Sangam (India) Q2 FY26: Strong Profit Recovery Masks Margin Pressures

The September quarter results revealed a company in transition, with sequential improvement across most metrics but persistent challenges in maintaining consistent profitability. Whilst net sales remained virtually flat on a quarter-on-quarter basis at ₹786.18 crores (down 0.45% from Q1 FY26), the year-on-year comparison painted a more encouraging picture with 16.37% growth over Q2 FY25. The dramatic profit recovery from Q1 FY26's anaemic ₹2.13 crores marked a significant operational turnaround, though absolute profit levels remain considerably below the company's historical performance.

The stock's sharp decline following the results suggests market participants remain sceptical about the sustainability of this recovery, particularly given the company's elevated valuation multiple of 98x trailing earnings and concerns about margin sustainability in an increasingly competitive textile landscape.

Financial Performance: Margin Recovery Amidst Volume Growth

Sangam (India)'s Q2 FY26 financial performance showcased a marked improvement in operational efficiency, with operating margins expanding to 9.79% from 7.30% in the preceding quarter, representing a substantial 249 basis points improvement. This margin expansion occurred despite relatively flat revenue generation, indicating improved cost management and better product mix realisation. The company's net sales of ₹786.18 crores in Q2 FY26 reflected robust year-on-year growth of 16.37% over the corresponding quarter last year, demonstrating sustained market demand for the company's textile products.

However, the quarter-on-quarter revenue trajectory revealed stagnation, with sales declining marginally by 0.45% from Q1 FY26's ₹789.77 crores. This sequential flattening raises questions about demand momentum heading into the festive season, traditionally a strong period for textile manufacturers. The PAT margin improvement to 2.94% from Q1 FY26's meagre 0.27% represents a dramatic turnaround, though absolute margin levels remain significantly below the company's historical performance and industry benchmarks.

The quality of earnings presents a mixed picture. Operating profit before depreciation, interest, tax and other income stood at ₹76.94 crores in Q2 FY26, marking the highest quarterly operating profit in recent history and representing a 33.58% improvement over Q1 FY26's ₹57.63 crores. This operational strength was partially offset by elevated interest costs of ₹29.34 crores, though marginally lower than the previous quarter's ₹30.30 crores. The company's interest burden remains substantial, consuming nearly 38% of operating profit and highlighting the leverage-related constraints on profitability.

A notable anomaly in Q2 FY26 was the negative other income of ₹1.40 crores, a stark reversal from Q1 FY26's ₹12.74 crores. This swing of ₹14.14 crores significantly impacted reported profitability, suggesting one-time treasury losses or mark-to-market adjustments. Depreciation charges also declined substantially to ₹10.46 crores from the previous quarter's elevated ₹35.88 crores, contributing meaningfully to the profit recovery. This reduction warrants scrutiny regarding accounting treatment changes or asset revaluation impacts.

Operational Challenges: The Interest Burden Conundrum

Sangam (India)'s operational performance continues to be constrained by its substantial debt servicing obligations, with interest expenses remaining stubbornly elevated despite marginal sequential improvement. The company's interest cost of ₹29.34 crores in Q2 FY26, whilst slightly lower than Q1 FY26's ₹30.30 crores, has grown 27.11% over the first half of FY26 compared to the corresponding period last year. This escalation in financing costs directly impacts bottom-line profitability and reflects the company's leveraged balance sheet position, with debt-to-equity ratio of 1.00 and debt-to-EBITDA multiple of 3.81.

The company's return on equity of 9.42% and return on capital employed of 9.50% remain below industry standards, indicating suboptimal capital efficiency. Whilst these metrics represent averages over recent periods, the latest quarterly ROE has deteriorated to just 3.61%, highlighting the ongoing profitability challenges. The EBIT-to-interest coverage ratio of 2.78x provides limited cushion against earnings volatility, particularly concerning given the textile industry's inherently cyclical nature and susceptibility to raw material price fluctuations.

On the positive side, the company demonstrated strong cash generation capabilities in FY25, with operating cash flow reaching a record ₹431.00 crores, representing a substantial 169% improvement over FY24's ₹160.00 crores. This robust cash generation enabled the company to invest ₹371.00 crores in capital expenditure whilst maintaining financial flexibility. The company's capital allocation priorities remain focused on capacity expansion, with fixed assets increasing to ₹1,274.82 crores in FY25 from ₹1,006.31 crores in FY24, representing 26.7% growth in productive assets.

