Raunaq International Q2 FY26: Turnaround Gains Momentum Despite Persistent Margin Pressures

The company's stock has struggled in recent months, declining 20.07% over the past three months and trading at ₹61.20 as of November 14, 2025—significantly below its 52-week high of ₹98.80. Despite the recent profitability, investors remain cautious about the sustainability of this turnaround, given the company's history of volatile quarterly performance and persistent operational inefficiencies.

Raunaq International, formerly known as Raunaq EPC International Limited until its name change in January 2024, operates in a challenging segment where project execution risks and working capital management are critical. The company's latest results present a mixed picture: whilst revenue growth has been impressive on a year-over-year basis, the underlying operational metrics reveal structural weaknesses that demand careful scrutiny.

Financial Performance: Revenue Surge Masks Operational Struggles

In Q2 FY26 (July-September 2025), Raunaq International reported net sales of ₹1.09 crores, representing a sharp 20.44% quarter-on-quarter decline from ₹1.37 crores in Q1 FY26. On a year-over-year basis, revenue contracted by a staggering 74.11% compared to ₹4.21 crores in Q2 FY25. This volatility in top-line performance underscores the project-based nature of the company's business, where lumpiness in order execution creates significant quarterly fluctuations.

The company's half-yearly performance for H1 FY26 (April-September 2025) presents a more encouraging picture, with consolidated net sales reaching ₹19.09 crores, marking an impressive 186.21% growth compared to the corresponding period last year. However, this growth must be contextualised against an extremely weak base, as the company struggled through FY22 and FY23 with minimal revenue generation.

The most alarming aspect of Raunaq's financial performance lies in its operating margins. The company reported an operating profit margin (excluding other income) of -269.72% in Q2 FY26, indicating that operational expenses far exceeded revenue generation. Employee costs of ₹0.28 crores, whilst down from ₹0.43 crores in the previous quarter, still represented a disproportionate burden relative to the revenue base. This negative operating leverage suggests fundamental inefficiencies in project execution and cost management.

The company's return to profitability in Q2 FY26 was heavily dependent on other income of ₹0.22 crores, which cushioned the operational losses. This reliance on non-operating income to achieve profitability raises questions about the sustainability of earnings quality. The profit before tax of -₹2.81 crores, coupled with a peculiar tax credit of ₹0.27 crores (effective tax rate of -9.61%), resulted in the reported net profit of ₹0.60 crores.

Operational Challenges: The Margin Conundrum

Raunaq International's operational difficulties extend beyond quarterly fluctuations. The company's five-year average return on capital employed (ROCE) stands at a deeply negative -79.22%, highlighting chronic inefficiency in capital deployment. However, the latest half-yearly ROCE of 23.52% suggests a recent improvement, albeit from an extremely low base. This metric requires sustained demonstration over multiple quarters before it can be considered a genuine turnaround indicator.

The company's return on equity (ROE) presents an interesting paradox. Whilst the five-year average ROE languishes at 3.16%—well below acceptable standards for value creation—the latest ROE has surged to 32.34%. This dramatic improvement reflects the combination of reduced equity base and recent profitability, but investors should note that such elevated ROE levels on a micro-cap with volatile earnings can be misleading indicators of sustainable performance.

The balance sheet reveals a company in transition. As of March 2021, Raunaq International maintained shareholder funds of ₹13.54 crores, supported by share capital of ₹3.34 crores and reserves of ₹10.20 crores. Long-term debt stood at ₹5.07 crores, whilst current liabilities totalled ₹13.29 crores. Notably, trade payables decreased significantly from ₹25.86 crores in March 2020 to ₹6.49 crores in March 2021, suggesting improved working capital management or reduced business activity.

The company's fixed assets contracted from ₹18.24 crores in March 2020 to ₹3.66 crores in March 2021, indicating asset disposals or significant depreciation. Current assets similarly declined from ₹51.07 crores to ₹14.95 crores over the same period. This asset-light structure may position the company for more nimble operations, but it also raises questions about capacity for scaling up project execution.

