ROCE of just 8.65%. While the latest ROCE of 11.50% shows some improvement, it remains below the threshold that would signal robust operational excellence. The company's ability to generate profits from its total capital base is constrained by high debt levels and rising interest costs, which have become increasingly burdensome.

The balance sheet reveals a moderately leveraged position, with long-term debt of ₹103.13 crores as of March 2025, down from ₹144.30 crores in the previous year. However, the debt-to-EBITDA ratio remains elevated at 17.11 times on average, indicating that the company carries significant debt relative to its earnings generation capacity. The net debt-to-equity ratio of 0.70 suggests moderate leverage, but when combined with weak profitability, this debt burden becomes more concerning.

Industry Context: Textile Sector Headwinds Persist

The Indian textile and garments sector has faced considerable headwinds over the past year, with demand volatility, rising input costs, and intense competition from imports weighing on margins across the industry. Precot's performance must be viewed within this challenging operating environment, where even well-managed companies have struggled to maintain profitability.

The company's year-on-year revenue decline of 15.79% in Q2 FY26 reflects broader demand weakness in the textile value chain. Export markets have remained subdued due to global economic uncertainty, while domestic consumption has been tepid. Cotton prices, a key raw material, have exhibited volatility, making it difficult for manufacturers to pass on costs to customers in a competitive market.

Precot's stock performance relative to its sector peers tells a concerning story. Over the past year, the stock has declined 22.25%, significantly underperforming the Garments & Apparels sector, which posted a positive return of 3.96%. This 26.21 percentage point underperformance suggests company-specific challenges beyond sector-wide issues. The stock's high beta of 1.50 indicates it is more volatile than the broader market, amplifying losses during downturns.

Peer Comparison: Valuation Discount Reflects Weak Fundamentals

A comparison with industry peers reveals why Precot trades at a significant valuation discount despite appearing "cheap" on headline multiples. The company's P/E ratio of 12.60x is below the peer average of approximately 19x, while its price-to-book ratio of 1.19x compares favourably to the peer average of around 2.30x. However, these lower multiples are justified by weaker underlying fundamentals.

Precot's ROE of 9.50% lags behind most peers. Donear Industries, for instance, generates an ROE of 17.26%, while Bella Casa Fashion delivers 13.86% and Orbit Exports posts 12.68%. Only Sutlej Textiles, with an ROE of 5.14%, performs worse than Precot on this critical profitability metric. This ROE gap explains much of the valuation discount, as investors are unwilling to pay premium multiples for subpar returns.

On the leverage front, Precot's debt-to-equity ratio of 0.70 is moderate compared to peers like Donear Industries (1.51) and Swaraj Suiting (1.65), but higher than Orbit Exports (0.03) and Bella Casa Fashion (0.18). The company's dividend yield of 0.67% is the highest among peers, though this may simply reflect the depressed stock price rather than a generous payout policy, given the low dividend payout ratio of 10.73%.

The peer comparison underscores that Precot's valuation discount is not an opportunity but rather a reflection of its inferior return profile and operational challenges. Until the company can demonstrate sustained improvement in profitability metrics and return ratios, the valuation gap with higher-quality peers is likely to persist.

Valuation Analysis: Attractive Multiples, But Is It a Value Trap?

At the current market price of ₹443.80, Precot trades at a P/E ratio of 12.60x trailing twelve-month earnings, which appears reasonable relative to historical levels and peer valuations. The price-to-book ratio of 1.19x suggests the stock trades close to its book value of ₹373.75 per share, indicating limited downside from a pure asset value perspective. The EV/EBITDA multiple of 7.86x is also in line with sector averages.

However, the company's PEG ratio of 2.56 raises concerns about the sustainability of growth relative to valuation. A PEG ratio above 2.0 typically suggests the stock is expensive relative to its earnings growth potential. With five-year sales growth of just 6.55% and EBIT growth of 38.39% (which appears inflated by recovery from depressed base years), the current valuation may not offer the margin of safety that value investors seek.

