Sandesh Ltd. Q3 FY26: Profit Plummets 89.89% as Other Income Volatility Masks Operating Weakness

The results paint a concerning picture of a media company struggling with operational efficiency despite modest top-line growth. While net sales increased 10.38% year-on-year to ₹77.84 crores, operating profit excluding other income collapsed 69.77% to ₹4.76 crores, indicating severe margin compression. The company's operating margin (excluding other income) plunged to 6.12% from 22.32% in the year-ago quarter, highlighting fundamental challenges in the core publishing business.

On a sequential basis, the quarter showed marginal improvement with net profit declining 93.35% from ₹58.04 crores in Q2 FY26, though this comparison is distorted by an exceptionally high other income base of ₹54.69 crores in the preceding quarter. The volatility in other income—which has ranged from ₹2.37 crores to ₹54.69 crores over recent quarters—raises serious questions about earnings quality and sustainability.

Financial Performance: Margin Erosion Amid Revenue Growth

Sandesh's Q3 FY26 financial performance reveals a troubling disconnect between revenue growth and profitability. Net sales rose 10.38% year-on-year to ₹77.84 crores and 6.15% sequentially from ₹73.33 crores, suggesting some resilience in advertising and circulation revenues. However, this top-line improvement failed to translate into bottom-line growth due to severe margin compression.

Operating profit before depreciation, interest, and tax (excluding other income) plummeted 69.77% year-on-year to ₹4.76 crores, resulting in an operating margin of just 6.12%—down from 22.32% in Q3 FY25. This 1,620 basis point margin contraction indicates substantial cost pressures or pricing challenges in the core media operations. Employee costs increased 15.57% year-on-year to ₹10.24 crores, consuming 13.15% of revenues compared to 12.56% a year ago.

The most alarming aspect of the results is the dramatic collapse in other income to ₹4.26 crores from ₹47.32 crores year-on-year—a 91.00% decline. This non-operating income component has historically been a significant contributor to Sandesh's profitability, but its extreme volatility raises red flags about earnings sustainability. In Q2 FY26, other income spiked to ₹54.69 crores, only to crash back down in Q3, suggesting these are one-time or irregular gains rather than recurring income streams.

Profit before tax stood at ₹7.20 crores, down 88.28% year-on-year from ₹61.43 crores. The tax expense of ₹3.33 crores represented an unusually high effective tax rate of 46.25%, compared to 37.83% in Q3 FY25 and 18.78% in Q2 FY26. This elevated tax rate further compressed net profit margins to 4.96%, down from 54.15% in the year-ago quarter.

Operational Challenges: Weak Return Ratios Signal Capital Inefficiency

Beyond the quarterly volatility, Sandesh's fundamental operational metrics reveal deeper structural challenges. The company's average return on equity (ROE) stands at just 9.98% over recent years, significantly below the 15% threshold typically expected from quality businesses. More concerning, the latest ROE has deteriorated to 3.53%, indicating worsening capital efficiency and profitability.

Return on capital employed (ROCE) averaged 9.73% historically but has turned negative in the most recent period due to negative capital employed—a highly unusual situation that suggests the company's working capital management or asset base has deteriorated significantly. For a media company with relatively light capital requirements, such weak return ratios are particularly troubling.

The balance sheet, however, remains conservatively structured with zero debt as of March 2025. Shareholder funds stood at ₹1,353.10 crores, comprising share capital of ₹7.57 crores and reserves of ₹1,345.53 crores. The company holds ₹358.31 crores in investments and ₹979.38 crores in current assets, indicating substantial liquid resources. Current liabilities totalled ₹50.54 crores, resulting in a comfortable current ratio of approximately 19.4x.

Despite this strong balance sheet, the company's inability to generate adequate returns on its capital base is concerning. Book value per share stands at ₹1,787.59, significantly higher than the current market price of ₹1,032.10, resulting in a price-to-book ratio of 0.55x. This substantial discount to book value suggests the market has serious doubts about the company's ability to earn acceptable returns on its equity capital.

