Real Touch Finance Q2 FY26: Profit Surge Masks Operational Efficiency Concerns

The Kolkata-based lender, which operates under the majority ownership of Ultraplus Housing Estate Private Limited (54.12% stake), has demonstrated consistent top-line momentum with net sales reaching ₹8.67 crores in Q2 FY26, up 5.99% quarter-on-quarter and 27.13% year-on-year. This represents the eighth consecutive quarter of revenue growth, underscoring the company's ability to expand its loan book in a competitive lending environment.

Despite the encouraging revenue trajectory, the quarter revealed significant operational challenges. The company's operating profit before depreciation, interest, and tax (excluding other income) plummeted to ₹4.27 crores—the lowest in recent quarters—whilst non-operating income surged to ₹2.49 crores, constituting an alarming 92.22% of profit before tax. This dramatic shift in earnings composition raises questions about the sustainability of the company's profitability and its core lending operations.

Financial Performance: Top-Line Growth Overshadows Margin Erosion

Real Touch Finance's Q2 FY26 revenue of ₹8.67 crores represents a continuation of the company's multi-year growth trajectory, with five-year sales compound annual growth rate standing at an impressive 75.06%. The sequential revenue increase of 5.99% demonstrates steady loan disbursement activity, whilst the 27.13% year-on-year expansion reflects robust demand for the company's lending products.

However, the quarter's standout feature—and primary concern—lies in the dramatic margin compression. Operating profit excluding other income collapsed to ₹4.27 crores, translating to an operating margin of just 49.25%, down sharply from 71.64% in Q1 FY26 and significantly below the 73.46% recorded in the year-ago quarter. This 22.39 percentage point sequential decline represents the steepest margin contraction in recent history and marks the lowest operating efficiency level observed across the trailing eight quarters.

The profit after tax margin improved to 23.30% from 16.38% in the previous quarter, but this enhancement owes more to the extraordinary surge in other income (₹2.49 crores) than to operational excellence. Interest expenses remained elevated at ₹4.00 crores, whilst employee costs moderated to ₹0.82 crores from ₹1.17 crores sequentially, providing some relief on the cost front.

On a half-yearly basis (H1 FY26), the company reported net sales of ₹16.85 crores with a combined net profit of ₹3.36 crores, reflecting healthy growth momentum. However, the sustainability of this performance hinges critically on the company's ability to restore operating margins to historical levels and reduce dependence on non-core income streams.

Operational Challenges: Margin Pressure and Non-Core Income Dependency

The quarter's most troubling development centres on Real Touch Finance's deteriorating operational efficiency and alarming reliance on non-operating income. The operating profit before interest, depreciation, and tax (excluding other income) of ₹4.27 crores represents the lowest level in the trailing eight quarters, raising red flags about the company's core lending profitability.

From a capital efficiency perspective, Real Touch Finance's return on equity (ROE) of 10.44% in the latest quarter, whilst improved from the five-year average of 6.20%, remains modest for a financial services company. Higher ROE typically indicates better capital efficiency and profitability, and the company's current level suggests room for improvement in generating returns for shareholders. The return on capital employed (ROCE) stands at 9.41%, reflecting the challenges of deploying capital profitably in the current operating environment.

The balance sheet presents a mixed picture. Shareholder funds increased to ₹47.05 crores as of March 2025 from ₹41.83 crores a year earlier, driven by retained earnings. However, current liabilities surged to ₹184.44 crores from ₹152.01 crores, indicating substantial short-term borrowing to fund loan growth. The company maintains minimal long-term debt, but the debt-to-equity ratio of 3.50 times reflects high leverage—a characteristic common amongst NBFCs but one that amplifies risk during periods of credit stress or funding market volatility.

Cash flow dynamics reveal concerning trends. Operating cash flow remained deeply negative at ₹26.00 crores for FY25, driven by a ₹31.00 crores adverse movement in working capital as the company expanded its loan book. The company bridged this gap through financing activities (₹25.00 crores inflow), but the persistent negative operating cash generation underscores the capital-intensive nature of the growth strategy and raises questions about long-term sustainability.

