Sanathan Textiles Q2 FY26: Profit Plunges 50% as Margins Compress Sharply

The September 2025 quarter revealed concerning operational challenges for the Kolkata-based textile manufacturer. Whilst revenue growth remained positive, the company's profitability metrics deteriorated sharply. Operating profit margin (excluding other income) contracted to 7.72% from 9.33% in the previous quarter, reflecting rising input costs and operational inefficiencies. More alarmingly, PAT margin compressed to a mere 2.46% from 5.42% in Q1 FY26, signalling significant pressure on the bottom line.

The stock, currently trading at ₹441.00, has delivered a modest 23.84% return over the past year, outperforming the Sensex's 7.07% gain by 16.77 percentage points. However, recent performance has been lacklustre, with the stock declining 8.43% over the past three months and 9.29% over six months, reflecting investor concerns about the company's deteriorating financial trajectory.

Financial Performance: Revenue Growth Fails to Translate into Profitability

In Q2 FY26, Sanathan Textiles posted net sales of ₹817.99 crores, marking a 9.75% sequential increase from ₹745.34 crores in Q1 FY26 and a 10.22% year-on-year improvement from ₹742.17 crores in Q2 FY25. This represented the highest quarterly revenue in recent periods, suggesting healthy demand for the company's garment products. However, this top-line expansion failed to flow through to the bottom line, as operational inefficiencies and rising costs severely dented profitability.

Operating profit (PBDIT excluding other income) stood at ₹63.15 crores in Q2 FY26, significantly lower than the ₹69.56 crores recorded in the previous quarter. The operating margin contracted sharply to 7.72% from 9.33% in Q1 FY26 and 7.84% in Q2 FY25. This margin erosion points to challenges in managing raw material costs, labour expenses, and other operational overheads. Employee costs rose to ₹29.93 crores from ₹25.10 crores quarter-on-quarter, indicating higher workforce-related expenditure.

The most alarming development was the dramatic spike in interest costs, which surged to ₹18.48 crores in Q2 FY26 from just ₹4.62 crores in Q1 FY26—a four-fold increase. This substantial jump reflects the company's elevated debt levels and higher borrowing costs. Combined with depreciation of ₹18.44 crores, these fixed charges severely eroded profitability. Profit before tax fell to ₹33.27 crores from ₹55.34 crores sequentially, whilst net profit collapsed to ₹20.12 crores. The PAT margin of 2.46% was the lowest in the past seven quarters, raising serious questions about earnings quality and sustainability.

Operational Challenges: Debt Burden and Margin Compression

The company's balance sheet reveals mounting leverage concerns. As of March 2025, long-term debt stood at ₹938.20 crores, nearly three times the ₹337.20 crores reported in March 2024. This substantial increase in borrowings has pushed the debt-to-equity ratio higher, with the half-yearly figure reaching 0.78 times—the highest in recent periods. The elevated debt levels explain the sharp spike in interest costs during Q2 FY26, which quadrupled sequentially to ₹18.48 crores.

Return on equity (ROE) for Sanathan Textiles stands at a modest 7.48%, significantly below the double-digit returns expected from quality companies. This weak ROE reflects inefficient capital deployment and suboptimal profitability. The company's average ROE of 7.48% and average ROCE of 11.47% both point to underwhelming capital efficiency. For context, better-performing peers in the garments sector typically deliver ROE in the 13-18% range, highlighting Sanathan's competitive disadvantage in generating shareholder returns.

The company's cash flow statement for FY25 reveals a worrying trend. Whilst cash flow from operations remained positive at ₹284.00 crores, cash flow from investing activities was deeply negative at ₹1,341.00 crores, indicating substantial capital expenditure. This was funded primarily through financing activities, which generated ₹1,058.00 crores—largely from increased borrowings. This aggressive expansion strategy has burdened the balance sheet with debt, leading to the current interest cost pressures that are severely impacting profitability.

Industry Context: Navigating a Challenging Apparel Landscape

The Indian garments and apparels sector has faced headwinds over the past year, with the broader industry delivering a negative 5.93% return over 12 months. Sanathan Textiles, however, managed to outperform this sector benchmark by 29.77 percentage points, delivering a 23.84% return over the same period. This relative outperformance suggests that despite operational challenges, the company has managed to maintain investor interest, possibly due to its revenue growth trajectory and market positioning.

However, the company's five-year sales CAGR of -5.10% paints a concerning picture of long-term demand trends. This negative growth rate indicates that the company has struggled to expand its revenue base over the medium term, raising questions about its competitive positioning and market share dynamics. The five-year EBIT CAGR of just 0.68% further underscores the stagnation in profitability growth, suggesting structural challenges in the business model.

The garments sector is characterised by intense competition, volatile raw material costs (particularly cotton and synthetic fibres), and pricing pressures from both domestic and international players. Companies in this space must balance volume growth with margin protection—a challenge that Sanathan appears to be struggling with currently. The sharp margin compression in Q2 FY26 suggests that the company may be prioritising volume growth over profitability, a strategy that carries significant risks if not executed carefully.