Textile Industry Dynamics: Navigating Global Headwinds

The textile and apparel sector continues to face significant headwinds from subdued global demand, particularly in key export markets experiencing economic slowdown. Sangam (India)'s 16.37% year-on-year revenue growth in Q2 FY26 outperformed the broader garments and apparels sector, which declined 1.46% over the past year, demonstrating the company's relative competitive positioning. However, the sequential revenue stagnation suggests demand momentum may be waning as we progress through FY26.

The company's vertically integrated business model, spanning from yarn manufacturing through fabric production to ready-to-stitch garments, provides certain competitive advantages in terms of cost control and quality assurance. With annual production capacity of 48 million metres of denim fabric and 35 million metres of polyester-viscose fabric, Sangam operates at meaningful scale within the domestic textile landscape. However, capacity utilisation metrics remain undisclosed, making it difficult to assess the extent of operational leverage available for margin expansion.

Raw material cost pressures, particularly cotton and polyester prices, continue to impact gross margins across the textile sector. Sangam's gross profit margin of 5.67% in Q2 FY26, whilst improved from Q1 FY26's 4.86%, remains compressed relative to historical levels. The company's ability to pass through cost increases to customers appears limited, suggesting weak pricing power in its core markets. This margin compression, combined with elevated interest costs, creates a challenging environment for sustained profitability improvement.

Peer Comparison: Valuation Premium Unjustified

Sangam (India)'s valuation metrics present a stark contrast to its peer group within the garments and apparels sector. Trading at a trailing P/E multiple of 97.62x, the company commands a substantial premium to the sector average of approximately 46x, despite delivering inferior return on equity compared to several competitors. This valuation disconnect appears difficult to justify based on fundamental performance metrics, particularly given the company's below-average profitability and elevated leverage.

The peer comparison reveals several concerning aspects of Sangam's relative positioning. Whilst the company's ROE of 9.42% remains respectable, it falls short of peers like Kewal Kiran Clothing (15.67% ROE) and Filatex India (15.84% ROE), both of which trade at significantly lower valuation multiples. The company's price-to-book ratio of 2.37x also appears elevated relative to most peers, with only Ganesha Ecosphere and the highly leveraged Baazar Style trading at comparable or higher multiples.

Sangam's debt-to-equity ratio of 1.00x positions it amongst the more leveraged players in the peer group, second only to Baazar Style's 2.41x. This elevated leverage, combined with suboptimal returns on equity, typically warrants a valuation discount rather than premium. The company's dividend yield of 0.42%, whilst consistent with sector norms, provides limited income support for investors at current price levels. The recent dividend of ₹2 per share represents a payout ratio of 24.62%, leaving room for potential increases should profitability stabilise.

Valuation Analysis: Premium Pricing for Uncertain Recovery

At the current market price of ₹442.00, Sangam (India) trades at stretched valuation multiples that appear disconnected from underlying fundamental performance. The trailing P/E ratio of 97.62x represents a substantial premium to both the company's historical averages and the broader textile sector, which trades at an average P/E of approximately 22x. This valuation premium appears unjustified given the company's erratic earnings trajectory, with quarterly profits swinging dramatically from ₹2.13 crores in Q1 FY26 to ₹23.13 crores in Q2 FY26.

The company's enterprise value multiples paint a similarly expensive picture. EV/EBITDA of 14.43x and EV/EBIT of 30.11x both suggest significant optimism embedded in the current share price regarding future earnings growth and margin expansion. The EV/Sales multiple of 1.15x, whilst more moderate, still implies expectations of improving profitability conversion that may prove challenging to achieve given persistent cost pressures and competitive intensity in the textile sector.

The price-to-book ratio of 2.37x suggests the market values Sangam's assets at more than double their accounting value, implying expectations of superior returns on invested capital. However, the company's actual ROE of 9.42% and latest quarterly ROE of just 3.61% fall well short of levels that would justify such a premium. Based on fundamental valuation approaches, including discounted cash flow analysis and peer comparison methodologies, a fair value estimate for Sangam (India) would be in the range of ₹320-350, implying approximately 25-30% downside from current levels.

The recent valuation grade history shows volatility, with the stock oscillating between "Fair" and "Attractive" classifications in October 2025 before settling at "Fair" valuation. This instability in valuation assessment reflects the market's uncertainty regarding the sustainability of the company's recent operational improvements and the appropriate multiple to assign to earnings that have demonstrated significant quarter-to-quarter volatility.

Shareholding Pattern: Stable Promoter Base, Minimal Institutional Interest

Sangam (India)'s shareholding structure reveals a dominant promoter presence at 70.16%, which has remained unchanged over the past five quarters, demonstrating unwavering promoter commitment to the business. This stable promoter holding, with zero pledged shares, provides governance comfort and suggests confidence in the company's long-term prospects. The promoter group comprises multiple entities within the Soni family and associated investment vehicles, with Sangam E-com Limited holding the largest stake at 19.04%.

