Rasi Electrodes Q2 FY26: Profitability Tumbles Amid Revenue Decline

The quarter was characterised by declining revenues, compressed margins, and elevated tax rates—a combination that has raised concerns about the company's near-term earnings trajectory. With net sales falling 13.59% sequentially to ₹16.78 crores and operating margins contracting to 4.59%, Rasi Electrodes faces an uphill battle to restore investor confidence in a sector that has underperformed significantly, with the electrodes and welding equipment index down 93.36% over the past year.

The deteriorating financial performance reflects both cyclical headwinds in the welding equipment sector and company-specific operational challenges. Management commentary on cost pressures and demand softness suggests that the difficult operating environment may persist into the second half of FY26. The stock's technical indicators have turned bearish, with the price trading below its 200-day moving average of ₹20.73, reinforcing the negative sentiment surrounding the counter.

Financial Performance: Revenue Decline Accelerates

Rasi Electrodes' Q2 FY26 results revealed a concerning acceleration in revenue decline. Net sales contracted 13.59% quarter-on-quarter to ₹16.78 crores—the lowest quarterly revenue in the past 12 quarters. On a year-on-year basis, the decline was even steeper at 18.66%, underscoring the persistent demand weakness in the company's core markets. This marks the third consecutive quarter of negative revenue growth, with sales falling from ₹21.25 crores in Q2 FY25 to the current levels.

The revenue downturn has had a cascading impact on profitability metrics. Operating profit before depreciation, interest, and tax (excluding other income) stood at ₹0.77 crores, representing a margin of just 4.59%—down from 7.42% in the previous quarter. This 283 basis point contraction suggests that the company is struggling to maintain pricing power or control costs in the face of softening demand. The gross profit margin similarly compressed to 7.51% from 9.27% in Q1 FY26, indicating margin pressures across the value chain.

Net profit after tax declined to ₹0.76 crores from ₹1.26 crores in Q1 FY26, a sequential drop of 39.74%. The PAT margin contracted to 4.53% from 6.49%, reflecting both operational deleverage and an elevated tax burden. The effective tax rate for the quarter stood at 28.30%, higher than the 21.74% in the previous quarter, further pressuring bottom-line profitability. Other income provided some cushion at ₹0.49 crores, up from ₹0.37 crores sequentially, but was insufficient to offset the core operational weakness.

Operational Challenges: Margin Compression and Quality Concerns

The margin compression witnessed in Q2 FY26 raises questions about Rasi Electrodes' operational efficiency and competitive positioning. The company's operating margin (excluding other income) of 4.59% represents a significant deterioration from the 7.42% achieved in the previous quarter and is well below the 6.01% recorded in the corresponding quarter last year. This suggests that the company is facing headwinds on multiple fronts—potentially including raw material cost pressures, pricing competition, and operational inefficiencies.

Return on equity (ROE) for the latest quarter stood at 8.41%, which, whilst indicating reasonable capital efficiency, has declined from historical levels. The five-year average ROE of 7.33% suggests that the company has struggled to consistently generate strong returns on shareholder capital. With current ROE at 8.41%, the company is performing slightly above its historical average, but the recent profitability decline threatens to erode this metric further in coming quarters.

The company's balance sheet reveals a net cash position of ₹2 crores, with virtually no long-term debt. This provides some financial flexibility, but the declining cash generation from operations—as evidenced by the profit decline—limits the company's ability to invest in growth initiatives or weather prolonged downturns. The debt-to-equity ratio of 0.05 indicates conservative financial management, though the absence of leverage also suggests limited ambition for expansion.

Sector Headwinds: Electrodes Industry in Deep Downturn

Rasi Electrodes operates in an industry facing severe structural challenges. The electrodes and welding equipment sector has experienced a catastrophic decline, with the sector index down 93.36% over the past year. This suggests that the challenges facing Rasi are not company-specific but reflect broader industry dynamics, including reduced infrastructure spending, competition from imports, and technological shifts in welding methodologies.

Despite the sector's poor performance, Rasi Electrodes has actually outperformed its peer group, with its one-year decline of 44.66% comparing favourably to the sector's 93.36% collapse. This relative outperformance provides some comfort, suggesting that the company's competitive position within the industry remains intact, even as the overall market contracts. However, this is cold comfort for investors who have seen their capital erode significantly.

Valuation Analysis: Attractive Entry Point or Value Trap?

At the current price of ₹19.37, Rasi Electrodes trades at a trailing P/E ratio of 19.44x, which appears reasonable given the company's historical profitability. The price-to-book ratio of 1.63x suggests the stock is trading at a moderate premium to book value, which stands at ₹10.47 per share. The company's valuation grade has been classified as "Attractive" since May 2025, when the stock was trading at ₹22.30, suggesting that the recent price decline has enhanced the valuation appeal.

