Salona Cotspin Q3 FY26: Profit Slumps 79% as Margins Compress Amid Tepid Demand

The quarter's results reveal a troubling combination of revenue contraction, margin erosion, and elevated interest costs that have collectively undermined profitability. Net sales declined 8.95% sequentially to ₹155.49 crores, whilst operating margins compressed to 4.93% from 5.22% in the previous quarter. Year-on-year comparisons show marginal improvement in revenue (down just 1.77% versus December 2024), but profitability remains under severe strain with PAT margin collapsing to a mere 0.21% from 0.63% in Q2 FY26.

The textile sector has faced headwinds from volatile cotton prices, subdued export demand, and intense competition from synthetic alternatives. Salona Cotspin's Q3 performance underscores these challenges, with the company struggling to maintain pricing power whilst managing elevated working capital requirements and debt servicing obligations. The quarter's tax rate anomaly at 60.71% further distorted the bottom line, though this appears to be a one-off adjustment rather than a structural issue.

Financial Performance: Revenue Decline Compounds Margin Pressures

Salona Cotspin's Q3 FY26 revenue of ₹155.49 crores represents a sequential decline of 8.95% from ₹170.77 crores in Q2 FY26, breaking a two-quarter growth streak. The year-on-year comparison shows a modest 1.77% decline from ₹158.29 crores in Q3 FY25, indicating that demand conditions remain tepid but relatively stable compared to the prior year. However, the sequential contraction is concerning, particularly as the October-December period typically represents a seasonally stronger quarter for textile manufacturers catering to winter apparel demand.

Operating profit (PBDIT excluding other income) declined to ₹7.66 crores from ₹8.92 crores sequentially, with the operating margin compressing to 4.93% from 5.22%. This 29 basis point margin erosion reflects the dual impact of revenue deleverage and potentially higher input costs. Year-on-year, the operating margin has contracted sharply from 5.89% in Q3 FY25, highlighting sustained pressure on pricing and cost management. The company's gross profit margin similarly deteriorated to 2.07% from 2.18% in the previous quarter, suggesting limited ability to pass through cost increases to customers.

The profit before tax collapsed to ₹0.84 crores from ₹1.17 crores sequentially, a 28.21% decline. However, the real damage occurred at the net profit level, where an abnormally high tax rate of 60.71% resulted in a tax outgo of ₹0.51 crores, leaving net profit at just ₹0.33 crores. This compares unfavourably with Q2 FY26's tax rate of 8.55% and Q1 FY26's 24.26%. Whilst quarterly tax rate fluctuations can occur due to timing differences and adjustments, the magnitude of this quarter's rate warrants scrutiny. On a nine-month basis for FY26, the company has reported cumulative net profit of ₹2.93 crores on revenues of ₹483.36 crores, translating to a PAT margin of just 0.61%.

Interest costs declined marginally to ₹4.68 crores from ₹5.23 crores in Q2 FY26, providing some relief, though the absolute burden remains elevated given the company's high debt levels. Depreciation stood at ₹2.38 crores, slightly lower than the previous quarter's ₹2.56 crores. Employee costs rose to ₹5.06 crores from ₹4.88 crores, reflecting inflationary pressures and potentially higher headcount to support expanded capacity.

Operational Challenges: Margin Erosion and Quality Concerns

The deterioration in Salona Cotspin's operational metrics extends beyond top-line weakness. The company's return on equity (ROE) has collapsed to just 1.48% on a trailing twelve-month basis, down dramatically from the five-year average of 21.62%. This sharp decline signals a fundamental erosion in capital efficiency and profitability. Return on capital employed (ROCE) similarly weakened to 7.81% from the historical average of 10.87%, indicating that the company is generating increasingly inadequate returns on the capital deployed in its business.

The balance sheet reveals mounting stress. Total debt stood at ₹64.92 crores as of March 2025, with current liabilities ballooning to ₹196.85 crores, resulting in a debt-to-equity ratio of approximately 2.75 times. The company's debt-to-EBITDA ratio of 5.69 times reflects a heavy debt burden relative to operating cash generation capacity. Interest coverage, measured by EBIT-to-interest ratio, averaged just 3.49 times over recent periods—a relatively weak level that leaves limited cushion for any further deterioration in operating performance.

Working capital management appears strained. The March 2025 balance sheet shows current assets of ₹226.61 crores against current liabilities of ₹196.85 crores, yielding a current ratio of approximately 1.15—adequate but not comfortable given the cyclical nature of the textile business. Trade payables stood at ₹13.50 crores, whilst other current liabilities reached ₹9.22 crores. The cash flow statement for FY25 reveals that whilst operating cash flow turned positive at ₹63 crores (after being negative in FY24), this was largely driven by working capital release rather than underlying earnings strength.