Industry Context: Navigating a Competitive NBFC Landscape

The Indian NBFC sector has experienced robust growth in recent years, benefiting from strong credit demand, financial inclusion initiatives, and improving asset quality metrics. However, the sector faces headwinds from rising funding costs, regulatory scrutiny, and intense competition from both traditional banks and fintech players.

Real Touch Finance operates in the micro-cap segment of the NBFC universe, focusing on providing loans to underserved customer segments. Whilst this positioning offers growth opportunities, it also entails higher credit risk, operational challenges, and limited access to low-cost funding compared to larger, more established peers. The company's ability to maintain asset quality whilst scaling operations will be critical to long-term success.

The company's five-year sales CAGR of 75.06% significantly outpaces the broader NBFC sector growth rate of approximately 19.18% over the past year, highlighting Real Touch Finance's aggressive expansion strategy. However, this rapid growth must be balanced against the need to maintain asset quality, operational efficiency, and adequate capitalisation.

Peer Comparison: Valuation Discount Reflects Quality Concerns

Real Touch Finance's valuation metrics present a mixed picture when benchmarked against micro-cap NBFC peers. The company trades at a price-to-earnings ratio of 12.65 times trailing twelve-month earnings, representing a significant discount to the broader NBFC sector average P/E of 24 times. This valuation gap reflects market concerns about the company's modest profitability, weak institutional following, and below-average quality grade.

Real Touch Finance demonstrates superior return on equity (6.20%) compared to most peers in the micro-cap NBFC space, where average ROE hovers around 2%. This relatively stronger profitability metric provides some justification for the company's valuation premium over select peers, though it remains well below industry leaders. The price-to-book ratio of 1.32 times sits comfortably below the peer average of approximately 2.2 times, suggesting the market assigns limited premium to the company's balance sheet quality.

The company's debt-to-equity ratio of 3.50 times stands out as significantly higher than most micro-cap peers, reflecting its more aggressive use of leverage to fund growth. Whilst this capital structure is not uncommon for NBFCs, it does expose Real Touch Finance to greater refinancing risk and interest rate sensitivity compared to peers with more conservative balance sheets.

Valuation Analysis: Attractive Entry Point or Value Trap?

Real Touch Finance's current valuation presents a paradox: attractive multiples offset by concerning fundamental trends. At ₹51.00 per share, the stock trades at 12.65 times trailing earnings and 1.32 times book value—both representing meaningful discounts to the broader NBFC sector. The company's proprietary valuation grade of "Attractive" suggests the current price offers reasonable value relative to historical norms and peer comparisons.

The price-to-earnings-growth (PEG) ratio of 0.16 times appears extraordinarily attractive, suggesting the stock trades at a significant discount to its growth rate. However, this metric must be interpreted cautiously given the sustainability concerns around the company's recent earnings trajectory, particularly the heavy reliance on non-operating income in Q2 FY26.

The stock has declined 41.69% from its 52-week high of ₹87.46, now trading closer to the lower end of its annual range. This correction reflects both company-specific challenges and broader market rotation away from micro-cap stocks. The current price of ₹51.00 sits just 70.91% above the 52-week low of ₹29.84, suggesting substantial volatility and uncertainty about the company's prospects.

Based on normalised earnings potential and peer valuations, a fair value estimate for Real Touch Finance ranges between ₹45.00 to ₹55.00 per share, implying limited upside from current levels. The valuation discount reflects legitimate concerns about earnings quality, operational efficiency, and the company's ability to sustain profitability without extraordinary other income contributions.

Shareholding: Stable Promoter Base, Zero Institutional Interest

Real Touch Finance's shareholding structure reveals a stable promoter base but complete absence of institutional investor interest—a significant red flag for potential investors. Ultraplus Housing Estate Private Limited maintains a consistent 54.12% stake, unchanged over the past five quarters, demonstrating promoter commitment but also limited appetite for further capital infusion.

