Sanathan Textiles Q2 FY26: Margin Pressure Intensifies as Interest Costs Surge

The quarter's most striking feature was the dramatic surge in interest expenses, which quadrupled from ₹4.62 crores in Q1 FY26 to ₹18.48 crores in Q2 FY26. This 300% quarter-on-quarter spike, coupled with margin compression across the board, resulted in profit after tax margins collapsing to 2.46% from 5.42% in the previous quarter. The company's operating profit to interest coverage ratio fell to a concerning 3.42 times, the lowest level observed in recent quarters, raising questions about financial sustainability and debt servicing capability.

Despite revenue reaching an all-time quarterly high of ₹817.99 crores, representing a healthy 9.75% sequential growth and 10.22% year-on-year expansion, the bottom line failed to keep pace. The disconnect between topline momentum and profitability deterioration signals significant operational headwinds, primarily stemming from escalating financing costs and margin pressures that have intensified through the first half of FY2026.

Financial Performance: Revenue Growth Masks Profitability Crisis

Sanathan Textiles' Q2 FY26 results present a tale of two narratives. On the surface, net sales of ₹817.99 crores marked the highest quarterly revenue in the company's recent history, continuing an upward trajectory from ₹745.34 crores in Q1 FY26 and ₹742.17 crores in Q2 FY25. The 10.22% year-on-year growth suggests decent demand conditions in the garments sector, whilst the 9.75% sequential expansion indicates improving order flows and capacity utilisation.

However, beneath the revenue strength lies a troubling erosion of profitability. Operating profit excluding other income fell to ₹63.15 crores from ₹69.56 crores in Q1 FY26, translating to operating margins of 7.72% versus 9.33% in the previous quarter. This 161 basis point sequential margin contraction reflects rising input costs, operational inefficiencies, or competitive pricing pressures that management has been unable to offset through volume growth or cost optimisation.

The profit before tax declined to ₹33.27 crores from ₹55.34 crores quarter-on-quarter, whilst net profit after tax plummeted to ₹20.12 crores. The PAT margin of 2.46% represents less than half the 5.42% achieved in Q1 FY26 and significantly trails the 6.41% margin recorded in Q2 FY25. The tax rate anomaly at 39.53% in Q2 FY26, substantially higher than the 26.94% in Q1 FY26, further compounded the profit squeeze, suggesting potential one-time tax adjustments or changes in the tax structure.

Balance Sheet Concerns: Debt Burden Escalates Rapidly

An examination of Sanathan Textiles' balance sheet reveals the underlying cause of the interest cost explosion. As of March 31, 2025, the company's long-term debt stood at ₹938.20 crores, representing a staggering 178% increase from ₹337.20 crores a year earlier. This aggressive debt accumulation appears to have funded capital expenditure, as the cash flow statement shows investing activities consuming ₹1,341 crores in FY2025 compared to just ₹245 crores in FY2024.

Shareholder funds increased to ₹1,808.01 crores from ₹1,274.97 crores, driven by reserves and surplus growth to ₹1,721.26 crores. However, the pace of debt accumulation has outstripped equity growth, resulting in a deteriorating capital structure. The debt-to-equity ratio, whilst still moderate at 0.52 (calculated as total debt divided by shareholder funds), has been rising rapidly and warrants close monitoring given the company's modest return on equity of 11.40%.

Current liabilities rose to ₹674.08 crores from ₹505.35 crores, with trade payables increasing to ₹488.27 crores from ₹436.94 crores. This suggests extended payment cycles to suppliers, a common strategy during periods of working capital stress. Current assets stood at ₹857.34 crores, down from ₹909.33 crores, indicating tighter liquidity conditions despite the revenue growth.

