Sanghi Industries Q2 FY26: Losses Deepen Despite Revenue Surge as Debt Burden Weighs

The ₹1,684 crore market capitalisation company, which operates the world's largest single-stream cement plant at Sanghipuram in Gujarat's Kutch district, has been loss-making for consecutive quarters despite showing signs of operational recovery. The stock closed at ₹65.24 on October 31, 2025, down 20.92% over the past year and trading 27.93% below its 52-week high of ₹90.52, reflecting persistent investor concerns about the company's financial viability.

The quarter's results paint a picture of a company caught between operational recovery and financial distress. Whilst revenue jumped 16.12% sequentially and 88.07% year-on-year, the company's loss-making status has persisted for seven consecutive quarters, underscoring deep-seated structural challenges that revenue growth alone cannot address.

Financial Performance: Revenue Recovery Overshadowed by Cost Pressures

Sanghi Industries' Q2 FY26 results demonstrate the company's ability to generate revenue growth whilst simultaneously highlighting its inability to translate that growth into profitability. Net sales of ₹284.93 crores represented a robust 16.12% sequential increase and an impressive 88.07% year-on-year surge, reflecting improved demand conditions in the cement sector and better capacity utilisation at the company's Gujarat facility.

However, the operating profit excluding other income stood at merely ₹24.87 crores, yielding an operating margin of 8.73%—a 163 basis points contraction from the previous quarter's 10.36%. This margin compression, despite higher revenue, signals persistent cost pressures that are eroding the benefits of volume growth. The company's operating margin has been highly volatile, ranging from a negative 1.26% in June 2024 to 20.65% in March 2024, indicating unstable operational efficiency.

The most alarming aspect of the quarter's performance remains the crushing burden of interest costs. At ₹52.90 crores, interest expense consumed 213% of the operating profit, leaving no room for profitability after accounting for depreciation of ₹92.89 crores. This financial structure—where interest and depreciation together total ₹145.79 crores against operating profit of just ₹24.87 crores—makes it mathematically impossible for the company to achieve profitability at current operating efficiency levels.

On a half-yearly basis (H1 FY26), the company reported cumulative sales of ₹530.31 crores, reflecting 41.61% growth compared to the corresponding period last year. However, the cumulative loss for H1 FY26 stood at ₹191.95 crores, underscoring the persistent nature of the company's financial challenges. The quality of earnings remains severely compromised, with negative cash flows from operations of ₹248.55 crores in FY25, indicating that losses are not merely accounting phenomena but reflect genuine cash outflows.

The Debt Trap: Leverage Strangling Profitability

Sanghi Industries' fundamental challenge lies in its balance sheet structure. With long-term debt of ₹2,485 crores as of March 2025—a 19.40% increase from ₹2,081.30 crores in the previous year—the company operates under a debt-to-equity ratio of 4.06, placing it among the most leveraged companies in the cement sector. This leverage has created a vicious cycle: the company must generate sufficient operating profit to service debt, but the very investments financed by this debt have not yet yielded adequate returns.

The company's return on equity (ROE) tells a sobering story. At a dismal 1.31% on average and a catastrophic -65.93% for the latest period, Sanghi Industries is destroying shareholder value at an alarming rate. For context, healthy cement companies typically maintain ROE above 15%, with industry leaders exceeding 20%. The company's return on capital employed (ROCE) of -4.89% further confirms that capital is being deployed unproductively, with returns falling far short of the cost of capital.

The balance sheet reveals shareholder funds of ₹612.41 crores as of March 2025, down dramatically from ₹1,110.79 crores a year earlier—a 44.87% erosion in equity value in just twelve months. This decline reflects the cumulative impact of sustained losses, with reserves and surplus shrinking from ₹852.46 crores to ₹354.08 crores. At this trajectory, the company's net worth could be completely wiped out within two years if losses continue at the current pace, raising serious going-concern questions.