The complete absence of foreign institutional investors (FIIs), mutual funds, insurance companies, and other domestic institutional investors (DIIs) signals a lack of confidence from sophisticated market participants. This zero institutional holding—highly unusual even for micro-cap stocks—reflects concerns about the company's governance, financial transparency, liquidity, and growth prospects. The remaining 45.88% shareholding comprises retail and non-institutional investors, a constituency typically characterised by limited research capabilities and higher volatility in trading behaviour.

Positively, there is no promoter pledging of shares, eliminating one potential source of governance risk. However, the static shareholding pattern over multiple quarters suggests limited investor interest and raises questions about the company's ability to attract capital for future growth initiatives.

Stock Performance: Severe Underperformance Despite Recent Bounce

Real Touch Finance's stock price performance presents a study in contrasts: spectacular long-term gains offset by severe recent underperformance. The stock has delivered extraordinary returns over extended periods—1,114.29% over five years and 311.29% over ten years—significantly outpacing the Sensex and generating substantial alpha for long-term holders. However, these historical gains mask a dramatic reversal in momentum over the past year.

The stock's year-to-date decline of 38.18% and one-year loss of 25.44% represent dramatic underperformance against both the Sensex (up 7.34% and 5.50% respectively) and the NBFC sector (up 19.18% over one year). This 44.62 percentage point underperformance versus the sector highlights company-specific challenges rather than broader industry headwinds.

Recent trading sessions show modest stabilisation, with the stock gaining 4.23% following the Q2 results announcement and posting positive returns across one-week (1.90%), one-month (2.82%), three-month (8.35%), and six-month (13.18%) periods. However, these short-term gains must be viewed in the context of the severe drawdown from the 52-week high of ₹87.46.

From a technical perspective, the stock remains in a bearish trend, trading below its 5-day (₹50.08), 20-day (₹50.62), 50-day (₹50.63), and 100-day (₹51.56) moving averages. Multiple technical indicators including MACD, Bollinger Bands, and KST flash bearish signals, suggesting continued downward pressure absent a fundamental catalyst.

Investment Thesis: Mixed Signals Across Critical Parameters

Real Touch Finance presents a complex investment proposition characterised by conflicting signals across valuation, quality, fundamentals, and technical factors. The company's proprietary investment score of 29 out of 100—firmly in "Strong Sell" territory—reflects these concerns and suggests significant caution is warranted.

The investment case rests on a single pillar: attractive valuation. Trading at 12.65 times earnings and 1.32 times book value, the stock offers a meaningful discount to both historical averages and sector peers. For contrarian investors with high risk tolerance, this valuation gap could present an opportunity if the company successfully addresses operational challenges.

However, this lone positive is overwhelmed by multiple concerns. The below-average quality grade reflects weak long-term financial performance, with an average ROE of just 6.20%—well below the 15% threshold typically expected from financial services companies. The complete absence of institutional investors signals a lack of confidence from sophisticated market participants who conduct rigorous due diligence.

The bearish technical trend, with the stock trading below all major moving averages and multiple indicators flashing sell signals, suggests continued near-term pressure. The high beta of 1.50 and volatility of 52.92% indicate that any further deterioration in fundamentals or market sentiment could trigger sharp price declines.

Key Strengths & Risk Factors

Outlook: What to Watch in Coming Quarters

The coming quarters will be critical for Real Touch Finance. Investors should closely monitor whether the company can restore operating margins to historical levels and demonstrate that Q2 FY26's extraordinary other income was truly a one-off event. The sustainability of revenue growth whilst maintaining asset quality will determine whether the current attractive valuation represents a genuine opportunity or a value trap.

Management's ability to articulate a clear strategy for improving operational efficiency, attracting institutional investors, and generating positive operating cash flow will be crucial. Without visible progress on these fronts, the stock is likely to remain under pressure despite its seemingly attractive valuation multiples.