Sakthi Finance Q2 FY26: Profit Declines Amid Rising Interest Burden and Margin Pressure

The quarter's results reflect a company grappling with the twin challenges of stagnant revenue growth and rising financing costs. Whilst operating margins expanded to 72.84% from 71.81% in the previous quarter, the benefit was largely offset by higher interest expenses of ₹31.50 crores, up 0.77% sequentially. The company's profit before tax stood at ₹5.46 crores in Q2 FY26, down from ₹5.81 crores in Q1 FY26, representing a 6.02% quarterly decline that underscores the pressure on core profitability.

Founded in 1955 as 'The Pollachi Credit Society Pvt. Ltd.' and renamed Sakthi Finance Limited in 1967, the company operates as an NBFC Investment and Credit Company (NBFC-ICC) with a focused mandate on hire purchase financing for commercial vehicles and infrastructure equipment. Despite its seven-decade legacy, the company faces mounting headwinds in a competitive lending environment characterised by margin compression and elevated cost of funds.

Financial Performance: Stagnation Amid Margin Pressures

Sakthi Finance's Q2 FY26 financial performance paints a picture of stagnation rather than growth. Interest earned, the company's primary revenue metric, declined 1.64% quarter-on-quarter to ₹52.87 crores, whilst also contracting 2.62% year-on-year. This marks the second consecutive quarter of revenue decline, with Q1 FY26 having posted ₹53.75 crores following ₹52.70 crores in Q4 FY25.

The operating margin expansion to 72.84% in Q2 FY26, up 103 basis points from the previous quarter and 329 basis points year-on-year, represents a bright spot in an otherwise challenging quarter. This improvement was driven primarily by lower employee costs, which declined to ₹7.95 crores from ₹8.41 crores in Q1 FY26, a 5.47% sequential reduction. However, the benefit of operational efficiency was largely neutralised by the company's heavy interest burden, which consumed 59.59% of interest income in Q2 FY26, up from 58.15% in the previous quarter.

The profit after tax margin of 7.11% in Q2 FY26, whilst lower than Q1 FY26's 7.67%, represents an improvement from the 6.58% recorded in the year-ago quarter. This marginal year-on-year improvement reflects the company's ability to maintain profitability despite revenue headwinds, though the sequential decline signals ongoing pressure on bottom-line performance.

Operational Challenges: High Leverage and Weak Returns

Sakthi Finance's operational profile is characterised by high financial leverage and anaemic return on equity, raising concerns about the sustainability of its business model. The company's debt-to-equity ratio stood at a concerning 5.45 times on a half-yearly basis for H1 FY26, representing the highest level in recent periods and significantly above industry norms. This elevated leverage amplifies both risk and the sensitivity of profitability to changes in interest rates and asset quality.

The return on equity of 7.36% as of the latest period, whilst marginally improved from the five-year average of 6.03%, remains well below acceptable thresholds for financial services companies. This weak ROE reflects the company's struggle to generate adequate returns on shareholder capital, a fundamental weakness that limits its ability to attract growth capital and compete effectively with better-capitalised peers. The ROCE of 11.11% similarly underscores subdued profitability relative to capital employed.

Cash and cash equivalents stood at ₹191.33 crores on a half-yearly basis for H1 FY26, representing the highest level in recent periods and providing some cushion against liquidity pressures. However, this elevated cash position must be viewed in the context of the company's substantial debt burden and the need to maintain adequate liquidity buffers in a tightening credit environment.

Asset Quality and Business Model Sustainability

Whilst specific non-performing asset data was not available in the quarterly results, the company's business model focus on used commercial vehicle and construction equipment financing carries inherent credit risks. These asset classes are typically more vulnerable to economic cycles and borrower stress compared to secured retail lending or prime corporate credit.

The company's operating profit before depreciation, interest, and tax (PBDIT) stood at ₹38.51 crores in Q2 FY26, virtually flat compared to ₹38.60 crores in the previous quarter. This stagnation in operating profit, combined with rising interest costs, resulted in profit before tax of ₹5.46 crores, the lowest in recent quarters. The effective tax rate of 31.14% in Q2 FY26, up from 29.09% in Q1 FY26, further compressed net profitability.

Industry Positioning: Lagging Peer Performance

When benchmarked against NBFC peers, Sakthi Finance's operational and financial metrics reveal a company struggling to compete effectively. The company's return on equity of 6.03% (five-year average) trails most comparable NBFCs, whilst its debt-to-equity ratio of 4.83 times (average) significantly exceeds that of better-capitalised competitors.

Sakthi Finance's valuation metrics reflect this operational underperformance. The stock trades at a P/E ratio of 16.17 times, below the industry average of 23 times, and a price-to-book value of 1.19 times, significantly lower than the peer average of approximately 4.3 times. Whilst this valuation discount might appear attractive on the surface, it primarily reflects the company's weak return profile and elevated leverage rather than representing genuine value.

