Sri Nachammai Cotton Mills Q3 FY26: Deepening Losses Signal Structural Distress

The third quarter results expose a company grappling with fundamental operational challenges. Net sales of ₹16.75 crores declined 11.80% sequentially from ₹18.99 crores in Q2 FY26, whilst also registering a 2.84% year-on-year contraction. More concerning is the operating profit before depreciation, interest, tax, and other income (PBDIT excl OI), which plunged to a loss of ₹1.99 crores—the lowest level on record—compared to a loss of ₹0.41 crores in the previous quarter. This translates to an operating margin of negative 11.88%, a dramatic deterioration from negative 2.16% in Q2 FY26.

Financial Performance: Accelerating Deterioration

The quarter's financial performance reflects a company in distress across multiple dimensions. Revenue declined for the second consecutive quarter, falling 11.80% from ₹18.99 crores to ₹16.75 crores, whilst year-on-year growth remained negative at 2.84%. The gross profit margin collapsed to negative 17.73% from negative 6.53% in Q2 FY26, indicating severe pricing pressure or cost inflation that the company cannot pass through to customers.

Interest costs remained elevated at ₹1.03 crores in Q3 FY26, up 21.18% sequentially, reflecting the company's heavy debt burden. Depreciation stood at ₹0.60 crores, relatively stable compared to ₹0.61 crores in the previous quarter. Other income provided minimal relief at ₹0.05 crores, down sharply from ₹0.27 crores in the year-ago period. The combination of operational losses and high fixed costs resulted in a profit before tax of negative ₹3.57 crores, the worst quarterly performance in recent history.

On an annual basis, FY25 results showed net sales of ₹69.00 crores, representing modest growth of 4.50% from ₹66.00 crores in FY24. However, the company reported a net loss of ₹3.00 crores for the full year, an improvement from the ₹4.00 crore loss in FY24 but still deeply unprofitable. The five-year sales compound annual growth rate stands at negative 13.05%, highlighting sustained revenue contraction.

Operational Challenges: Structural Weaknesses Exposed

The company's operational metrics paint a picture of fundamental business challenges. The return on equity (ROE) averaged 7.72% over the long term but has deteriorated to negative 19.52% in the latest period, reflecting the severe erosion of shareholder value. Return on capital employed (ROCE) stands at negative 4.16% currently, down from an already weak average of 0.95%, indicating the company is destroying capital rather than generating returns.

The balance sheet reveals concerning trends. Total shareholder funds declined to ₹16.11 crores as of March 2025 from ₹19.34 crores a year earlier, driven by accumulated losses. Long-term debt increased significantly to ₹31.42 crores from ₹21.56 crores, pushing the net debt-to-equity ratio to 2.11 times. Fixed assets stood at ₹38.88 crores, up from ₹36.45 crores, suggesting capital expenditure even as the business struggles to generate positive cash flows.

Working capital management remains a challenge, with current assets of ₹41.12 crores as of March 2025 down from ₹46.19 crores, whilst current liabilities stood at ₹16.65 crores. The company generated nil operating cash flow in FY25, with ₹2.00 crores of financing inflows offsetting ₹2.00 crores of investing outflows, leaving the cash position unchanged at zero.

Industry Context: Underperformance Across Timeframes

Sri Nachammai Cotton Mills operates in the highly competitive garments and apparels sector, where pricing power is limited and raw material costs remain volatile. The company's one-year stock return of negative 11.25% significantly underperformed the sector average decline of 2.40%, resulting in negative alpha of 8.85 percentage points. Against the broader Sensex, which gained 9.85% over the same period, the company's underperformance is even more stark at 21.10 percentage points.

The stock's three-year performance shows a decline of 11.86%, whilst the Sensex surged 37.89%, representing an alpha of negative 49.75 percentage points. Volatility remains elevated at 70.11%, with a beta of 1.50, indicating the stock is significantly more volatile than the broader market. The risk-adjusted return over one year stands at negative 0.16, placing the stock firmly in the "high risk, low return" category.

Compared to sector peers, Sri Nachammai Cotton Mills demonstrates higher average ROE of 7.72% versus the peer average of approximately 3.00%, though this metric has turned sharply negative in recent quarters. The company's debt-to-equity ratio of 2.11 is significantly higher than peers like Mish Designs (0.11) and Vivaa Tradecom (0.18), indicating elevated financial leverage. The price-to-book value of 0.67 times suggests the market values the company below its stated book value, reflecting scepticism about asset quality and future profitability.

Valuation Analysis: Deep Discount Reflects Distress

The company's valuation metrics reflect the market's deep concern about its financial viability. With the stock trading at ₹31.95 against a book value of ₹37.58 per share, the price-to-book ratio of 0.67 times represents a 33% discount to book value. However, this discount appears justified given the negative earnings and deteriorating fundamentals. The enterprise value-to-EBITDA multiple of negative 56.95 times and EV-to-EBIT of negative 21.49 times are meaningless in the context of sustained losses.

