Som Distilleries Q2 FY26: Seasonal Slump Dents Profitability Despite Margin Gains

The quarterly results reveal a stark seasonal pattern typical of the alcoholic beverages industry, with Q2 traditionally representing a weaker period due to monsoon-related demand softness. Revenue declined precipitously to ₹269.59 crores from ₹528.38 crores in Q1 FY26, marking a 48.98% sequential contraction. On a YoY basis, sales fell 6.95%, indicating pressure beyond typical seasonal factors. Despite the revenue headwinds, the company demonstrated operational resilience by expanding its operating margin (excluding other income) to 14.87% from 13.32% in the previous quarter, suggesting effective cost management and potentially favourable input cost dynamics.

Financial Performance: Seasonal Weakness Masks Margin Improvement

The Q2 FY26 performance presents a tale of two narratives—severe top-line contraction offset partially by margin expansion. Net sales of ₹269.59 crores represent the lowest quarterly figure in recent periods, declining 48.98% QoQ and 6.95% YoY. This dual decline suggests both seasonal pressures and potential market share challenges or regional demand weakness. The monsoon season traditionally dampens consumption of alcoholic beverages, particularly beer, which forms a significant portion of Som Distilleries' portfolio.

However, the margin story provides some comfort. Operating profit (PBDIT excluding other income) stood at ₹40.10 crores with a margin of 14.87%, up 155 basis points QoQ and an impressive 315 basis points YoY. This margin expansion, achieved despite revenue compression, indicates improved operational efficiency, better product mix, or favourable raw material costs. The PAT margin of 7.23% declined 73 basis points QoQ due to the operating leverage impact but improved 78 basis points YoY, demonstrating the company's ability to protect bottom-line profitability over the longer term.

Interest costs remained relatively stable at ₹4.91 crores (versus ₹4.94 crores in Q1 FY26), whilst depreciation declined marginally to ₹8.16 crores from ₹8.73 crores. The tax rate increased to 28.93% from 27.95% in the previous quarter, contributing to the profit compression. On a half-yearly basis (H1 FY26), the company generated net sales of ₹797.97 crores and consolidated net profit of ₹61.56 crores, representing growth over the corresponding period but highlighting the extreme quarterly volatility inherent in this seasonal business.

Operational Challenges: Weak Returns on Capital Constrain Value Creation

Whilst Som Distilleries has demonstrated strong revenue growth over the long term (five-year sales CAGR of 36.22%), the company's ability to convert this growth into shareholder value remains constrained by weak capital efficiency metrics. The average return on equity (ROE) stands at 8.96%, significantly below the 15% threshold typically considered attractive for equity investors. Similarly, the average return on capital employed (ROCE) of 8.19% indicates that the company generates returns barely exceeding the cost of capital, limiting wealth creation potential.

The balance sheet, however, presents a relatively healthy picture with controlled leverage. Long-term debt declined to ₹35.13 crores as of March 2025 from ₹99.24 crores a year earlier, reducing the debt-to-equity ratio and improving financial flexibility. The debt-to-EBITDA ratio of 1.47 and net debt-to-equity of 0.20 indicate manageable leverage levels. The company's ability to generate operating cash flow of ₹42.00 crores in FY25, albeit down from ₹73.00 crores in FY24 due to working capital absorption, demonstrates underlying cash generation capability.

Working capital management emerged as a concern in FY25, with changes in working capital absorbing ₹116.00 crores compared to ₹63.00 crores in the previous year. This elevated working capital requirement, likely driven by inventory build-up and receivables, constrained free cash flow despite healthy profitability. The company's capital expenditure of ₹100.00 crores in FY25 reflects ongoing capacity expansion efforts, though this needs to translate into improved capital efficiency metrics to justify continued investment.

Industry Context: Navigating Competitive Intensity in Beverages

The Indian alcoholic beverages sector presents a complex operating environment characterised by regulatory fragmentation, state-level taxation variations, and intense competition. Som Distilleries operates in both the beer and Indian-made foreign liquor (IMFL) segments, competing against established players with significantly larger scale and brand portfolios. The company's market capitalisation of ₹2,395 crores positions it as a relatively smaller player compared to industry leaders, limiting its negotiating power with distributors and retailers.