Peer Comparison: Valuation and Performance Metrics

Compared to its peers, Sanathan Textiles trades at a relatively modest P/E multiple of 26.90x, lower than most competitors. However, this valuation discount appears justified given the company's weak ROE of 7.48%—significantly below the 13.33% delivered by Gokaldas Exports and 18.60% by PDS. The company's price-to-book ratio of 2.01x is also lower than peers like Kitex Garments (3.99x) and PDS (2.86x), reflecting the market's scepticism about the quality of its earnings and balance sheet.

Sanathan's debt-to-equity ratio of 0.71 is higher than most peers, with only Kitex Garments (1.01) carrying more leverage. This elevated debt burden, combined with weak profitability metrics, positions Sanathan unfavourably within its peer group. The absence of dividend payments further highlights the company's cash flow constraints and management's prioritisation of debt servicing and capital expenditure over shareholder returns.

Valuation Analysis: Premium Unjustified Given Deteriorating Fundamentals

At the current market price of ₹441.00, Sanathan Textiles commands a market capitalisation of ₹3,657 crores and trades at a P/E ratio of 26.90x based on trailing twelve-month earnings. Whilst this multiple is below the peer average, it appears elevated relative to the company's fundamental performance. The stock's price-to-book ratio of 2.01x implies that investors are paying twice the book value for each share—a premium that seems difficult to justify given the weak ROE of 7.48% and deteriorating profitability trends.

The company's EV/EBITDA multiple of 19.37x and EV/EBIT multiple of 24.39x both suggest that the market is pricing in expectations of a recovery in operating performance. However, the Q2 FY26 results indicate that such a recovery remains elusive. With operating margins compressing and interest costs surging, the path to improved profitability appears challenging in the near term.

From a valuation grade perspective, the stock is currently rated as "Attractive" according to proprietary metrics, having been upgraded from "Fair" in May 2025. However, this rating appears increasingly disconnected from the underlying financial reality. The recent quarterly performance suggests that the stock's valuation may need to be reassessed downwards to reflect the deteriorating earnings trajectory and elevated debt burden.

Shareholding Pattern: Stable Promoter Base, Growing Institutional Interest

The shareholding pattern reveals a stable promoter base holding 78.58% of the equity, with no change over the past three quarters. This high promoter holding provides management stability and indicates strong insider confidence. Importantly, there is zero promoter pledging, eliminating concerns about forced selling or financial distress at the promoter level.

Mutual fund holdings increased marginally to 11.57% in December 2025 from 11.24% in September 2025, suggesting continued institutional interest despite the weak quarterly performance. However, FII holdings declined to 1.47% from 1.67%, indicating some foreign investor scepticism. The total institutional holding of approximately 13.50% remains moderate, suggesting room for further institutional accumulation if the company can demonstrate a turnaround in profitability.

Stock Performance: Outperforming Market Despite Recent Weakness

Over the past year, Sanathan Textiles has delivered a 23.84% return, significantly outperforming the Sensex's 7.07% gain and generating a positive alpha of 16.77 percentage points. This strong one-year performance reflects investor optimism about the company's growth potential, despite the recent operational challenges. The stock has also outperformed its sector, which declined 5.93% over the same period, by nearly 30 percentage points.

However, recent momentum has turned decidedly negative. The stock has declined 8.43% over three months and 9.29% over six months, both periods showing significant underperformance versus the Sensex. This recent weakness reflects growing investor concerns about the deteriorating profitability and elevated debt levels revealed in recent quarterly results. The stock currently trades 21.81% below its 52-week high of ₹564.00, but remains 53.63% above its 52-week low of ₹287.05.

From a technical perspective, the stock is classified as "Mildly Bullish" with a high beta of 1.35, indicating greater volatility than the broader market. The stock trades below all key moving averages (5-day, 20-day, 50-day, 100-day, and 200-day), suggesting weak technical momentum. With volatility at 36.53%—significantly higher than the Sensex's 11.53%—the stock falls into the "high risk, high return" category, making it suitable only for risk-tolerant investors.

Investment Thesis: Deteriorating Fundamentals Outweigh Valuation Appeal

The investment case for Sanathan Textiles rests on three key pillars: valuation, quality, and financial trends. On valuation, the stock trades at a P/E of 26.90x and P/BV of 2.01x—multiples that appear reasonable in isolation but seem elevated when viewed against the company's weak ROE of 7.48% and deteriorating profitability. The current valuation grade of "Attractive" appears increasingly disconnected from the underlying financial reality.

On quality, the company scores "Below Average" based on long-term financial performance. The five-year sales CAGR of -5.10% and EBIT CAGR of just 0.68% indicate stagnation rather than growth. Whilst the company benefits from zero promoter pledging and a stable balance sheet structure, the elevated debt-to-equity ratio of 0.71 and weak return metrics undermine the quality thesis. The average ROCE of 11.47% and ROE of 7.48% both fall well short of double-digit thresholds expected from quality compounders.

Most concerning is the financial trend, which has turned decidedly negative. The Q2 FY26 results revealed the lowest PAT margin in seven quarters, the highest interest costs on record, and a sharp compression in operating margins. The proprietary financial trend indicator currently shows "Negative" status, reflecting concerns about falling profitability, rising leverage, and deteriorating interest coverage. With the overall Mojo score at just 30 out of 100, the stock falls firmly into "SELL" territory.

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Outlook: What to Watch in Coming Quarters