Industry Context: Navigating a Competitive Landscape

The engineering, procurement, and construction (EPC) sector in India has experienced significant consolidation and competitive pressure in recent years. Large, well-capitalised players dominate major infrastructure projects, leaving smaller contractors like Raunaq International to compete for niche opportunities or subcontracting work. This structural disadvantage manifests in the company's volatile revenue patterns and difficulty in maintaining consistent margins.

Within the construction sector, Raunaq International operates at a significant scale disadvantage. With a market capitalisation of just ₹21.00 crores, the company ranks fourth among its peer group, limiting its ability to bid for larger, more profitable projects. The sector has also faced headwinds from raw material price volatility, labour shortages, and elongated payment cycles—challenges that disproportionately affect smaller players with limited financial cushion.

The company's focus on core infrastructural and industrial sectors—power, chemicals, hydrocarbons, metals, and automobiles—exposes it to cyclical demand patterns. Whilst India's infrastructure push under various government initiatives provides a favourable backdrop, translating this macro opportunity into sustained profitability requires execution capabilities and financial strength that Raunaq International has yet to consistently demonstrate.

Peer Comparison: Valuation in Context

Comparing Raunaq International with its construction sector peers reveals interesting valuation dynamics. The company trades at a price-to-earnings ratio of 8.18x—significantly below the sector average and well below peers like KCL Infra (23.14x) and PBA Infra (49.70x). However, this apparent valuation discount must be weighed against the company's inferior operational metrics and higher execution risks.

Raunaq International's price-to-book value ratio of 2.65x sits in the middle of the peer range, higher than KCL Infra (0.42x) but below Mewar Hi-Tech (3.04x). The company's net cash position (debt-to-equity of -0.26) provides a relative advantage over more leveraged peers, offering financial flexibility to pursue opportunities without the burden of heavy interest costs. This clean balance sheet represents one of the company's few unambiguous strengths.

The average ROE of 3.16% for Raunaq International trails most peers except PBA Infra, indicating weaker profitability and capital efficiency. Higher ROE typically justifies premium valuations, but in this case, the company's recent operational improvements have not yet translated into sustained superior returns. Investors paying 2.65 times book value are essentially betting on a turnaround that remains unproven.

Valuation Analysis: Attractive Entry Point or Value Trap?

Raunaq International's current valuation metrics present a complex picture. At ₹61.20 per share, the stock trades at a P/E ratio of 8.18x—substantially below the construction sector average P/E of 35x. This 77% discount to sector multiples could indicate either a compelling value opportunity or justified scepticism about the company's ability to sustain profitability.

The company's proprietary valuation grade has improved to "Very Attractive" as of November 2025, having oscillated between "Attractive" and "Very Attractive" throughout the summer months. This valuation assessment reflects the combination of low multiples and improved recent ROE. However, the frequent grade changes themselves signal the market's uncertainty about the company's fundamental trajectory.

The stock's 52-week trading range of ₹44.50 to ₹98.80 illustrates significant volatility. Currently trading at ₹61.20, the stock sits 38.06% below its 52-week high but 37.53% above its 52-week low. This mid-range positioning suggests the market is weighing both the turnaround potential and the execution risks in relatively equal measure.

One concerning aspect of the valuation is the enterprise value to EBITDA multiple of 18.47x, which appears elevated given the operational challenges. This metric suggests that despite the low P/E ratio, the market is not entirely convinced of the earnings quality or sustainability. The disconnect between the low P/E and higher EV/EBITDA often signals concerns about earnings composition or balance sheet quality.

Shareholding Pattern: Stable Promoter Base, Minimal Institutional Interest

The shareholding structure of Raunaq International has remained remarkably stable over the past five quarters, with promoter holding consistently maintained at 52.28%. This stability provides a degree of governance continuity, with the Surinder P. Kanwar Group—the company's founding promoters—retaining majority control. Importantly, there is zero promoter pledging, eliminating concerns about forced selling or governance issues arising from pledged shares.