The regulatory environment remains a double-edged sword. Whilst high entry barriers through licensing restrictions protect incumbents, frequent policy changes at the state level create operational uncertainty. Recent trends towards higher taxation on alcoholic beverages in several states, aimed at discouraging consumption, pose margin pressures that companies must offset through price increases or operational efficiencies. Som Distilleries' ability to expand margins despite revenue pressures suggests some success in navigating this challenging environment.

Consumer preferences in the Indian alcoholic beverages market are evolving, with premiumisation emerging as a key trend. Consumers increasingly favour premium and super-premium brands, presenting both opportunity and challenge for companies like Som Distilleries. The company's product portfolio positioning and brand strength will determine its ability to capture this premiumisation trend and improve realisations.

Peer Comparison: Valuation Discount Reflects Quality Gap

Som Distilleries trades at a significant valuation discount to its peer group, reflecting concerns about capital efficiency and institutional confidence. With a price-to-earnings (P/E) ratio of 23.12x, the stock trades at approximately 60% discount to the beverages sector average of around 59x. This discount appears justified when examining underlying quality metrics, particularly return on equity and institutional ownership patterns.

The peer comparison reveals Som Distilleries' relative weaknesses. Its ROE of 8.96% trails the peer group average of approximately 16%, indicating inferior capital efficiency. Whilst the company maintains a conservative balance sheet with debt-to-equity of 0.20 (comparable to Radico Khaitan), this financial prudence has not translated into superior returns. The price-to-book value (P/BV) ratio of 3.18x, whilst lower than premium peers like Radico Khaitan (14.66x) and Allied Blenders (11.70x), remains elevated relative to the company's return profile, suggesting limited margin of safety.

Notably, Som Distilleries does not pay dividends, unlike most peers who maintain modest dividend yields ranging from 0.12% to 0.63%. This absence of dividend distribution, combined with weak institutional ownership of just 1.52%, signals limited confidence from sophisticated investors. The company's quality grade of "Average" reflects these fundamental challenges, with recent upgrade from "Below Average" indicating improvement but not yet reaching investment-grade quality.

Valuation Analysis: Attractive Multiples Overshadowed by Quality Concerns

At the current market price of ₹121.55, Som Distilleries trades at seemingly attractive valuation multiples that mask underlying quality issues. The P/E ratio of 23.12x represents a significant discount to both the broader beverages sector (59x) and premium peers, whilst the P/BV of 3.18x appears reasonable for a company with improving profitability. However, these headline multiples require contextualisation against the company's capital efficiency and growth sustainability.

The price-to-earnings-growth (PEG) ratio of 2.20x suggests the stock may not be as inexpensive as headline P/E suggests. A PEG ratio above 2.0 typically indicates that valuation multiples are elevated relative to expected growth rates, raising concerns about future return potential. The enterprise value-to-EBITDA (EV/EBITDA) multiple of 13.84x and EV-to-sales of 1.73x appear reasonable for a growing beverages company but do not provide substantial margin of safety given execution risks.

The stock's valuation grade has fluctuated between "Very Attractive" and "Attractive" in recent months, currently standing at "Very Attractive." This assessment appears driven primarily by the recent price correction—the stock has declined 29.80% from its 52-week high of ₹173.15—rather than fundamental improvement. The current price of ₹121.55 remains 24.92% above the 52-week low of ₹97.30, suggesting the stock trades in the middle of its recent range rather than at distressed levels.

The book value per share of ₹36.30 implies that investors are paying 3.35 times book value, a premium that demands either high returns on equity or exceptional growth prospects. Given Som Distilleries' ROE of 8.96% and the challenges evident in recent quarterly performance, this premium appears difficult to justify on fundamental grounds. The absence of dividend yield eliminates one potential source of total return, making investors entirely dependent on capital appreciation driven by earnings growth.

Shareholding Pattern: Promoter Accumulation Signals Confidence

The shareholding pattern reveals encouraging trends in promoter behaviour, though institutional participation remains conspicuously weak. Promoter holding increased to 39.37% as of June 2025 from 35.33% a year earlier, with consistent sequential increases across recent quarters. This accumulation pattern, particularly the 243 basis point jump between December 2024 and March 2025, signals promoter confidence in the company's prospects and provides some comfort regarding governance and strategic direction.