Fixed assets of ₹3,069.64 crores represent the bulk of the company's asset base, reflecting the capital-intensive nature of the cement business. However, these assets are generating insufficient returns, with the sales-to-capital-employed ratio of just 0.30x indicating that the company generates only ₹0.30 of revenue for every rupee of capital employed—a sign of severe underutilisation or inefficiency.

Operational Challenges: Margin Volatility and Cost Management Failures

Beyond the debt burden, Sanghi Industries faces operational challenges that prevent it from achieving sustainable profitability. The company's operating margin has shown extreme volatility, ranging from negative territory to over 20% across recent quarters. This inconsistency suggests that the company lacks pricing power, faces volatile input costs, or suffers from operational inefficiencies that prevent stable margin realisation.

Employee costs have shown some moderation, declining to ₹10.77 crores in Q2 FY26 from ₹12.27 crores in the previous quarter, but this represents a minor saving compared to the magnitude of losses. The company's total expenditure structure remains problematic, with the inability to achieve operating leverage despite revenue growth indicating that variable costs are not being adequately controlled.

The cement industry in India has faced headwinds including elevated coal and pet coke prices, intense competition, and regional demand fluctuations. However, most established players have managed to maintain profitability through this period, suggesting that Sanghi Industries' challenges are more company-specific than industry-wide. The company's location in Gujarat—a relatively strong cement market—should provide some advantage, yet this has not translated into competitive performance.

Peer Comparison: Significantly Underperforming Industry Standards

When benchmarked against cement sector peers, Sanghi Industries' financial distress becomes starkly apparent. Whilst the company cannot be assigned a P/E ratio due to its loss-making status, its price-to-book value of 2.75x appears elevated given the poor quality of the underlying book value, which is rapidly eroding due to sustained losses.

In contrast, profitable peers like KCP Ltd. trade at a P/E of 12.95x with a P/BV of 1.71x, whilst generating positive returns on equity of 12.07%. Heidelberg Cement India, despite trading at a higher P/E of 34.65x, maintains a much healthier balance sheet with negative net debt (cash surplus) and an ROE of 11.18%. Orient Cement, trading at 17.00x earnings, has zero debt and an ROE of 11.28%.

Sanghi Industries' debt-to-equity ratio of 4.06 stands in sharp contrast to peers who maintain debt-free or near-debt-free balance sheets. This comparison underscores that the company's challenges are not industry-wide phenomena but reflect company-specific execution failures and capital structure problems. The company's average ROE of 1.31% over the past five years compares unfavourably to the peer average of approximately 10-12%, indicating sustained underperformance.

Valuation Analysis: Risky Premium Unjustified by Fundamentals

At the current market price of ₹65.24, Sanghi Industries commands a market capitalisation of ₹1,684 crores—a valuation that appears disconnected from underlying fundamentals. The company's valuation grade of "Risky" accurately reflects the precarious financial position, with the stock trading at 2.75x book value despite the book value itself shrinking rapidly due to accumulated losses.

The enterprise value-to-EBITDA multiple of 43.79x appears extremely elevated, particularly given the company's inability to convert EBITDA into free cash flow. More tellingly, the EV-to-EBIT ratio of -25.37x (negative due to losses) indicates that the market is essentially valuing the company on hope rather than current earnings power. The EV-to-sales ratio of 4.21x seems high for a loss-making cement manufacturer, especially when compared to profitable peers trading at lower multiples.

The company's book value per share of ₹23.71 suggests significant downside risk if losses continue, as the current price of ₹65.24 represents a 175% premium to book value. Given the rate of equity erosion—₹498 crores lost in FY25 alone—this premium appears unjustified. A fair value estimate based on liquidation value would place the stock closer to ₹15-20 per share, implying 70-75% downside from current levels if the company cannot achieve a turnaround.

Shareholding Pattern: Institutional Exodus and Promoter Pledging

The shareholding pattern reveals concerning trends that underscore institutional scepticism about the company's prospects. Promoter holding stands at just 14.10% as of September 2025, having declined from 21.47% in December 2024—a 7.37 percentage point reduction that suggests either stake dilution or outright selling by promoters. More alarmingly, 14.10% of shares are pledged, indicating that promoters have mortgaged their entire stake, likely to secure financing or meet margin requirements.

