Shah Alloys Q2 FY26: Revenue Collapses 95% as Steel Manufacturer Faces Existential Crisis

The stock has declined 3.59% following the results announcement, trading at ₹73.03, as investors grapple with the magnitude of the business collapse. With negative operating margins of 29.39% and a negative book value of ₹7.69 crores, the Ahmedabad-based company faces an existential crisis that raises serious questions about its ability to continue as a going concern.

Financial Performance: A Manufacturing Meltdown

The quarterly numbers reveal a company in freefall. Net sales collapsed to ₹2.96 crores in Q2 FY26 from ₹23.64 crores in Q1 FY26, representing a staggering 87.48% quarter-on-quarter decline. On a year-on-year basis, revenues have evaporated by 95.54%, falling from ₹66.31 crores in Q2 FY25. This is not a cyclical downturn—this represents a near-complete cessation of business operations.

Operating profit before depreciation, interest, tax, and other income (PBDIT) stood at negative ₹0.87 crores, yielding an operating margin of negative 29.39%. The company is losing money on every unit of revenue generated, with operating losses more than doubling sequentially from negative ₹0.41 crores in Q1 FY26. Employee costs of ₹0.91 crores and fixed charges continue to burden the company despite the revenue collapse.

On a half-yearly basis (H1 FY26), Shah Alloys reported net sales of ₹26.60 crores compared to ₹184.86 crores in H1 FY25, representing an 85.61% decline. The consolidated net profit for H1 FY26 stood at ₹7.97 crores versus negative ₹13.07 crores in H1 FY25, though this improvement appears to be driven by extraordinary items rather than operational recovery.

Quarterly Trend: Seven Quarters of Deterioration

Examining the quarterly progression reveals the extent of the deterioration. From Q1 FY24 through Q2 FY26, revenues have declined in every single quarter except one. The company reported sales of ₹128.41 crores in Q1 FY24, which fell to ₹118.55 crores in Q2 FY24, then ₹66.31 crores in Q3 FY24, before collapsing to the current ₹2.96 crores. This represents a systematic unwinding of the business rather than temporary disruption.

Balance Sheet Distress: Negative Equity and Mounting Liabilities

The balance sheet paints an equally troubling picture. As of March 2025, Shah Alloys reported shareholder funds of negative ₹7.69 crores, down from positive ₹11.24 crores in March 2024. The company has completely eroded its equity base, with reserves and surplus standing at negative ₹27.49 crores. This negative book value translates to a book value per share of negative ₹3.88, meaning the company's liabilities exceed its assets.

Current liabilities have ballooned to ₹195.86 crores as of March 2025, with trade payables of ₹76.36 crores representing suppliers awaiting payment. The company's current assets of just ₹35.11 crores are woefully inadequate to meet these obligations, creating a severe liquidity crisis. Long-term debt stands at ₹3.68 crores, though the company's debt-to-equity ratio is meaningless given the negative equity base.

Fixed assets have declined from ₹106.20 crores in March 2020 to ₹57.07 crores in March 2025, suggesting either asset sales or inadequate capital expenditure to maintain productive capacity. The company generated negative operating cash flow of ₹4.00 crores in FY25, further straining its already precarious financial position.

Profitability Metrics: Five-Year Decline

The annual income statement reveals a company that has been struggling for years. Net sales declined from ₹880.00 crores in FY22 to ₹266.00 crores in FY25, representing a 55.10% decline in the most recent fiscal year. The five-year sales growth rate stands at negative 21.81%, whilst EBIT growth of 13.07% over the same period is misleading given the volatile and largely negative EBIT figures.

Operating margins have been consistently negative or barely positive in recent years. The company reported an operating margin (excluding other income) of negative 3.80% in FY25, negative 2.90% in FY24, and positive 0.60% in FY23. Only in FY22, during the post-pandemic commodity boom, did Shah Alloys achieve meaningful profitability with a 13.20% operating margin and ₹82.00 crores in net profit.

Return on equity averaged 62.07% over the five-year period, but this metric is distorted by the negative equity base and volatile earnings. The latest ROE is meaningless given the negative book value. Return on capital employed (ROCE) averaged 6.84% but stood at negative 27.25% in the most recent period, reflecting the complete breakdown in operational efficiency.

Peer Comparison: Underperforming Across All Metrics

Comparing Shah Alloys to its peers in the iron and steel products sector reveals the extent of its underperformance. Whilst the company's average ROE of 62.07% appears superior to peers like National Fittings (7.45%) and Rajasthan Tube Manufacturing (9.66%), this metric is misleading given the negative equity base and recent losses.

Shah Alloys ranks last amongst its peer group with a market capitalisation of ₹149.00 crores. Its price-to-book value of negative 19.51 times reflects the negative equity, whilst peers trade at positive multiples ranging from 0.50 to 19.53 times. The company's inability to generate consistent profits places it in the loss-making category alongside Rajasthan Tube Manufacturing, whilst peers like Bansal Roofing and National Fittings maintain profitable operations.