However, the institutional ownership picture remains concerning. Foreign institutional investor (FII) holding stands at a mere 1.47%, having declined from 1.60% in the previous quarter. Mutual fund participation is virtually non-existent at 0.00%, with no major fund house holding meaningful stakes. Insurance companies show zero ownership, whilst other domestic institutional investors (DIIs) hold just 0.05%. This collective institutional holding of approximately 1.52% represents one of the lowest levels amongst listed beverage companies and suggests sophisticated investors remain unconvinced about the company's investment merits.

The non-institutional category, representing primarily retail investors, accounts for 59.11% of shareholding. This high retail participation, combined with low institutional ownership, typically correlates with higher volatility and limited research coverage. The absence of institutional anchor investors also means the stock may struggle to attract attention during market corrections, potentially leading to oversized price declines during periods of broader market stress.

Positively, the company maintains zero promoter pledging, eliminating concerns about financial distress or forced selling. The key promoters—Jagdish Kumar Arora (23.69%) and Som Distilleries Private Limited (9.66%)—hold substantial stakes, aligning their interests with minority shareholders. The presence of 18 FII investors, despite their small aggregate holding, indicates some level of international interest that could expand with improved performance and enhanced disclosure practices.

Stock Performance: Long-Term Outperformance Masks Recent Weakness

Som Distilleries' stock performance presents a study in contrasts—exceptional long-term returns overshadowed by concerning recent trends. Over five years, the stock has delivered a staggering return of 1,109.76%, vastly outperforming the Sensex return of 93.78% and generating alpha of 1,015.98 percentage points. Similarly, the four-year return of 681.24% and three-year return of 175.81% demonstrate the wealth creation potential during the company's growth phase.

However, the recent performance trajectory has deteriorated markedly. The stock has declined 13.86% over three months and 10.59% over six months, substantially underperforming the Sensex which posted gains of 4.92% and 3.97% respectively during these periods. The one-week return of -4.55% and one-day decline of 4.03% following the Q2 results indicate investor disappointment with the quarterly performance. The stock currently trades below all key moving averages—5-day (₹125.21), 20-day (₹128.81), 50-day (₹130.38), 100-day (₹141.18), and 200-day (₹135.33)—a technically bearish configuration.

The stock's volatility of 42.44% classifies it as a high-risk, high-return investment, with a beta of 1.35 indicating 35% greater volatility than the broader market. This elevated volatility, combined with the recent price weakness, suggests the stock may experience sharp moves in either direction based on quarterly results and sector sentiment. The year-to-date return of 10.55% and one-year return of 21.49% remain positive but have moderated from the exceptional gains of prior years, suggesting the easy gains from the company's turnaround phase may be behind it.

Technical indicators uniformly point to bearish momentum. The Moving Average Convergence Divergence (MACD) shows bearish signals on both weekly and monthly timeframes, whilst Bollinger Bands indicate bearish conditions. The trend officially changed to "Bearish" on November 6, 2025, from "Mildly Bearish," reflecting the accelerating price decline. The immediate support level sits at the 52-week low of ₹97.30, approximately 20% below current levels, whilst resistance emerges at the 20-day moving average of ₹128.81, about 6% above the current price.

Investment Thesis: Value Trap or Turnaround Opportunity?

Som Distilleries presents a complex investment proposition that requires careful consideration of competing factors. The company's "Very Attractive" valuation grade and low P/E multiple of 23.12x might tempt value-seeking investors, particularly given the 30% decline from 52-week highs. However, this apparent cheapness must be weighed against fundamental quality concerns, weak capital efficiency metrics, and deteriorating near-term trends.

The proprietary Mojo score of 31/100 places the stock firmly in "SELL" territory, down from "HOLD" territory just weeks ago. This rating reflects the confluence of negative factors: deteriorating quarterly financial trends, bearish technical momentum, and quality metrics that remain below investment grade despite recent improvements. The score downgrade from 51 to 31 between early November and mid-November signals rapidly deteriorating fundamentals that warrant caution.

The company's long-term growth credentials remain intact, with five-year sales CAGR of 36.22% and EBIT growth of 74.17% demonstrating the business's expansion potential. The balance sheet strength—with debt-to-equity of 0.20 and no promoter pledging—provides financial flexibility for continued growth investments. However, these positives are offset by the persistent inability to generate adequate returns on invested capital, with ROE of 8.96% and ROCE of 8.19% falling short of the cost of capital.

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Outlook: What to Watch in Coming Quarters