Seshasayee Paper Q2 FY26: Margin Pressures Intensify Amid Weak Demand Environment

The results underscore the challenging operating environment facing the paper industry, with Seshasayee Paper grappling with subdued demand, pricing pressures, and elevated input costs. The company's operating profit margin excluding other income stood at 7.59% in Q2 FY26, a sequential improvement from 5.53% in Q1 FY26 but substantially below the 7.71% achieved in Q2 FY25. More concerning is the stark deterioration from the robust 24.67% margin recorded in Q3 FY24, highlighting the severe margin compression over the past 18 months.

The company's reliance on non-operating income has become increasingly pronounced, with other income contributing ₹13.34 crores in Q2 FY26—representing 46.46% of profit before tax. This heavy dependence on treasury income and other non-core sources raises questions about the sustainability of earnings quality and the underlying operational health of the core paper manufacturing business.

Financial Performance: Revenue Decline Compounds Margin Pressures

Seshasayee Paper's Q2 FY26 revenue of ₹346.32 crores represents the lowest quarterly sales figure in recent quarters, declining 10.14% sequentially from ₹385.40 crores in Q1 FY26 and falling 13.09% year-on-year from ₹398.47 crores in Q2 FY25. This downward trajectory reflects the broader malaise afflicting the paper industry, characterised by weak demand from the printing and publishing segments and intense competition from digital alternatives.

The company's operating profit before depreciation, interest, and tax (excluding other income) stood at ₹26.30 crores in Q2 FY26, representing a margin of 7.59%. Whilst this marks a sequential improvement from the 5.53% margin in Q1 FY26, it remains substantially below historical levels. The 12-quarter trend reveals a precipitous decline from the 24.67% margin achieved in Q3 FY24 and the 27.36% margin in Q4 FY23, underscoring the structural challenges confronting the business.

Net profit margin of 5.13% in Q2 FY26 similarly reflects the compressed profitability landscape. The company generated ₹17.77 crores in net profit on revenues of ₹346.32 crores, compared to ₹24.77 crores on revenues of ₹398.47 crores in Q2 FY25. This deterioration in both absolute profit and margin percentages signals fundamental operational headwinds that extend beyond cyclical demand fluctuations.

Operational Challenges: Deteriorating Return Ratios Signal Fundamental Weakness

The company's return on equity (ROE) of 5.49% in Q2 FY26 represents a concerning deterioration in capital efficiency. This figure falls substantially below the five-year average ROE of 12.39%, indicating diminished profitability relative to shareholder equity. For a capital-intensive manufacturing business such as paper production, such depressed ROE levels suggest inadequate returns on invested capital and raise questions about the sustainability of value creation for equity holders.

Return on capital employed (ROCE) similarly reflects operational distress, standing at 4.73% in the latest period—dramatically below the five-year average of 19.10%. This sharp contraction in ROCE underscores the challenges in generating adequate returns from the company's asset base amid subdued demand and margin pressures. The decline from historical ROCE levels above 19% to current levels below 5% represents one of the most significant red flags in the company's financial profile.

The company's balance sheet reveals a debt-free structure with net cash of ₹591 crores, representing one of the few bright spots in an otherwise challenging financial picture. Total debt stands at merely ₹82 crores against shareholder funds of ₹1,988.40 crores, resulting in a negligible debt-to-equity ratio. This fortress balance sheet provides financial flexibility and insulates the company from interest rate volatility, though it also raises questions about capital allocation efficiency given the low returns being generated on equity.

Employee costs of ₹26.82 crores in Q2 FY26 remained relatively stable compared to ₹27.38 crores in Q1 FY26, though they have declined from ₹29.52 crores in Q2 FY25. This reduction in absolute employee costs amid declining revenues suggests some level of operational rationalisation, though the impact on margins has been insufficient to offset broader headwinds.

Industry Context: Paper Sector Faces Structural Headwinds

The broader paper and paper products sector has encountered significant challenges over the past year, with the sector declining 33.21% compared to Seshasayee Paper's 15.95% decline. This relative outperformance of 17.26 percentage points suggests that whilst Seshasayee faces operational difficulties, it has fared better than many sector peers. However, this is cold comfort given the absolute negative returns and deteriorating fundamentals.

The paper industry confronts structural headwinds from digitisation, which continues to erode demand for printing and writing paper—Seshasayee's core product category. Educational institutions, corporates, and government departments increasingly favour digital documentation, reducing consumption of physical paper. Additionally, environmental concerns and regulatory pressures regarding deforestation and water usage have intensified scrutiny on paper manufacturers, potentially constraining future expansion and increasing compliance costs.

Raw material costs, particularly for wood pulp and chemicals, have exhibited volatility, compressing margins across the sector. Seshasayee's operating margin decline from 24.67% in Q3 FY24 to 7.59% in Q2 FY26 exemplifies this industry-wide margin pressure. The company's ability to pass through input cost increases to customers appears limited given weak demand conditions and competitive intensity.

Peer Comparison: Valuation Appears Reasonable but Performance Lags

Seshasayee Paper's valuation metrics present a mixed picture when compared to sector peers. The company trades at a price-to-earnings ratio of 18.32x based on trailing twelve-month earnings, positioned between West Coast Paper's 12.02x and Andhra Paper's 18.67x. However, String Metaverse's elevated 107.51x PE reflects a different business model with stronger growth characteristics.

Seshasayee's ROE of 5.49% significantly lags the peer group average, with West Coast Paper generating 8.91% and Pudumjee Paper achieving 17.92%. This inferior return profile suggests operational inefficiencies or structural disadvantages relative to competitors. The company's price-to-book ratio of 0.81x implies the market values the company below its book value, reflecting scepticism about its ability to generate adequate returns on equity.