The company's dividend yield of 1.47%, based on the latest dividend of ₹0.80 per share (ex-dividend date: September 19, 2025), provides some income support for shareholders but does little to offset the substantial capital erosion experienced over the past year.

Valuation Analysis: Discount Reflects Fundamental Weakness

At the current market price of ₹42.56, Sakthi Finance trades at what appears to be a significant discount to both historical levels and peer multiples. The stock has declined 42.10% from its 52-week high of ₹73.50, though it remains 6.40% above its 52-week low of ₹40.00. This valuation compression reflects deteriorating investor sentiment towards the company's prospects rather than presenting a compelling entry opportunity.

The P/E ratio of 16.17 times, whilst below the industry average, must be considered in the context of the company's weak growth trajectory and return profile. With five-year sales growth of just 4.93% and EBIT growth of 4.56%, the company's PEG ratio of 3.44 suggests the current valuation is actually expensive relative to growth prospects. The price-to-book value of 1.19 times, though seemingly modest, still represents a premium to book value despite ROE of only 6.03%.

The valuation assessment has shifted from "Attractive" to "Fair" as of October 15, 2025, following a period of volatility that saw the grade fluctuate between "Very Expensive" and "Fair" in early October. This stabilisation at "Fair" suggests the market has reached an equilibrium that prices in both the company's operational challenges and its modest dividend yield.

Shareholding Pattern: Stable but Uninspiring

Sakthi Finance's shareholding pattern reveals a stable ownership structure dominated by promoters, with no institutional participation whatsoever. Promoter holding has remained constant at 67.02% across the last five quarters, with no sequential changes. The remaining 32.98% is held by non-institutional investors, primarily retail shareholders.

The complete absence of foreign institutional investors, mutual funds, insurance companies, and other domestic institutional investors is particularly noteworthy and concerning. This 0.00% institutional holding reflects the company's small market capitalisation (₹278 crores), limited liquidity, and weak fundamental profile. The lack of institutional interest also suggests limited research coverage and price discovery, contributing to the stock's high volatility.

Promoter entities include Sakthifinance Financial Services Limited (19.19%), Abt Investments (India) Private Limited (13.49%), and Sakthi Financial Services (Cochin) Private Limited (11.06%), amongst others. Positively, there is no promoter pledging, indicating the promoters maintain unencumbered ownership of their stakes.

Stock Performance: Severe Underperformance Across Timeframes

Sakthi Finance's stock performance has been dismal across virtually all timeframes, with particularly severe underperformance relative to both the Sensex and its NBFC sector peers. The stock has declined 27.59% over the past year, compared to the Sensex's gain of 9.11%, resulting in negative alpha of 36.70 percentage points. This underperformance has accelerated in recent months, with the stock down 14.71% over six months versus the Sensex's 4.47% gain.

The stock's underperformance relative to the NBFC sector has been even more pronounced, with the sector delivering 25.01% returns over the past year whilst Sakthi Finance declined 27.59%, resulting in sector underperformance of 52.60 percentage points. This massive underperformance reflects both company-specific challenges and investor preference for larger, better-capitalised NBFCs with stronger growth trajectories.

From a technical perspective, the stock is in a confirmed bearish trend as of November 12, 2025, trading below all key moving averages. The 5-day moving average stands at ₹43.28, with the stock currently below this level, whilst the 200-day moving average of ₹47.76 represents strong overhead resistance. The stock's high beta of 1.50 indicates it is significantly more volatile than the broader market, amplifying both downside and upside movements.

Investment Thesis: Multiple Red Flags Outweigh Limited Positives

Sakthi Finance's investment thesis is severely compromised by a combination of weak fundamentals, operational challenges, and unfavourable technical trends. The company's proprietary Mojo score of 23 out of 100, resulting in a "STRONG SELL" rating, reflects the multiple structural issues facing the business.

The quality assessment of "Below Average" is underpinned by weak long-term financial performance metrics, including five-year sales growth of just 4.93%, EBIT growth of 4.56%, and an average ROE of 6.03%. The debt-to-equity ratio of 4.83 times (average) and current level of 5.45 times represents excessive leverage that constrains financial flexibility and amplifies risk.

Whilst the valuation appears "Fair" at current levels, this assessment must be tempered by the recognition that the discount to peers reflects fundamental weaknesses rather than opportunity. The flat financial trend in Q2 FY26, combined with bearish technical indicators, suggests limited near-term catalysts for improvement.

Key Strengths and Risk Factors

Outlook: Limited Catalysts for Near-Term Recovery

The outlook for Sakthi Finance remains challenging, with limited visibility on catalysts that could drive a meaningful improvement in operational or financial performance. The company's Q2 FY26 results underscore the structural challenges facing the business, including revenue stagnation, margin pressure from elevated interest costs, and weak return on equity that limits capital generation.

Investors should closely monitor the company's ability to stabilise revenue growth, manage its high leverage, and improve return on equity in coming quarters. Any further deterioration in these metrics would reinforce the negative investment thesis and justify continued avoidance or exit from the stock.