Som Distilleries Q3 FY26: Sharp Profit Decline Raises Concerns Despite Revenue Base

Net sales for Q3 FY26 came in at ₹250.55 crores, declining 16.79% year-on-year and 7.06% quarter-on-quarter, marking the lowest quarterly revenue in the past year. Operating profit margins contracted sharply to 7.75%, down from 12.05% in Q3 FY25, whilst PAT margins compressed to just 2.19% from 7.14% a year earlier. The quarter's performance represents a significant deterioration in both top-line momentum and profitability metrics, raising questions about the sustainability of the company's recent growth trajectory.

The Bhopal-based alcoholic beverage manufacturer, which operates in the competitive Indian IMFL and beer segments, has seen its stock price decline significantly over the past six months, falling 41.34% compared to the Sensex's 4.51% gain during the same period. The company's current trading price represents a 48.77% decline from its 52-week high of ₹173.15, highlighting the severe erosion in investor confidence following deteriorating operational performance.

Financial Performance: Margin Compression Drives Profit Collapse

The Q3 FY26 results reveal a troubling deterioration across all profitability parameters. Operating profit excluding other income plummeted to ₹19.43 crores from ₹36.30 crores in Q3 FY25, representing a 46.47% year-on-year decline. Operating margins contracted by 428 basis points to 7.75%, the lowest level in at least seven quarters, indicating severe pressure on the company's core business operations.

The sequential comparison paints an equally concerning picture. Revenue declined 7.06% from Q2 FY26's ₹269.59 crores, whilst operating profit fell even more sharply by 51.54% from ₹40.10 crores. This dramatic margin compression suggests the company faced significant headwinds during the quarter, potentially from adverse product mix shifts, pricing pressures, or elevated input costs that could not be passed through to customers.

Interest expenses surged to ₹7.52 crores in Q3 FY26, the highest quarterly level in the past seven quarters, representing a 297.88% year-on-year increase from ₹1.89 crores in Q3 FY25. This dramatic rise in borrowing costs significantly impacted profitability, with the operating profit-to-interest coverage ratio falling to just 2.58 times, the lowest on record. The elevated interest burden reflects both higher debt levels and potentially rising interest rates, creating a double squeeze on bottom-line performance.

A concerning aspect of the quarter's performance was the elevated contribution of other income to profitability. Non-operating income of ₹3.68 crores constituted 49.66% of profit before tax, raising questions about the quality of earnings. This heavy reliance on non-core income sources to support profitability is unsustainable and masks the underlying weakness in operational performance. PAT margins compressed to just 2.19%, down from 7.14% in Q3 FY25, reflecting the combined impact of margin erosion, higher interest costs, and operational challenges.

Operational Challenges: Weak Returns Signal Execution Issues

The company's return ratios reveal structural concerns about capital efficiency and profitability. Return on equity (ROE) for the latest period stood at 12.47%, whilst the average ROE over recent years was just 10.89%, significantly below industry standards for consumer goods companies. This modest ROE suggests the company is generating relatively weak returns on shareholder capital, particularly concerning given the elevated growth investments in recent years.

Return on capital employed (ROCE) tells a similar story. The latest ROCE of 15.62% compares to an average of just 10.15%, indicating improved but still suboptimal capital productivity. For a company in the beverages sector with established brands and distribution networks, these return metrics suggest operational inefficiencies, pricing constraints, or competitive pressures that limit profitability despite revenue growth.

The balance sheet reveals a company in expansion mode but facing leverage pressures. Total debt declined from ₹99.24 crores in March 2024 to ₹35.13 crores in March 2025, reflecting deleveraging efforts. However, the company's debt-to-EBITDA ratio averaged 4.85 times, considered elevated for the sector. Fixed assets increased to ₹622.24 crores in March 2025 from ₹504.63 crores the previous year, indicating ongoing capital expenditure, likely for capacity expansion or modernisation initiatives.

Working capital management appears stretched, with current assets of ₹656.36 crores against current liabilities of ₹450.90 crores as of March 2025. Trade payables stood at ₹154.80 crores, down from ₹165.26 crores in the prior year. The cash flow statement for FY25 shows operating cash flow of ₹42.00 crores, down significantly from ₹73.00 crores in FY24, whilst investing cash outflow remained substantial at ₹100.00 crores, reflecting continued capital investment despite operational headwinds.

Seasonality Impact: June Quarter Strength Masks Underlying Weakness

The quarterly trend data reveals a pronounced seasonality pattern in Som Distilleries' business, with the June quarter (Q1) consistently delivering the strongest revenue performance. Q1 FY26 revenue of ₹528.38 crores was more than double the Q3 FY26 figure of ₹250.55 crores, highlighting the significant seasonal variation. This pattern held true in the previous year as well, with Q1 FY25 revenue of ₹513.08 crores substantially exceeding other quarters.

