Sandesh Ltd Q2 FY26: Sharp Profit Decline Masks Revenue Resilience Amid Volatility

The quarter's results reveal a company grappling with operational challenges despite maintaining revenue momentum. Whilst net sales grew to ₹77.84 crores, marking a 6.15% sequential improvement from Q1 FY26's ₹73.33 crores, the company's profitability metrics deteriorated sharply. Operating profit excluding other income collapsed to ₹4.76 crores from ₹15.74 crores a year ago, compressing margins to just 6.12% from a healthy 22.32% in the prior-year quarter. This operational weakness, combined with other income declining 91.00% to ₹4.26 crores from ₹47.32 crores, created the perfect storm for bottom-line erosion.

The sequential comparison paints an equally concerning picture. Net profit crashed 93.35% from Q1 FY26's exceptional ₹58.04 crores, a quarter that had benefited from abnormally high other income of ₹54.69 crores. This volatility in non-operating income has become a defining characteristic of Sandesh's financial profile, raising questions about earnings quality and sustainability. The company's tax rate also exhibited unusual behaviour, surging to 46.25% in Q2 FY26 from 37.83% in the year-ago quarter, further pressuring net profit.

Financial Performance: Revenue Growth Fails to Translate to Profits

Sandesh's Q2 FY26 financial performance presents a troubling dichotomy between top-line resilience and bottom-line deterioration. Net sales of ₹77.84 crores represented the company's strongest quarterly revenue performance in recent periods, surpassing even the traditionally robust March quarter. However, this revenue growth failed to translate into profitability, with operating profit excluding other income plummeting 69.76% year-on-year to ₹4.76 crores.

The margin compression tells a stark story of operational stress. Operating margins excluding other income contracted by 1,620 basis points to 6.12% from 22.32% in Q2 FY25, suggesting significant cost pressures or revenue mix deterioration. Employee costs rose 15.57% year-on-year to ₹10.24 crores, outpacing revenue growth and indicating potential inefficiencies in workforce management. On a sequential basis, the 7.45% increase in employee expenses from Q1 FY26 further strained profitability.

The company's profit after tax margin collapsed to 4.96% from 54.15% a year ago, reflecting the compounded impact of operational weakness and reduced other income. Depreciation remained relatively stable at ₹1.79 crores, whilst interest costs were negligible at ₹0.03 crores, highlighting Sandesh's debt-free status as one of the few bright spots in an otherwise challenging quarter.

The Other Income Conundrum: Earnings Quality Under Scrutiny

Perhaps the most concerning aspect of Sandesh's quarterly results is the extreme volatility in other income, which has emerged as a critical determinant of reported profitability. In Q2 FY26, other income collapsed 91.00% year-on-year to ₹4.26 crores from ₹47.32 crores, representing a staggering swing that single-handedly explains the profit decline. Even more alarmingly, other income now constitutes 59.17% of profit before tax, raising serious questions about the sustainability and quality of earnings.

This pattern of erratic other income is not new for Sandesh. Q1 FY26 had witnessed an extraordinary ₹54.69 crores in other income, artificially inflating profits to ₹58.04 crores. The subsequent normalisation in Q2 exposed the underlying operational weakness that had been masked by these non-recurring gains. Over the past eight quarters, other income has swung wildly from ₹66.42 crores in March 2024 to a low of ₹2.37 crores in December 2024, creating unpredictable earnings patterns that complicate valuation and investment decisions.

The reliance on other income highlights a fundamental challenge: Sandesh's core media operations are struggling to generate consistent, sustainable profits. With operating profit excluding other income at just ₹4.76 crores in Q2 FY26, the company's ability to deliver stable returns to shareholders without extraordinary income items appears severely compromised. This earnings quality issue is particularly troubling given the company's weak return on equity of just 5.67%, well below acceptable thresholds for capital efficiency.

Return Metrics: Capital Efficiency Deteriorates Further

Sandesh's return on equity (ROE) of 5.67% for the latest period represents a concerning deterioration in capital efficiency, falling well short of the double-digit returns that characterise quality businesses. This weak ROE reflects the company's struggle to generate adequate profits relative to its substantial shareholder equity base of ₹1,353.10 crores as of March 2025. The average ROE over recent years stands at just 10.20%, indicating persistent challenges in deploying capital productively.

Return on capital employed (ROCE) paints an even grimmer picture, with the latest half-yearly figure registering a meagre 3.64%, the lowest level in recent history. The five-year average ROCE of 10.84% masks a clear downward trend in operational efficiency. More troublingly, the company's five-year EBIT growth rate stands at a shocking -175.51%, indicating not just stagnation but active deterioration in operating profitability over the medium term.

The company's balance sheet, whilst debt-free with net cash position reflected in a negative debt-to-equity ratio of -0.64, fails to compensate for these weak operational returns. Sandesh holds ₹358.31 crores in investments and ₹979.38 crores in current assets as of March 2025, yet this capital appears to be generating inadequate returns for shareholders. The sales-to-capital-employed ratio of just 0.29 times suggests inefficient asset utilisation, with the company requiring substantial capital to generate relatively modest revenues.

Industry Context: Underperforming in a Challenging Media Landscape

The broader media and entertainment sector has faced its own headwinds, declining 3.63% over the past year. However, Sandesh's 26.97% decline significantly underperforms this already weak sectoral trend, suggesting company-specific challenges beyond industry-wide pressures. The traditional print media business continues to face structural challenges from digital disruption, advertising migration to online platforms, and changing reader preferences, all of which impact Sandesh's core Gujarati newspaper operations.