Capital expenditure has been substantial, with ₹26 crores invested in FY25 following ₹71 crores in FY24. Fixed assets increased to ₹106.45 crores from ₹70.48 crores, suggesting capacity expansion efforts. However, the timing of this expansion appears unfortunate given the current demand environment. The company financed this growth through increased debt, with long-term borrowings declining from ₹77.15 crores to ₹64.92 crores but overall leverage remaining elevated.

Industry Context: Textile Sector Headwinds Persist

The Indian textile industry continues to grapple with multiple challenges. Global demand for cotton textiles has remained subdued, particularly from key export markets in Europe and North America where economic uncertainty has dampened consumer spending on discretionary items including apparel. Domestic demand has been relatively resilient but insufficient to offset export weakness. Cotton yarn prices have exhibited volatility, creating margin pressures for spinners caught between fluctuating raw material costs and limited pricing power in finished goods.

Competition from synthetic fibres and blended fabrics has intensified, with polyester and other man-made fibres gaining market share due to cost advantages and performance characteristics. Pure cotton yarn manufacturers like Salona Cotspin face the dual challenge of defending market share whilst maintaining profitability in an increasingly competitive landscape. Additionally, power and labour costs have trended upward, further squeezing margins for textile manufacturers operating in a price-sensitive market.

The garments and apparels segment, in which Salona Cotspin operates, has witnessed consolidation and capacity rationalisation. Smaller players with limited scale and high debt burdens have found it particularly challenging to navigate the current environment. Export incentives and government support schemes have provided some relief, but the fundamental demand-supply dynamics remain challenging. The sector's outlook hinges on a revival in global trade and domestic consumption growth, neither of which appears imminent in the near term.

Peer Comparison: Valuation Premium Unjustified

A comparison with peers in the garments and apparels segment reveals that Salona Cotspin trades at a significant valuation premium despite inferior operational metrics. The company's price-to-earnings ratio of 104.83 times is dramatically higher than comparable companies such as Indian Card Clothing Company (9.13x) and Sh. Dinesh Mills (9.33x). This elevated multiple appears unjustified given the company's weak profitability, high leverage, and deteriorating return ratios.

Salona Cotspin's historical ROE of 21.62% (five-year average) compares favourably with most peers, but the latest ROE of just 1.48% tells a very different story. The company's debt-to-equity ratio of 2.75 times is amongst the highest in the peer group, with only Praxis Home Retail carrying comparable leverage. The price-to-book ratio of 1.55 times appears reasonable in isolation but becomes concerning when considered alongside the deteriorating return profile.

The dividend yield of 0.40% is modest, with the company having declared a ₹1 per share dividend most recently. The payout ratio of 17.01% suggests management's intention to conserve cash, likely reflecting the need to service debt and fund working capital requirements. In contrast, peers with stronger balance sheets like Weizmann and Sh. Dinesh Mills offer comparable or higher dividend yields despite lower absolute valuations.

Valuation Analysis: Premium Difficult to Justify

At the current price of ₹251 per share, Salona Cotspin commands a market capitalisation of ₹134 crores. The company's enterprise value-to-EBITDA multiple of 10.82 times and EV-to-EBIT of 14.69 times appear elevated given the weak profitability trends and high debt burden. The EV-to-sales ratio of 0.58 times is relatively modest, but this metric provides little comfort when operating margins are compressed to sub-5% levels and net margins have collapsed below 0.5%.

The price-to-book ratio of 1.55 times compares with a book value per share of ₹154.96, implying a modest premium to net asset value. However, the quality of these assets is questionable given the poor returns being generated. The company's fixed assets have grown substantially to ₹106.45 crores, but the incremental return on these investments appears inadequate. The EV-to-capital employed ratio of 1.15 times suggests the market is valuing the business at slightly above replacement cost, but this too seems optimistic given the ROCE of just 7.81%.

Historical valuation grades show the stock moved from "Very Attractive" to "Attractive" multiple times in late 2024 and 2025, suggesting high volatility in valuation perception. The current "Attractive" grade appears generous given the fundamental deterioration. A more appropriate valuation would likely place the stock closer to book value or below, particularly if the earnings trajectory does not stabilise. Fair value estimates are difficult to construct given the earnings volatility, but a P/E multiple of 15-20 times normalised earnings (assuming ₹5-6 crores annual profit) would suggest a price range of ₹140-170 per share, implying 30-45% downside from current levels.

Shareholding Pattern: Promoter Confidence Marginally Improving

Promoter holding in Salona Cotspin increased to 68.42% in December 2025 from 67.09% in the previous three quarters, representing a sequential increase of 1.33 percentage points. This uptick suggests some degree of promoter confidence, though the increase is modest and could simply reflect regulatory or compliance-driven actions rather than strong conviction. The promoter group remains highly fragmented, with 24 individual promoter entities holding stakes ranging from 0.06% to 8.66%.