However, the Q3 FY26 performance stands out negatively even accounting for normal seasonality. Revenue of ₹250.55 crores represents a 16.79% decline from Q3 FY25's ₹301.12 crores, indicating deterioration beyond seasonal factors. The profit decline of 75.99% year-on-year far exceeds the revenue decline, pointing to severe operational deleverage and margin pressures specific to this quarter's performance.

Industry Context: Underperformance Versus Sector Peers

The beverages sector has faced headwinds over the past year, with the sector delivering a negative 4.67% return. However, Som Distilleries significantly underperformed even this weak benchmark, posting a 13.76% decline over one year. This 9.09 percentage point underperformance versus the sector suggests company-specific challenges beyond broader industry trends.

The alcoholic beverages industry in India faces regulatory complexities, state-level taxation variations, and competitive intensity. Premium spirits and beer segments have shown growth, but pricing power remains constrained by regulatory oversight and consumer price sensitivity. Som Distilleries operates in both IMFL blending/bottling and beer manufacturing, exposing it to competitive dynamics in both segments. The company's inability to maintain margins despite its established presence suggests either market share losses, unfavourable product mix shifts, or execution challenges in cost management.

Som Distilleries trades at a P/E ratio of 19.37x, significantly below the peer average of approximately 43x and the industry P/E of 68x. This valuation discount reflects the market's concerns about the company's profitability trajectory and growth sustainability. The company's ROE of 10.89% lags most peers, with Allied Blenders, Tilaknagar Industries, Globus Spirits, and G M Breweries all delivering superior returns on equity above 13%. Only Radico Khaitan, with its 12.80% ROE, operates in a similar range, though it commands a substantial valuation premium at 69.95x P/E.

The price-to-book ratio of 2.41x appears reasonable compared to the peer average of approximately 6.5x, suggesting the market is pricing in limited growth expectations. The company's debt-to-equity ratio of 0.22 is conservative and below most peers, providing some financial flexibility. However, the elevated debt-to-EBITDA ratio of 4.85 times indicates that whilst absolute leverage is moderate, profitability relative to debt remains constrained. This combination of weak returns and moderate valuation multiples suggests the market has already incorporated concerns about operational performance into the stock price.

Valuation Analysis: Discount Justified by Deteriorating Fundamentals

At the current price of ₹88.70, Som Distilleries trades at a P/E ratio of 19.37x based on trailing twelve-month earnings. Whilst this represents a significant discount to the industry P/E of 68x and peer average of 43x, the valuation discount appears justified given the recent deterioration in financial performance. The company's PEG ratio of 19.37 indicates that even accounting for historical growth, the stock is not offering compelling value at current levels.

The price-to-book ratio of 2.41x compares to a book value per share of ₹36.30, suggesting the market is valuing the company at approximately 2.4 times its net asset value. For a company with an ROE of just 10.89%, this multiple appears reasonable, as the company is generating returns only marginally above its cost of equity. The EV/EBITDA multiple of 11.59x and EV/Sales of 1.52x are in line with sector norms for mid-tier beverage companies.

The stock has declined 48.77% from its 52-week high of ₹173.15, indicating substantial value erosion over the past several months. The current price of ₹88.70 is just 6.18% above the 52-week low of ₹83.54, suggesting the stock is trading near its recent bottom. However, this proximity to lows does not necessarily indicate value, as the deteriorating fundamentals may justify further downside if operational performance does not stabilise.

The company's valuation grade has fluctuated between "Very Attractive" and "Attractive" over recent months, currently standing at "Very Attractive." However, this assessment appears to be based primarily on low multiples relative to historical norms rather than improving business fundamentals. The sharp decline in Q3 FY26 profitability suggests that even at current "attractive" valuations, the stock faces significant risks if the margin compression trend continues.

Shareholding: Promoter Confidence Building, Institutional Interest Weak

Promoter holding in Som Distilleries has shown a gradual increasing trend, rising from 35.33% in September 2024 to 39.39% in December 2025. The sequential increase of 0.02 percentage points in Q3 FY26 follows larger increases in previous quarters, including a 2.43 percentage point jump in Q4 FY25. This steady accumulation of shares by promoters signals confidence in the company's long-term prospects, though it has not prevented the recent operational deterioration.

Foreign institutional investor (FII) holding declined to 0.95% in December 2025 from 1.47% in June 2025, representing a sequential reduction of 0.52 percentage points. This declining FII interest coincides with the deteriorating operational performance and suggests sophisticated institutional investors are reducing exposure ahead of potential further challenges. The total institutional holding of just 0.95% (FIIs only, with negligible mutual fund and insurance participation) indicates very limited institutional conviction in the stock.