The Other Income Dependency: A Structural Weakness

The most critical issue facing Sandesh is its structural dependence on other income to generate acceptable profitability levels. Over the past seven quarters, other income has averaged ₹31.17 crores per quarter, while operating profit (excluding other income) averaged ₹8.68 crores. This means non-operating income has been 3.6 times larger than core operating profit—an unsustainable and concerning ratio for any business.

In the media and entertainment industry, companies should primarily earn profits from advertising, subscriptions, and content monetisation. Sandesh's core publishing operations are generating minimal margins, with operating profit margins (excluding other income) ranging from a loss of 52.04% in Q4 FY25 to a peak of 29.65% in Q1 FY24. The current quarter's 6.12% operating margin is among the weakest in recent history, suggesting intensifying competitive pressures or structural challenges in the Gujarati media market.

The nature of this other income remains unclear from the available data, but its extreme volatility—swinging from ₹2.37 crores to ₹66.42 crores across quarters—suggests it comprises one-time gains, investment income, or asset sales rather than recurring revenue streams. For long-term investors, this creates significant uncertainty about normalised earning power.

Industry Context: Media Sector Headwinds Intensify

The broader media and entertainment sector in India faces significant structural challenges as digital platforms disrupt traditional print and broadcast businesses. Regional language newspapers, while maintaining loyal readership bases, have struggled to monetise digital audiences effectively and face declining print advertising revenues as brands shift budgets to digital channels.

Sandesh operates in the Gujarati media market, where it claims to be the largest player with six editions across Gujarat. However, the company's deteriorating margins suggest it is not immune to industry-wide pressures. The 10.38% revenue growth in Q3 FY26 appears modest given the low base and may not be sufficient to offset rising costs and competitive intensity.

The company's five-year sales growth of just 2.39% compound annual growth rate (CAGR) and a shocking -175.51% EBIT growth CAGR underscore the severity of the challenges. These figures indicate that Sandesh has not only failed to grow profitably but has actually seen its operating profitability deteriorate dramatically over the medium term.

Peer Comparison: Valuation Discount Reflects Weak Fundamentals

Comparing Sandesh to peers in the media and entertainment sector reveals why the stock trades at a significant discount despite appearing "cheap" on traditional metrics. While Sandesh's price-to-earnings ratio of 15.67x seems reasonable compared to the industry average of 14x, and its price-to-book ratio of 0.55x appears attractive, these metrics mask fundamental weaknesses.

Sandesh's ROE of 9.98% is comparable to Bright Outdoor's 9.93% but lags GTPL Hathway's 11.89%. However, the more concerning comparison is the deteriorating trend—Sandesh's latest ROE of 3.53% is well below all profitable peers. The company's dividend yield of 0.48% is among the lowest in the group, reflecting management's cautious approach to capital allocation given uncertain earnings prospects.

The negative debt-to-equity ratio of -0.63 indicates Sandesh is a net cash company, which is a positive differentiator. However, this conservative balance sheet has not translated into superior returns, suggesting the company lacks profitable reinvestment opportunities in its core business.

Valuation Analysis: Discount Justified by Deteriorating Fundamentals

At ₹1,032.10, Sandesh trades at a market capitalisation of ₹770.00 crores, representing a price-to-book value of 0.55x—a 45% discount to book value. While this might appear attractive at first glance, the discount is justified by the company's weak return on equity and deteriorating profitability trends.

The stock's price-to-earnings ratio of 15.67x is based on trailing twelve-month earnings that include volatile other income. If we normalise earnings based on core operating performance, the valuation appears significantly less attractive. With operating margins (excluding other income) at just 6.12% in Q3 FY26 and an annualised revenue run rate of approximately ₹311 crores (based on recent quarterly performance), normalised operating profit would be around ₹19 crores annually, implying a much higher P/E multiple on sustainable earnings.

The enterprise value to EBITDA multiple of 16.28x appears elevated for a company with negative growth and weak margins. The EV/EBIT ratio of 7.71x and negative EV/Sales ratio of -0.34x reflect the company's net cash position but also highlight the market's scepticism about earnings quality.