Institutional participation remains conspicuously absent, with zero holdings from foreign institutional investors (FIIs), mutual funds, insurance companies, and other domestic institutional investors (DIIs). The complete lack of institutional interest is a significant red flag, suggesting that professional investors have not found the company's fundamentals, governance, or growth prospects sufficiently attractive to warrant investment. The non-institutional shareholding of 31.58% comprises largely retail and individual investors.

Promoter pledging stands at a minimal 0.28%, which is a positive indicator suggesting the promoters are not using their shares as collateral for borrowings. However, this provides limited comfort given the overall weak operational performance and high corporate debt levels. The absence of institutional investors means the stock lacks the research coverage, liquidity, and credibility that typically accompanies institutional ownership.

Stock Performance: Significant Underperformance Across Timeframes

Salona Cotspin's stock has delivered disappointing returns across most relevant timeframes. Over the past year, the stock has declined 12.22%, significantly underperforming the Sensex which gained 7.97% during the same period—a negative alpha of 20.19 percentage points. The two-year performance is even more concerning, with the stock down 26.90% compared to the Sensex's gain of 17.42%, representing a negative alpha of 44.32 percentage points.

The stock's volatility of 60.56% over the past year is extraordinarily high, more than five times the Sensex's volatility of 11.53%. This places Salona Cotspin in the "high risk, low return" category—the worst possible combination for investors. The risk-adjusted return of -0.20 compares unfavourably with the Sensex's risk-adjusted return of 0.69, indicating that investors have been poorly compensated for the elevated risk undertaken.

The stock's beta of 1.50 indicates it is 50% more volatile than the broader market, amplifying both gains and losses. However, given the negative returns, this high beta has worked entirely against shareholders. The stock currently trades 25.07% below its 52-week high of ₹335 reached earlier, whilst sitting 17.87% above its 52-week low of ₹212.95. Technical indicators show the stock is trading below all key moving averages (5-day, 20-day, 50-day, 100-day, and 200-day), suggesting weak momentum and lack of buying interest.

Longer-term returns paint a more mixed picture. The five-year return of 234.22% and ten-year return of 619.20% demonstrate that the stock has delivered substantial wealth creation over extended periods, significantly outperforming the Sensex. However, these gains appear to have been driven by the exceptional growth period from FY20 to FY23 when revenues surged and profitability expanded. The recent deterioration suggests that earlier gains may have been unsustainable and driven by cyclical factors rather than durable competitive advantages.

Investment Thesis: Deteriorating Fundamentals Outweigh Valuation Appeal

Salona Cotspin's investment case has weakened considerably based on recent performance. The company's proprietary Mojo Score of 52 out of 100 places it in "HOLD" territory, though the recent downgrade from "HOLD" to "SELL" in late January 2026 reflects the deteriorating fundamental trajectory. The score breakdown reveals mixed signals across key parameters: whilst valuation appears "Very Attractive" and quality is rated "Average," the negative financial trend and elevated debt levels present significant concerns.

The technical picture shows a "Mildly Bullish" trend as of late January 2026, having recently reversed from "Mildly Bearish." However, this technical uptick has not been supported by fundamental improvement. Most technical indicators remain bearish or mixed, with MACD showing bearish signals on both weekly and monthly timeframes, and the stock trading below all major moving averages. The recent price action suggests technical bounces rather than sustainable trend reversals.

The company's quality assessment reveals both strengths and weaknesses. The five-year sales growth of 35.19% and EBIT growth of 34.30% demonstrate impressive historical expansion. However, the current operating environment appears far less favourable. The average EBIT-to-interest coverage of 3.49 times is weak, leaving limited margin for error. The debt-to-EBITDA ratio of 5.69 times and net debt-to-equity of 2.75 times reflect a highly leveraged capital structure that constrains financial flexibility.

Key Strengths & Risk Factors

Outlook: What to Watch

The path forward for Salona Cotspin depends critically on external demand conditions and management's ability to execute operational improvements. The company must focus on margin recovery through cost optimisation, enhanced capacity utilisation, and product mix improvement. Deleveraging should be prioritised to reduce the interest burden and improve financial flexibility. However, the challenging sector dynamics and absence of institutional support suggest that meaningful improvement may take several quarters to materialise.

Investors should monitor quarterly results closely for signs of margin stabilisation and revenue momentum. Key metrics to track include operating margins, interest coverage, working capital trends, and debt levels. Any sustained improvement in these parameters could provide an entry opportunity, but current fundamentals do not support fresh investment at prevailing valuations.