The absence of dividend yield for Seshasayee contrasts with peers such as West Coast Paper (1.09%) and Andhra Paper (1.29%), though the company did declare a ₹5 per share dividend with an ex-date of May 22, 2024. The modest dividend payout ratio of 11.12% over the past five years suggests conservative distribution policies, potentially reflecting management's desire to retain capital for future investments or uncertainty about earnings sustainability.

Valuation Analysis: Fair Value but Limited Upside Potential

At the current price of ₹252.15, Seshasayee Paper trades at a P/E multiple of 18.32x, which appears reasonable given the company's operational challenges and deteriorating return profile. The stock's price-to-book ratio of 0.81x suggests the market assigns limited value to the company's assets beyond their liquidation value, reflecting concerns about earning power and competitive positioning.

The enterprise value-to-EBITDA multiple of 11.77x appears elevated relative to the company's growth prospects and margin profile. With EBITDA margins compressed to single digits and revenue declining, this valuation multiple implies limited margin of safety for investors. The EV/Sales ratio of 0.58x reflects the asset-light nature of the valuation relative to revenues, though this metric provides limited insight given the margin compression challenges.

The stock's 52-week range of ₹246.30 to ₹359.00 illustrates significant volatility, with the current price trading just 2.38% above the 52-week low and 29.76% below the 52-week high. This proximity to multi-month lows reflects market pessimism about near-term prospects. The valuation grade recently changed from "Expensive" to "Fair" on October 15, 2025, at ₹259.15, suggesting improving value as the stock price declined.

Shareholding Pattern: Stable Ownership Structure

Seshasayee Paper's shareholding pattern reveals a stable ownership structure with promoter holding at 42.90% in Q2 FY26, unchanged from Q1 FY26 but marginally higher than 42.78% in Q3 FY25. This stable promoter stake suggests confidence in the company's long-term prospects, though the lack of incremental buying raises questions about management's conviction given the stock's decline.

Foreign institutional investor (FII) holdings stood at 13.02% in Q2 FY26, marginally declining from 13.03% in Q1 FY26. The number of FII holders decreased from 50 to 49, suggesting some foreign investors have exited positions. This modest FII participation reflects limited international investor interest in the company, likely due to its small-cap status and sector-specific challenges.

The complete absence of mutual fund holdings represents a significant red flag, indicating domestic institutional investors have avoided the stock. This lack of mutual fund participation suggests professional fund managers view the risk-reward profile as unattractive, potentially due to concerns about earnings sustainability, sector headwinds, or corporate governance considerations.

Other domestic institutional investors (DII) maintained steady holdings at 14.37%, providing some stability to the shareholder base. Non-institutional holdings of 29.71% represent retail and high-net-worth individual investors, with the number of non-institutional holders increasing from 22,127 to 22,163, suggesting some retail interest despite the stock's decline.

Stock Performance: Sustained Underperformance Across Timeframes

Seshasayee Paper's stock performance reveals persistent underperformance across multiple timeframes, with the stock declining 15.95% over the past year compared to the Sensex's 5.18% gain—an alpha of -21.13 percentage points. The three-month performance shows an 11.21% decline against the Sensex's 2.47% gain, whilst the year-to-date return of -17.69% substantially lags the Sensex's 7.77% advance.

The two-year and three-year returns paint an even more concerning picture, with the stock declining 26.64% and 12.89% respectively, whilst the Sensex advanced 30.42% and 40.75%. This sustained underperformance of 57.06 percentage points over two years and 53.64 percentage points over three years indicates fundamental deterioration rather than temporary cyclical weakness.

The stock's volatility of 35.47% substantially exceeds the Sensex's 12.53% volatility, resulting in a high-risk, low-return profile. The risk-adjusted return of -0.45 over the past year reflects negative absolute returns combined with elevated volatility—an unfavourable combination for investors. The beta of 1.35 indicates the stock tends to move 35% more than the broader market, amplifying both gains and losses.

Relative to the paper sector, Seshasayee has outperformed, with the sector declining 33.21% over the past year compared to the stock's 15.95% decline. However, this relative outperformance provides little solace given both the sector and the stock have delivered substantially negative absolute returns. The stock currently trades below all key moving averages—5-day, 20-day, 50-day, 100-day, and 200-day—indicating sustained bearish momentum.

Technical Analysis: Bearish Trend Intact with Limited Support

Seshasayee Paper's technical picture remains decidedly bearish, with the stock in a confirmed downtrend since August 28, 2025, when it changed from "Mildly Bearish" to "Bearish" at ₹269.60. The stock has declined 6.47% since that trend change, with price action consistently below all major moving averages. The MACD indicator shows bearish readings on both weekly and monthly timeframes, whilst Bollinger Bands indicate mildly bearish momentum.

The stock's current price of ₹252.15 trades just 2.38% above the 52-week low of ₹246.30, which represents immediate support. A breach of this level could trigger further selling pressure and potentially accelerate the downtrend. Immediate resistance appears at the 20-day moving average of ₹257.09, followed by more substantial resistance at the 100-day moving average of ₹276.04 and the 200-day moving average of ₹278.58.

Delivery volumes have shown some improvement, with delivery percentage at 77.64% on October 24, 2025, compared to the five-day average of 67.17%. However, the trailing one-month average delivery volume of 9,080 shares declined 31.65% from the previous month's average of 13,280 shares, suggesting reduced institutional participation and weakening conviction among buyers.

Outlook: Monitoring Points for Potential Reversal

The outlook for Seshasayee Paper remains challenging in the near to medium term, with structural headwinds in the paper industry likely to persist. Digitisation trends continue to erode demand for printing and writing paper, whilst raw material cost volatility and competitive intensity constrain pricing power. The company's ability to restore margins to historical levels appears limited absent significant industry consolidation or product mix improvements.