Despite being Gujarat's largest Gujarati media house with six editions across the state, Sandesh has struggled to translate market leadership into consistent financial performance. The company's revenue has declined at an annual rate of 2.39% over the past five years, reflecting the challenging dynamics facing regional print media. The March 2025 annual results showed net sales of ₹294 crores, down 8.7% from ₹322 crores in the previous year, continuing a multi-year trend of top-line contraction.

The company's attempts to diversify revenue streams and manage costs have yielded mixed results. Whilst Sandesh maintains minimal debt and strong cash reserves, its inability to generate adequate returns on this capital suggests strategic challenges in adapting to the evolving media landscape. The weak debtors turnover ratio of 5.26 times in the latest half-year indicates potential collection challenges or extended credit periods that tie up working capital.

Valuation Analysis: Discount Reflects Fundamental Concerns

At a current price of ₹1,183.05, Sandesh trades at a price-to-book value of just 0.65 times, representing a significant discount to book value of ₹1,787.59 per share. This substantial discount reflects market scepticism about the company's ability to generate adequate returns on its equity base. With a P/E ratio of 17.63 times trailing twelve-month earnings, the stock appears reasonably valued on a historical earnings basis, though this metric is distorted by the volatile other income that has artificially inflated past profits.

The company's valuation grade has been downgraded to "Risky" from "Attractive" as of May 30, 2025, reflecting deteriorating fundamentals and earnings quality concerns. The negative EV/EBITDA multiple of -2.85 times and EV/EBIT of -1.35 times result from the company's substantial cash holdings exceeding its market capitalisation, creating a negative enterprise value. Whilst this might appear attractive superficially, it primarily highlights the market's deep concern about the company's ability to deploy this cash productively.

Compared to media sector peers, Sandesh trades at a lower P/E multiple (17.63x versus peer average of approximately 34x) but also delivers significantly lower ROE (10.20% versus peer average of approximately 19%). The lower valuation multiple appears justified given the company's inferior return profile, declining revenue trajectory, and earnings volatility. The minimal dividend yield of 0.43% provides little income support, with the latest dividend of ₹2.50 per share representing a paltry 3.73% payout ratio.

Shareholding: Stable Promoter Base Amidst Institutional Exodus

Sandesh's shareholding pattern reveals a highly promoter-dominated structure with minimal institutional participation. Promoter holding has remained rock-solid at 74.81% across the past five quarters, indicating strong family control through entities led by Satyesh Prochem LLP (41.83%) and Parthiv Falgunbhai Patel (13.15%). The absence of any promoter pledging provides some comfort regarding financial stability, though it also suggests limited access to alternative capital sources.

Institutional participation remains virtually non-existent, with foreign institutional investors (FIIs) holding a minuscule 0.09% as of September 2025, down from 0.16% a year ago. This gradual reduction in FII stake, though small in absolute terms, signals waning foreign investor interest. Mutual fund and insurance company holdings are completely absent, reflecting the stock's lack of appeal to domestic institutional investors. The non-institutional shareholding has marginally increased to 25.08%, but this category typically includes retail investors with limited analytical resources.

Stock Performance: Severe Underperformance Across All Timeframes

Sandesh's stock price performance has been dismal across virtually all relevant timeframes, with the shares declining 26.97% over the past year compared to the Sensex's 8.49% gain, resulting in a negative alpha of 35.46 percentage points. The year-to-date performance is even worse, with the stock down 26.12% against the Sensex's 7.72% gain. This underperformance reflects deteriorating fundamentals, earnings disappointments, and waning investor confidence.

The technical picture reinforces the bearish sentiment. The stock has been in a bearish trend since November 13, 2025, trading below all key moving averages including the 5-day (₹1,173.31), 20-day (₹1,172.11), 50-day (₹1,186.27), 100-day (₹1,191.41), and 200-day (₹1,202.45) averages. The stock has declined 36.90% from its 52-week high of ₹1,875.00, though it remains 18.30% above the 52-week low of ₹1,000.00, suggesting some support at lower levels.

The longer-term picture offers little solace. Whilst the three-year return of 55.34% and five-year return of 126.20% appear respectable, these gains are concentrated in earlier periods and have been significantly eroded in recent quarters. The stock's high beta of 1.50 indicates amplified volatility relative to the broader market, with volatility of 44.66% over the past year placing it in the "high risk, low return" category. The negative risk-adjusted return of -0.60 and negative Sharpe ratio confirm that investors have not been adequately compensated for the elevated risk.

Investment Thesis: Multiple Red Flags Warrant Caution

The investment case for Sandesh Ltd. is severely compromised by multiple fundamental and technical weaknesses. The company's proprietary Mojo score of just 17 out of 100 places it firmly in "Strong Sell" territory, reflecting the confluence of negative factors including bearish technical trends, negative financial trends, poor long-term growth, and consistent market underperformance.

From a quality perspective, Sandesh receives an "Average" grade, elevated primarily by its debt-free balance sheet and absence of promoter pledging. However, these positives are overwhelmed by weak return metrics, with ROE of 10.20% and ROCE of 10.84% indicating poor capital efficiency. The five-year operating profit growth rate of -175.51% is particularly alarming, signalling fundamental deterioration in the business model rather than temporary cyclical weakness.

The valuation, whilst appearing attractive on a price-to-book basis at 0.65 times, is assessed as "Risky" by the Mojo system. This risk designation reflects concerns about earnings quality, sustainability, and the company's ability to generate adequate returns on its substantial equity base. The technical picture reinforces caution, with the stock in a confirmed bearish trend and trading below all key moving averages. The financial trend is classified as "Negative" based on the September 2025 quarter, with profit after tax declining 81.6% versus the previous four-quarter average.

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