Institutional participation remains negligible, with FII holding at a mere 0.52% and mutual fund holding completely exited at 0.00% as of September 2025, down from 0.26% in December 2024. This complete absence of mutual fund interest and minimal FII participation signals that professional investors have lost confidence in the company's turnaround prospects. The total institutional holding of just 1.05% ranks among the lowest in the cement sector, where quality companies typically attract 20-40% institutional ownership.

The non-institutional and retail holding of 23.95% suggests that the stock remains in weak hands, with retail investors potentially unaware of the severity of the company's financial distress. The presence of Ambuja Cements Limited as a 58.08% shareholder (the largest promoter) provides some stability, but even this backing has not prevented the company's financial deterioration.

Stock Performance: Severe Underperformance Across All Timeframes

Sanghi Industries' stock performance reflects the market's growing recognition of the company's fundamental challenges. Over the past year, the stock has declined 20.92%, significantly underperforming both the Sensex (up 5.73%) and the broader cement sector (up 6.27%). This 26.65 percentage point negative alpha versus the Sensex and 27.19 percentage point underperformance versus the sector indicates that company-specific factors, rather than industry trends, are driving the weakness.

The two-year performance is particularly dismal, with the stock down 44.29% whilst the Sensex gained 31.41%—a staggering 75.70 percentage point underperformance. This extended period of weakness has destroyed significant shareholder value, with investors who bought two years ago facing nearly 50% losses. Even over longer periods, the stock has underperformed, generating just 17.66% returns over three years versus 38.18% for the Sensex.

The stock's beta of 1.35 indicates higher volatility than the broader market, with a risk-adjusted return of -0.70 over the past year reflecting the poor compensation for risk taken. The volatility of 29.70% (versus 12.50% for the Sensex) means that investors endure significant price swings without commensurate returns, placing the stock firmly in the "Medium Risk Low Return" category—an unfavourable risk-reward profile.

From a technical perspective, the stock trades in a "Mildly Bullish" short-term trend as of October 28, 2025, but this represents a weak technical setup given the fundamental deterioration. The stock trades above its key moving averages (5-day, 20-day, 50-day, 100-day, and 200-day), but this technical strength appears fragile given the underlying financial stress. The 52-week low of ₹50.10 represents significant downside risk if the company's financial situation continues to deteriorate.

Investment Thesis: Quality Deficit Outweighs Any Valuation Appeal

The investment case for Sanghi Industries is severely compromised by multiple structural weaknesses. The company's "Below Average" quality grade reflects sustained financial underperformance, with a 5-year EBIT CAGR of -210.15% indicating not just stagnation but active deterioration in profitability. The average ROCE of -0.64% and ROE of 1.31% over the past five years demonstrate that the company has consistently failed to generate adequate returns on invested capital.

The financial trend classification of "Flat" for Q2 FY26 understates the severity of the situation. Whilst the company has shown revenue growth, the inability to translate this into positive earnings—or even improving losses—indicates fundamental business model problems. Operating cash flow of ₹-248.55 crores in FY25 represents the lowest level in the company's recent history, signalling that the business is consuming cash rather than generating it.

Outlook: Existential Challenges Require Drastic Action

The path forward for Sanghi Industries requires dramatic intervention to address the fundamental mismatch between operating profitability and capital structure. The company needs to either significantly improve operating margins—ideally to 15-20% levels seen in profitable quarters—or undertake substantial debt restructuring to reduce the interest burden. Without such action, the current trajectory leads to complete equity erosion within 18-24 months.

For investors, the key monitoring points include quarterly operating margin trends, progress on debt reduction, and any signs of capital infusion from the parent Ambuja Cements. The company's survival likely depends on support from its majority shareholder, as standalone operations appear incapable of generating sufficient cash to service debt obligations. Any delay in such support could trigger a debt restructuring scenario that would be highly dilutive to existing shareholders.