The stock's current valuation grade of "Attractive" might be misleading when viewed in isolation. While headline multiples appear cheap, the deteriorating financial trend, weak return ratios, and negative technical momentum suggest this could be a classic value trap. The stock has declined 35.73% from its 52-week high of ₹690.50, and the downtrend shows little sign of reversal.

Shareholding Pattern: Stable Promoter Base, Minimal Institutional Interest

Precot's shareholding pattern reveals a stable promoter holding of 61.51% that has remained unchanged over the past five quarters, indicating strong promoter commitment. With no pledged shares, there are no immediate concerns about financial distress at the promoter level. The promoter group is led by Ashwin Chandran and Prashanth Chandran, each holding 17.96%, along with D. Sarath Chandran at 13.69%.

However, the near-total absence of institutional investor interest is a red flag. Foreign institutional investor (FII) holdings have dwindled to zero in Q2 FY26 from 0.23% in March 2025, suggesting institutional investors have been exiting the stock. Mutual fund and insurance company holdings remain at zero, indicating no interest from domestic institutional investors. Other domestic institutional investor (DII) holdings also fell to zero from 0.78% in December 2024.

The lack of institutional participation reflects concerns about the company's growth prospects, profitability, and governance. Non-institutional investors account for 38.49% of the shareholding, but this largely represents retail and non-institutional holdings with limited analytical resources. The absence of sophisticated institutional investors who could provide research coverage and liquidity is a concern for potential investors.

Stock Performance: Severe Underperformance Across Timeframes

Precot's stock price performance has been dismal across most relevant timeframes, with the stock declining 22.25% over the past year compared to a 9.48% gain for the Sensex, resulting in a negative alpha of 31.73 percentage points. The year-to-date performance is equally concerning, with the stock down 21.17% against an 8.36% gain for the benchmark, representing 29.53 percentage points of underperformance.

Short-term trends are no better. Over the past week, the stock fell 5.71% while the Sensex gained 0.96%, and over the past three months, it declined 1.34% against a 4.18% Sensex gain. The six-month performance shows an 18.26% decline versus a 2.85% Sensex gain, highlighting persistent weakness. The stock currently trades below all its major moving averages, including the 5-day (₹456.96), 20-day (₹458.46), 50-day (₹443.70), 100-day (₹493.31), and 200-day (₹484.62) averages, indicating a clear downtrend.

On a positive note, the stock has generated exceptional long-term returns for patient investors. Over three years, it has delivered 132.97% returns compared to 37.31% for the Sensex, and over five years, it has surged 805.71% against 91.65% for the benchmark. However, these historical gains offer little comfort to recent investors who have experienced significant capital erosion.

Investment Thesis: Multiple Headwinds Outweigh Valuation Appeal

The investment thesis for Precot is challenged by multiple headwinds that outweigh the superficial appeal of low valuation multiples. The company's Mojo Score of 34 out of 100 places it firmly in SELL territory, with the score having declined from 58 (HOLD category) in late August 2025. This deterioration reflects worsening fundamentals across key parameters.

On the valuation front, the stock receives an "Attractive" grade, which might tempt value investors. However, this must be weighed against an "Average" quality grade, a "Negative" financial trend, and "Mildly Bearish" technical indicators. The combination of these factors suggests that the low valuation is justified by poor fundamentals rather than representing a genuine opportunity.

The company's quality assessment reveals several structural weaknesses. Five-year sales growth of 6.55% is modest, while the average EBIT-to-interest coverage of just 2.34x is weak and deteriorating. The average debt-to-EBITDA ratio of 17.11 indicates high leverage relative to earnings, and the average ROCE of 8.65% and ROE of 9.50% are below acceptable thresholds for a profitable manufacturing business.

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Outlook: What to Watch in Coming Quarters