Profitability Metrics: ROE and ROCE Signal Mediocre Returns

Sanathan Textiles' return on equity of 11.40% and return on capital employed of 12.67% position the company in the lower tier of profitability amongst textile manufacturers. Higher ROE figures indicate better capital efficiency and stronger profitability, making these modest returns a key concern for investors evaluating the company's ability to generate value from shareholder capital. The ROE of 9.53% for the latest period represents a further deterioration, suggesting that recent investments have yet to translate into improved profitability.

The company's ROCE of 11.59% for the latest period, calculated as earnings before interest and tax (excluding other income) divided by capital employed (net of cash and current investments), reflects the underlying earning power of the business before financing costs. With the cost of debt likely exceeding 10% given current interest rate conditions, the spread between ROCE and borrowing costs appears uncomfortably narrow, limiting the financial leverage benefits and raising questions about the wisdom of debt-funded expansion.

The five-year sales growth rate of negative 5.10% and EBIT growth of just 0.68% over the same period paint a picture of a company struggling to achieve sustainable growth. These historical trends suggest structural challenges in the business model or competitive positioning that have persisted over multiple years. The recent revenue uptick in Q2 FY26, whilst encouraging, needs to be sustained over multiple quarters before it can be viewed as a genuine turnaround in the growth trajectory.

Peer Comparison: Valuation Appears Reasonable but Quality Lags

Relative to its peer group in the garments and apparels sector, Sanathan Textiles trades at a price-to-earnings ratio of 23.23 times, broadly in line with the industry median and below players like Gokaldas Exports (36.56x) and PDS Ltd (49.20x). The price-to-book value of 2.21 times appears reasonable, particularly when compared to high-quality peers like Pearl Global (5.19x) and Gokaldas Exports (3.04x), though it reflects the company's lower return on equity.

The critical differentiator lies in profitability metrics. Sanathan's ROE of 11.40% trails most peers, with Indo Count Industries delivering 16.93%, Pearl Global at 14.51%, and PDS Ltd achieving 17.45%. This profitability gap justifies the valuation discount and suggests that unless operational performance improves materially, the stock is unlikely to command a premium multiple. The absence of dividend payments, unlike some peers who offer yields between 0.38% and 1.32%, further diminishes the investment appeal for income-focused investors.

Valuation Analysis: Attractive Rating Masks Fundamental Concerns

At the current market price of ₹464.15, Sanathan Textiles carries a market capitalisation of ₹3,975 crores and trades at 23 times trailing twelve-month earnings. The company's proprietary valuation grade of "Attractive" suggests the stock offers reasonable value relative to its historical trading range and peer group multiples. The price-to-book value of 2.21 times, combined with a book value per share of ₹214.22, implies the market is willing to pay a modest premium over net asset value.

However, valuation attractiveness must be weighed against quality concerns. The stock has corrected 17.70% from its 52-week high of ₹564.00, reflecting market recognition of the deteriorating earnings trajectory. Trading at ₹464.15, it remains 61.70% above the 52-week low of ₹287.05, suggesting significant volatility and uncertainty about the company's earnings power and growth prospects.

The enterprise value to EBITDA multiple of 15.51 times and EV to sales of 1.38 times suggest the market is pricing in modest growth expectations. Given the company's negative five-year sales CAGR of 5.10% and flat EBIT growth, these multiples appear fair rather than cheap. The absence of a PEG ratio calculation reflects the lack of consistent earnings growth, a fundamental prerequisite for growth-oriented valuation frameworks.

Shareholding Pattern: Institutional Confidence Remains Tepid

Promoter holding remains rock-solid at 78.58% with zero pledging, indicating strong management confidence and alignment with minority shareholders. The Dattani family, through various trusts and individual holdings, controls the company with no apparent succession or governance concerns. This concentrated ownership structure provides stability but limits free float and can impact liquidity during periods of market stress.

Institutional participation tells a more concerning story. Mutual fund holdings declined to 11.24% in September 2025 from 12.11% in June 2025, representing a 0.87 percentage point reduction. Foreign institutional investors similarly reduced their stake from 2.19% to 1.67%, a 0.52 percentage point decline. This sequential selling by sophisticated investors coincides with the deteriorating quarterly results, suggesting institutions are losing conviction in the company's near-term prospects.