Valuation Analysis: Value Trap or Distressed Opportunity?

Shah Alloys trades at ₹73.03, down 12.54% from its 52-week high of ₹83.50 but up 67.42% from its 52-week low of ₹43.62. With a market capitalisation of ₹149.00 crores and negative book value, traditional valuation metrics provide little guidance. The P/E ratio is not applicable given the loss-making status, whilst the price-to-book value of negative 19.51 times is meaningless.

The company's enterprise value to sales ratio of 2.08 times appears reasonable on the surface, but this metric becomes misleading when revenues have collapsed by 95%. Enterprise value to EBITDA of negative 226.29 times reflects the negative operating profit, making the company effectively unvalued by conventional metrics. The proprietary Mojo Score of 31 out of 100 places the stock firmly in "SELL" territory.

The valuation grade has consistently been marked as "RISKY" since May 2023, with multiple downgrades reflecting the deteriorating fundamentals. The stock's quality grade stands at "BELOW AVERAGE" based on long-term financial performance, whilst the financial trend is classified as "NEGATIVE" and technical trend as "BULLISH"—a dangerous combination suggesting technical momentum divorced from fundamental reality.

Shareholding Pattern: Promoters Hold Steady Amidst Crisis

Promoter shareholding has remained largely stable at 53.75% in Q2 FY26, down marginally by 0.03% from 53.78% in Q1 FY26. The promoter group, led by Rajendrabhai V Shah (39.97%), Rajendrabhai V Shah HUF (7.74%), and Ragini Rajendrabhai Shah (5.79%), has maintained their stake despite the severe operational challenges. Notably, there is zero promoter pledging, suggesting the promoters are not leveraging their shares for personal borrowing.

Institutional participation remains negligible, with just one FII holding a minuscule 0.03% stake as of Q2 FY26. Mutual funds, insurance companies, and other domestic institutional investors have zero exposure to the stock, reflecting the complete lack of institutional confidence. The 46.22% non-institutional shareholding consists primarily of retail investors, many of whom may be trapped in the stock following its dramatic decline.

Stock Performance: Technical Strength Masks Fundamental Weakness

Despite the catastrophic fundamentals, Shah Alloys has delivered remarkable long-term returns, though recent performance has been volatile. The stock has returned 980.33% over five years and an extraordinary 1,247.42% over ten years, vastly outperforming the Sensex returns of 91.65% and 232.28% respectively. However, this long-term performance masks the recent deterioration, with the stock down 7.55% over the past week.

The stock's beta of 1.50 indicates high volatility, with price movements amplified relative to the broader market. The technical trend remains classified as "BULLISH" with MACD, moving averages, and KST indicators showing positive signals. However, this technical strength appears divorced from fundamental reality, with the stock trading above its 5-day, 20-day, 50-day, 100-day, and 200-day moving averages despite the business collapse.

The one-year return of 8.92% underperforms the Sensex's 9.48% gain, whilst the iron and steel products sector returned 15.95%, highlighting Shah Alloys' 7.03% underperformance versus its peer group. The risk-adjusted return of 0.14 with volatility of 62.11% places the stock in the "HIGH RISK MEDIUM RETURN" category—a dangerous profile for most investors.

Investment Thesis: Multiple Red Flags Outweigh Any Positives

The investment thesis for Shah Alloys is overwhelmingly negative. The company scores just 31 out of 100 on the proprietary Mojo Score, firmly in "SELL" territory. The quality grade stands at "BELOW AVERAGE" based on deteriorating financial performance, whilst the financial trend is classified as "NEGATIVE" with revenues and profits in freefall. The valuation grade of "RISKY" reflects the negative equity and unsustainable capital structure.

The only positive factor is the "BULLISH" technical trend, which appears to be driven by speculative trading rather than fundamental improvement. The combination of negative financial trends, below-average quality, risky valuation, and bullish technicals creates a dangerous setup where technical momentum could reverse sharply once speculative interest wanes.

Outlook: What to Watch

The outlook for Shah Alloys depends entirely on the company's ability to stabilise operations and restore revenue generation. Investors should monitor quarterly revenue trends, operating margin recovery, working capital management, and any announcements regarding asset sales, restructuring, or capital infusion. The following factors will be critical in determining whether the company can survive this crisis or faces insolvency.

Shah Alloys Ltd. represents a cautionary tale of how quickly a manufacturing business can deteriorate from generating ₹880 crores in annual revenue (FY22) to near-complete operational shutdown. The 95% revenue collapse in Q2 FY26, combined with negative equity and massive current liabilities, places the company in severe financial distress. Whilst the stock has delivered extraordinary long-term returns, the current situation bears no resemblance to past performance. The technical bullishness appears disconnected from fundamental reality, creating a dangerous value trap for unsuspecting investors. Unless the company can demonstrate a credible turnaround plan with immediate revenue restoration and capital infusion, the stock should be avoided entirely. For existing shareholders, any technical rally provides an opportunity to exit before potential insolvency proceedings.