Mutual fund holding stands at zero as of December 2025, down from a minimal 0.05% in March 2025. The complete absence of mutual fund investment is particularly noteworthy, as these investors typically provide stability and long-term capital. Insurance company holdings also remain at zero. The non-institutional shareholding of 59.66% represents primarily retail investors, whose holdings increased slightly by 0.55 percentage points quarter-on-quarter. This shareholding composition, dominated by promoters and retail investors with minimal institutional participation, creates potential liquidity constraints and higher volatility.

Stock Performance: Severe Underperformance Across All Timeframes

Som Distilleries' stock performance has been dismal across most relevant timeframes. Over the past year, the stock declined 13.76% whilst the Sensex gained 10.41%, resulting in a negative alpha of 24.17 percentage points. The underperformance has accelerated in recent months, with the stock falling 28.09% over three months compared to the Sensex's 0.44% gain, and declining 41.34% over six months against the Sensex's 4.51% rise.

The technical picture is uniformly negative. The stock trades below all key moving averages, including the 5-day (₹91.98), 20-day (₹92.29), 50-day (₹101.57), 100-day (₹114.32), and 200-day (₹131.02) moving averages. This alignment of moving averages in descending order creates a strong bearish technical setup, with each level likely to act as resistance on any attempted recovery. The overall technical trend is classified as "Bearish," with MACD, moving averages, and KST indicators all showing bearish signals.

The stock's beta of 1.41 indicates it is 41% more volatile than the broader market, amplifying both gains and losses. However, with the stock in a sustained downtrend, this high beta has worked against investors, magnifying losses. The risk-adjusted return over one year stands at negative 0.33, with volatility of 42.15%, placing the stock in the "HIGH RISK LOW RETURN" category. This combination of high volatility, negative returns, and bearish technical momentum creates a challenging environment for both existing holders and potential new investors.

Looking at longer timeframes provides some context to the recent underperformance. Over three years, the stock delivered 84.76% returns versus the Sensex's 38.81%, generating positive alpha of 45.95 percentage points. Over five years, the stock posted remarkable returns of 706.18% compared to the Sensex's 63.47%, with alpha of 642.71 percentage points. These exceptional long-term returns reflect the company's growth trajectory from FY20 to FY24, when revenue grew from ₹459 crores to ₹1,442 crores. However, the recent deterioration suggests this growth phase may be stalling, with operational challenges emerging.

Investment Thesis: Quality Concerns Override Valuation Appeal

Som Distilleries presents a complex investment case characterised by attractive valuation multiples offset by deteriorating operational performance and weak quality metrics. The company's Mojo score of 29 out of 100 places it firmly in "STRONG SELL" territory, reflecting the significant concerns across multiple parameters. The valuation grade of "Very Attractive" suggests low multiples, but this attractiveness is undermined by a "Negative" financial trend and "Bearish" technical outlook.

The quality assessment of "Average" reflects mixed fundamentals. Whilst the company has delivered strong sales growth of 37.49% CAGR over five years and EBIT growth of 60.19%, the return ratios remain suboptimal. Average ROCE of 10.15% and ROE of 10.89% indicate the company struggles to generate attractive returns despite revenue expansion. The debt-to-EBITDA ratio of 4.85 times is elevated, whilst the EBIT-to-interest coverage of 6.66 times, though adequate on average, has deteriorated sharply in Q3 FY26 to just 2.58 times.

The positive aspects include zero promoter pledging, which eliminates one source of risk, and gradual promoter stake increases, suggesting insider confidence. The company's long-term growth trajectory from FY20 to FY25 demonstrates its ability to scale operations and expand market presence. However, these positives are increasingly overshadowed by the recent operational deterioration, margin compression, and elevated interest costs that threaten profitability sustainability.

Outlook: Critical Juncture Requires Operational Turnaround

Som Distilleries stands at a critical juncture where the next few quarters will determine whether the Q3 FY26 performance represents a temporary setback or the beginning of a sustained downturn. The company must demonstrate its ability to stabilise margins, manage costs effectively, and restore profitability to levels consistent with its historical performance. The elevated interest burden requires urgent attention, either through debt reduction or improved operational cash generation to restore comfortable coverage ratios.

The seasonal strength of the June quarter (Q1 FY27) will provide an important test case. If the company can deliver strong revenue and margins in Q1 FY27 comparable to Q1 FY26's performance, it would suggest the Q3 FY26 weakness was aberrational. However, if margin pressures persist even during the seasonally strong quarter, it would confirm structural challenges requiring more fundamental operational restructuring.

For the investment thesis to improve, Som Distilleries must demonstrate consistent execution across multiple dimensions: revenue stabilisation, margin recovery, interest cost management, and improved capital efficiency. The company's long-term growth record provides some confidence in management's ability to navigate challenges, but the severity of the Q3 FY26 deterioration demands urgent corrective action. Until clear evidence of operational stabilisation emerges, the risk-reward profile remains unfavourable despite attractive valuation multiples.