The complete absence of foreign institutional investors (FIIs), mutual funds, and insurance companies signals a lack of institutional confidence in the company's prospects. Total institutional holdings stand at a negligible 0.07%, comprised entirely of other domestic institutional investors. This institutional vacuum means the stock lacks the support and liquidity that institutional participation typically provides, contributing to higher volatility and wider bid-ask spreads.

The non-institutional shareholding of 47.65% has remained static, suggesting limited trading activity and potentially low float. For a micro-cap stock, this illiquidity can be both a blessing and a curse—whilst it prevents sharp selling pressure, it also means that any meaningful position building or exit can significantly impact the stock price. Retail investors dominate the non-promoter shareholder base, which can lead to sentiment-driven price movements disconnected from fundamental developments.

Stock Performance: Significant Underperformance Across Timeframes

Raunaq International's stock performance has been characterised by extreme volatility and significant underperformance relative to broader market indices in recent months. Over the past three months, the stock has declined 20.07%, whilst the Sensex gained 4.92%—resulting in negative alpha of -24.99%. This underperformance accelerated in the past month, with the stock falling 8.66% against the Sensex's 3.09% gain.

The longer-term picture presents a starkly different narrative. Over three years, the stock has delivered returns of 144.80%, significantly outperforming the Sensex's 37.22% gain with positive alpha of 107.58%. The five-year return of 202.97% versus the Sensex's 93.78% demonstrates that patient investors have been rewarded, albeit through a highly volatile journey. However, the 10-year return of -28.13% against the Sensex's 230.19% gain serves as a sobering reminder of the company's long-term struggles.

From a technical perspective, the stock's current trend is classified as "Mildly Bullish," having downgraded from "Bullish" on September 29, 2025, at ₹73.20. The stock trades below all key moving averages—the 5-day MA (₹63.13), 20-day MA (₹66.37), 50-day MA (₹71.74), and 100-day MA (₹70.40)—indicating sustained selling pressure. Technical indicators present mixed signals, with MACD showing mildly bearish on weekly charts but bullish on monthly charts, whilst RSI shows no clear directional signal.

Investment Thesis: Turnaround Play with Significant Execution Risks

Raunaq International's investment case rests on several pillars, each requiring careful assessment. The company's proprietary Mojo Score stands at 58 out of 100, placing it in the "HOLD" category. This score reflects a balanced view of the company's prospects, acknowledging both the attractive valuation and the significant operational challenges that persist.

The "Very Attractive" valuation grade stems from the combination of low P/E multiples and improved recent ROE. However, this must be weighed against the "Below Average" quality grade, which reflects the company's weak long-term fundamental strength, with an average ROE of just 3.16% and negative average ROCE of -79.22%. The financial trend classification of "Positive" acknowledges the recent improvements in H1 FY26, particularly the 186.21% revenue growth and highest-ever ROCE of 23.52% for the half-year period.

The company's debt-free status (net debt-to-equity of -0.26) provides financial flexibility and eliminates interest burden concerns. This clean balance sheet represents a genuine competitive advantage, allowing the company to pursue opportunities without the constraints of debt servicing. Additionally, zero promoter pledging and stable promoter holding at 52.28% suggest aligned governance interests.

Key Strengths & Risk Factors

Outlook: Critical Monitoring Points Ahead

The trajectory of Raunaq International over the next 12-18 months will largely depend on the company's ability to convert recent revenue growth into sustainable profitability whilst addressing the structural margin challenges. The engineering contracting sector in India offers growth opportunities, but capturing these requires consistent execution capabilities that the company has yet to demonstrate over multiple quarters.

Investors should closely monitor the company's quarterly results for evidence of operational improvement. Specifically, the ability to generate positive operating profit (excluding other income) on a consistent basis would mark a genuine inflection point. Until such evidence materialises, the current profitability should be viewed as tentative rather than conclusive.

The broader construction sector outlook remains favourable, with government infrastructure spending and private sector capex providing tailwinds. However, Raunaq International's ability to participate meaningfully in this growth depends on securing larger projects, improving execution efficiency, and demonstrating margin sustainability—all of which remain question marks at present.