The valuation grade has oscillated between "Very Attractive" and "Risky" over recent months, currently sitting at "Risky" as of May 30, 2025. This volatility in valuation assessment mirrors the company's earnings volatility and reflects the difficulty in establishing a fair value for a business with such inconsistent profitability.

Shareholding Pattern: Stable Promoter Base, Minimal Institutional Interest

Sandesh's shareholding structure has remained remarkably stable over recent quarters, with promoter holding steady at 74.81% across the last five quarters. The promoter group, led by Satyesh Prochem LLP (41.83%) and Parthiv Falgunbhai Patel (13.15%), shows strong commitment to the business with zero pledging of shares—a positive indicator of confidence and financial stability.

However, the near-total absence of institutional investors is a significant red flag. Foreign institutional investors hold just 0.09% (down from 0.15% in December 2024), mutual funds hold 0.00%, and insurance companies have no stake in the company. Total institutional holdings stand at a minuscule 0.11%, indicating sophisticated investors have largely avoided or exited the stock.

This lack of institutional interest is particularly telling. Mutual funds and FIIs typically conduct thorough due diligence and have access to management, yet their complete absence suggests they do not see compelling value or growth prospects in Sandesh despite the apparent valuation discount. The declining FII stake from 0.15% to 0.09% over the past year indicates gradual institutional exit rather than accumulation.

Stock Performance: Severe Underperformance Across All Timeframes

Sandesh's stock performance has been dismal across virtually all timeframes, significantly underperforming both the benchmark Sensex and its media sector peers. Over the past year, the stock has declined 28.13% while the Sensex gained 6.44%, resulting in a negative alpha of 34.57 percentage points. This underperformance has accelerated in recent months, with the stock down 11.41% over three months versus a marginal 0.17% decline in the Sensex.

The stock's technical positioning is equally weak. Trading at ₹1,032.10, it sits 33.58% below its 52-week high of ₹1,553.95 and just 6.02% above its 52-week low of ₹973.50. More concerning, the stock trades below all key moving averages—5-day (₹1,010.59), 20-day (₹1,029.62), 50-day (₹1,063.37), 100-day (₹1,123.88), and 200-day (₹1,149.22)—indicating a sustained downtrend with no technical support.

The stock's beta of 1.50 indicates it is 50% more volatile than the broader market, amplifying both gains and losses. However, with a negative risk-adjusted return of -0.62 over the past year and volatility of 45.12% (versus 11.52% for the Sensex), investors have been punished with high risk and negative returns—the worst possible combination. The stock is classified as "HIGH RISK LOW RETURN," making it unattractive from a risk-reward perspective.

Sector comparison reveals Sandesh has underperformed the broader Media & Entertainment sector by 11.81 percentage points over the past year, with the sector declining 16.32% versus Sandesh's 28.13% fall. This suggests company-specific issues beyond general sector headwinds.

Investment Thesis: Multiple Red Flags Outweigh Balance Sheet Strength

The investment case for Sandesh is severely challenged by multiple fundamental and technical weaknesses that far outweigh the positives of a debt-free balance sheet and stable promoter holding. The company's proprietary Mojo Score stands at just 31 out of 100, firmly in "SELL" territory, reflecting weak performance across all key parameters.

The valuation is classified as "Risky" due to extreme earnings volatility driven by unpredictable other income. Quality is assessed as "Below Average" based on weak long-term fundamental strength, with a -175.51% five-year CAGR in operating profits. While the short-term financial trend turned "Positive" in Q3 FY26 based on sequential improvements, this must be viewed in context of the company's volatile earnings pattern. The technical trend remains firmly "Bearish," with the stock in a sustained downtrend since October 2025.

Outlook: What to Watch

For investors monitoring Sandesh, the focus should be on whether the company can stabilise and improve its core operating performance independent of other income volatility. The path forward requires demonstrable margin improvement, consistent profitability, and credible growth initiatives in digital media.