The total institutional holding of just 13.13% (combining mutual funds, FIIs, insurance companies, and other domestic institutions) is notably low for a company of this market capitalisation. The absence of insurance company participation and minimal other DII holdings at 0.21% further underscore the limited institutional interest. Non-institutional investors increased their stake to 8.29% from 6.91%, though this category typically represents retail investors who may lack the analytical resources of institutional players.

Stock Performance: Significant Underperformance Across Timeframes

Sanathan Textiles' stock performance reveals a pattern of recent weakness following earlier strength. The shares have declined 3.80% over the past week and 7.08% over the past month, significantly underperforming the Sensex which gained 1.98% during the same period. The negative alpha of 9.06% over one month reflects investor disappointment with the Q2 results and growing concerns about the sustainability of profitability given the elevated interest burden.

The three-month return of negative 4.53% against a Sensex gain of 3.56% translates to an alpha of negative 8.09%, indicating consistent underperformance as quarterly results have disappointed. However, taking a longer view, the stock has delivered 13.47% returns over six months versus 3.43% for the Sensex, and year-to-date returns stand at an impressive 26.71% compared to 6.74% for the benchmark index. This divergence suggests that earlier optimism about the company's prospects has given way to caution as operational challenges have become more apparent.

The stock currently trades below all key moving averages, including the 5-day (₹481.58), 20-day (₹492.21), 50-day (₹503.49), and 100-day (₹499.06) averages, though it remains above the 200-day moving average of ₹440.94. This technical setup indicates weakening momentum and suggests the path of least resistance may be downward in the near term unless fundamental catalysts emerge to reverse the negative sentiment.

Investment Thesis: Quality Concerns Overshadow Valuation Appeal

Sanathan Textiles presents a complex investment proposition characterised by conflicting signals across key parameters. The company's overall quality grade of "Average" reflects long-term financial performance that meets baseline standards but fails to distinguish itself in a competitive sector. The negative financial trend designation for Q2 FY26 captures the deteriorating profitability metrics, whilst the "Mildly Bullish" technical trend suggests some residual momentum from earlier price strength.

The proprietary Mojo score of 47 out of 100 places the stock in "SELL" territory, with the recommendation to consider exit opportunities. This score reflects the confluence of negative factors: deteriorating quarterly earnings, elevated debt burden, modest return ratios, and weak long-term growth. The score improved from 42 to 47 between February and March 2025, but has since stagnated, suggesting the fundamental improvement thesis has failed to materialise.

The investment case rests primarily on valuation, with the stock trading at 23 times earnings and 2.21 times book value, multiples that appear reasonable given the sector context. However, valuation alone provides insufficient justification for investment when fundamental quality is questionable and earnings momentum is negative. The absence of dividend income further limits the investment appeal, particularly for conservative investors seeking total return rather than pure capital appreciation.

Key Strengths and Risk Factors

Outlook: Critical Monitoring Points Ahead

The outlook for Sanathan Textiles hinges critically on management's ability to restore profitability whilst managing the elevated debt burden. The company appears to be in a transitional phase following aggressive capacity expansion, with the success of this strategy dependent on whether new investments generate adequate returns to justify the financial leverage undertaken. The next two to three quarters will be crucial in determining whether Q2 FY26 represents a temporary setback or the beginning of a more sustained earnings deterioration.

Investors should monitor several key metrics closely: operating margin trajectory, interest cost trends, working capital management, and institutional shareholding patterns. Any further deterioration in profitability or coverage ratios would signal deeper structural issues requiring more fundamental reassessment. Conversely, margin recovery and stabilisation of interest costs could provide the catalyst for a positive re-rating, though such an outcome appears unlikely in the immediate term given the magnitude of recent challenges.