However, valuation attractiveness must be weighed against the deteriorating fundamentals. With revenues declining for three consecutive quarters and margins compressing, the trailing earnings that support the current P/E multiple may not be sustainable. The company's enterprise value-to-EBITDA ratio of 13.49x and EV-to-sales ratio of 0.65x suggest that the market is pricing in modest expectations, but even these multiples may prove optimistic if the revenue decline accelerates.

The stock has declined 48.68% from its 52-week high of ₹37.74 but remains 29.13% above its 52-week low of ₹15.00. This positioning suggests that whilst the stock has corrected significantly, it has found some support at current levels. The lack of dividend yield (0.00%) means that investors cannot rely on income whilst waiting for capital appreciation, making the investment purely dependent on earnings recovery.

Shareholding Pattern: Stable but Uninspiring

The shareholding pattern of Rasi Electrodes has remained remarkably stable over the past five quarters, with promoter holding steady at 27.96% and non-institutional investors holding the remaining 72.04%. This stability suggests no significant change in ownership structure, but the absence of institutional participation is notable. Foreign institutional investors (FIIs), mutual funds, insurance companies, and other domestic institutional investors collectively hold 0.00% of the company—a clear red flag that sophisticated investors have chosen to stay away.

The number of non-institutional shareholders has declined marginally from 18,604 to 18,103, suggesting some retail investor exits. On a positive note, there is no promoter pledging (0.00%), indicating that the promoters are not financially stressed and have not leveraged their holdings. The promoter group, led by B Popatlal Kothari (15.94%) and P Kashyap Kothari (3.90%), maintains a stable ownership stake, though the relatively low promoter holding of 27.96% may limit their ability to drive strategic change.

Stock Performance: Short-Term Bounce Amid Long-Term Decline

Rasi Electrodes' stock performance presents a study in contrasts. Whilst the stock has surged 12.49% over the past week and 13.08% over the past month, the longer-term picture remains deeply troubling. The stock is down 44.66% over the past year, 17.54% over two years, and has generated negative alpha across most time periods when compared to the Sensex. The year-to-date performance is particularly painful, with the stock declining 35.54% against the Sensex's 8.50% gain, resulting in negative alpha of 44.04 percentage points.

The technical picture has turned decisively bearish, with the overall trend classified as "Bearish" since 4 September 2025. The stock is trading below its 200-day moving average of ₹20.73, though it has managed to stay above shorter-term moving averages (5-day, 20-day, 50-day, and 100-day), suggesting some near-term momentum. The MACD indicator shows "Mildly Bullish" on the weekly timeframe but "Bearish" on the monthly timeframe, whilst Bollinger Bands indicate "Mildly Bearish" conditions across both timeframes.

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 market. This high beta, combined with the stock's 46.85% volatility over the past year, classifies Rasi Electrodes as a "HIGH RISK LOW RETURN" investment. The risk-adjusted return of -0.95 over the past year underscores the poor risk-reward profile, with investors suffering significant losses despite taking on substantial volatility.

Investment Thesis: Struggling to Find Catalysts

The investment case for Rasi Electrodes rests on a few pillars: attractive valuation, a net cash balance sheet, and the potential for a cyclical recovery in the electrodes sector. The company's P/E ratio of 19.44x and P/BV ratio of 1.63x are reasonable relative to historical levels, and the absence of debt provides financial flexibility. However, these positives are overshadowed by deteriorating fundamentals, negative momentum, and a challenging industry environment.

The company's quality grade is classified as "Below Average," having been in this category for three consecutive quarters since December 2024. The financial trend is classified as "Flat," suggesting stagnant performance without clear direction. The technical trend is "Bearish," and the overall Mojo Score of 23 out of 100 places the stock firmly in "Strong Sell" territory. This combination of weak quality, flat fundamentals, negative technicals, and attractive-but-potentially-misleading valuation creates a challenging investment proposition.

Key Strengths & Risk Factors

Outlook: Critical Monitoring Points Ahead

The outlook for Rasi Electrodes hinges on the company's ability to arrest the revenue decline and restore margin stability. Management's commentary on demand trends, pricing power, and cost management initiatives will be critical in determining whether the current weakness represents a cyclical trough or the beginning of a more prolonged downturn. Investors should closely monitor quarterly results for signs of stabilisation in sales volumes and sequential margin improvement.

The company's financial trend classification of "Flat" since March 2025 suggests that the business has reached a plateau, with no clear direction emerging. For the trend to turn positive, Rasi Electrodes would need to demonstrate consistent quarter-on-quarter improvement in both revenue and profitability metrics. Conversely, another weak quarter could push the financial trend into "Negative" territory, further damaging investor sentiment.