The stock's valuation grade has been classified as "Risky" since May 2023, when it was downgraded from "Fair." The company does not pay dividends, with the last dividend of ₹1.30 per share declared in November 2006. The absence of dividend income, combined with capital losses, makes the investment proposition unattractive for income-seeking investors.

The stock trades 28.91% below its 52-week high of ₹44.94 and 27.80% above its 52-week low of ₹25.00. Technical indicators show a "mildly bearish" trend, with the stock trading below all key moving averages—5-day (₹31.36), 20-day (₹30.89), 50-day (₹30.37), 100-day (₹32.23), and 200-day (₹33.33). The MACD shows mildly bullish signals on a weekly basis but remains bearish on monthly charts, whilst RSI indicators provide no clear directional signal.

Shareholding Pattern: Stable Promoter Base, Minimal Institutional Interest

The shareholding pattern reveals a stable promoter holding of 55.52% as of December 2025, unchanged from the previous quarter. Key promoters include P. Umayal (24.10%), P. Palaniappan (14.86%), and Geethanjali Ramasamy (9.28%). Notably, there is zero promoter pledging, which is a positive indicator of promoter confidence despite the operational challenges.

Institutional holdings remain negligible, with just 0.01% held by mutual funds and zero holdings by foreign institutional investors (FIIs), insurance companies, and other domestic institutional investors (DIIs). The absence of institutional participation reflects the company's micro-cap status, poor liquidity (average daily volume of just 109 shares), and fundamental concerns about financial viability. Non-institutional investors hold 44.47% of the equity, a figure that has remained static across recent quarters.

Stock Performance: Consistent Underperformance Across Timeframes

The stock's performance has been disappointing across virtually all timeframes. Over one week, the stock gained 3.10%, outperforming the Sensex's 0.43% gain by 2.67 percentage points. However, this short-term bounce does little to offset longer-term underperformance. Over one month, the stock declined 1.14% versus the Sensex's 0.24% decline, resulting in negative alpha of 0.90 percentage points.

The three-month return of negative 4.88% compares unfavourably to the Sensex's decline of 0.94%, whilst the six-month return of negative 2.77% significantly trails the Sensex's gain of 4.29%. Year-to-date, the stock has gained 3.60% versus the Sensex's decline of 1.81%, providing some relative outperformance, though this is more a function of the broader market's weakness than any fundamental improvement in the company.

The longer-term picture is even more concerning. Over two years, the stock declined 6.50% whilst the Sensex gained 17.73%, representing negative alpha of 24.23 percentage points. The three-year performance shows a decline of 11.86% versus the Sensex's surge of 37.89%, resulting in negative alpha of 49.75 percentage points. Only over five years does the stock show positive absolute returns of 125.80%, though this still underperforms the Sensex's gain of 264.02% over ten years by a substantial margin.

Investment Thesis: Multiple Red Flags Warrant Caution

The investment thesis for Sri Nachammai Cotton Mills is severely challenged across all four key parameters of the Mojo analytical framework. The company's overall score of 9 out of 100 places it firmly in "Strong Sell" territory, with the recommendation to "strongly consider selling" or "exit recommended" for existing holders.

From a valuation perspective, the "Risky" grade reflects the company's loss-making status and deteriorating fundamentals. Whilst the price-to-book ratio of 0.67 times appears attractive on the surface, it fails to account for the ongoing capital destruction and negative earnings trajectory. The quality assessment of "Below Average" is driven by weak five-year sales growth of negative 13.05%, EBIT growth of negative 221.24%, and an EBIT-to-interest coverage ratio of just 0.08 times.

The financial trend is unequivocally "Negative," with Q3 FY26 marking the worst quarterly operating performance on record. Key negative factors include net profit at negative ₹3.06 crores (down 173.20% year-on-year), operating profit at the lowest level of negative ₹1.99 crores, operating margin at negative 11.88% (the lowest on record), and profit before tax excluding other income at negative ₹3.62 crores. Technical indicators show a "Mildly Bearish" trend, with the stock trading below all major moving averages and facing resistance at multiple levels.

Key Strengths & Risk Factors

Outlook: Critical Juncture Requires Decisive Action

Sri Nachammai Cotton Mills stands at a critical juncture where urgent operational restructuring is essential for survival. The company must address fundamental issues including pricing power, cost structure, working capital management, and debt servicing capacity. Without significant improvement in operating margins and a return to positive cash generation, the company's ability to service its debt obligations remains questionable.

For existing shareholders, the Q3 FY26 results represent a serious warning signal that requires immediate attention. The company's financial trend has been classified as "Negative" since September 2024, with no signs of stabilisation. The technical trend of "Mildly Bearish" and positioning below all major moving averages suggests limited near-term upside potential. Given the combination of operational losses, high leverage, negative cash flows, and consistent underperformance against both sector peers and broader market indices, the risk-reward profile remains heavily skewed to the downside.