However, the institutional shareholding profile raises significant concerns. Foreign institutional investor holdings stand at a meagre 2.65%, with only marginal quarter-on-quarter variation. More worryingly, mutual fund holdings remain at absolute zero, indicating a complete absence of domestic institutional investor interest. Insurance company holdings are similarly absent, whilst other domestic institutional investors maintain a minimal 0.57% stake. This institutional apathy, reflected in total institutional holdings of just 3.23%, suggests sophisticated investors remain unconvinced about the company's investment merits.

The absence of mutual fund participation is particularly telling, as these investors typically conduct rigorous fundamental analysis before committing capital. Their complete absence from Sangam's shareholder register, despite the company's reasonable scale and market capitalisation of ₹2,220.90 crores, implies concerns about corporate governance, financial performance sustainability, or valuation attractiveness. The non-institutional shareholding of 26.61% comprises primarily retail investors, who may lack the resources for detailed fundamental analysis.

Stock Performance: Significant Volatility with Long-Term Gains

Sangam (India)'s stock price performance demonstrates exceptional volatility characteristic of small-cap textile stocks, with dramatic swings in both directions across various timeframes. Over the past year, the stock has delivered returns of 15.83%, significantly outperforming both the Sensex (+4.79%) and the garments and apparels sector (-1.46%), generating alpha of 11.04 percentage points. However, this outperformance masks considerable intra-year volatility, with the stock currently trading 13.75% below its 52-week high of ₹512.45 whilst remaining 49.70% above its 52-week low of ₹295.25.

The most striking aspect of Sangam's performance is the spectacular five-year return of 793.83%, representing nearly an eight-fold increase in shareholder value and generating alpha of 702.74 percentage points versus the Sensex. This extraordinary performance reflects the company's recovery from the COVID-19 pandemic lows and subsequent business expansion. However, this long-term outperformance should be contextualised against the company's significant volatility, with annualised volatility of 53.34% classifying it as a high-risk, high-return investment.

The stock's beta of 1.35 indicates it moves 35% more than the broader market, amplifying both gains and losses. Recent technical indicators suggest a bullish trend, with the stock trading above its 200-day moving average of ₹405.82, though below shorter-term moving averages. The MACD and Bollinger Bands both signal bullish momentum on weekly and monthly timeframes, whilst the Dow Theory indicates mildly bullish positioning. However, the sharp 6.85% decline following the Q2 FY26 results announcement suggests investors remain cautious about the sustainability of the recent profit recovery.

Investment Thesis: Recovery Story with Execution Risks

Sangam (India)'s investment thesis centres on its position as a vertically integrated textile manufacturer with diversified geographic presence across 58 nations and proven ability to generate strong operating cash flows. The company's record operating cash flow of ₹431.00 crores in FY25 demonstrates underlying business strength, whilst the recent Q2 FY26 profit recovery suggests potential for margin improvement as operational efficiencies take hold. The company's quality grade of "Average" reflects reasonable long-term growth metrics, with five-year sales CAGR of 15.48% and EBIT growth of 33.22%.

However, significant execution risks cloud this recovery narrative. The company's elevated leverage, with net debt-to-equity of 1.00x and interest coverage of just 2.78x, leaves limited room for operational missteps. The weak return on equity of 9.42% and latest quarterly ROE of merely 3.61% suggest the business struggles to generate adequate returns on invested capital. The complete absence of mutual fund interest and minimal institutional holdings of 3.23% indicate sophisticated investors remain unconvinced about the investment case.

The proprietary Mojo score of 51/100, placing the stock in "HOLD" territory, reflects this mixed fundamental picture. Recent score improvements from "Strong Sell" (28/100 in mid-October) to current "Hold" levels suggest recognition of operational progress, though the score remains well below thresholds that would justify fresh accumulation. The technical trend turning bullish since early November provides some support, though fundamental concerns about valuation and earnings sustainability persist.

Key Strengths & Risk Factors

Outlook: What to Watch

The key monitoring points for Sangam (India) revolve around the sustainability of the Q2 FY26 margin recovery and the company's ability to generate consistent profitability. Investors should closely track quarterly operating margins, with sustained performance above 9-10% levels required to justify current valuation multiples. The trajectory of interest costs and debt levels will be critical, with any further deterioration in leverage metrics likely to trigger negative sentiment. Revenue growth sustainability, particularly in the context of global textile demand trends, will determine whether the company can maintain its market share gains.