Sri Ramakrishna Mills Q2 FY26: Operating Losses Deepen as Textile Headwinds Intensify

The deteriorating financial performance reflects mounting challenges in the textile sector, with the company's operating profit margin turning negative at -0.51% in Q2 FY26, the weakest quarterly performance on record. This marks a stark contrast to the company's historical profitability, with operating margins having reached as high as 39.23% in December 2020. The company's struggles are compounded by a high debt burden, with a debt-to-equity ratio of 1.75 times and a concerning debt-to-EBITDA ratio of 6.54 times, limiting financial flexibility during this challenging period.

Financial Performance: Revenue Contraction Triggers Operating Losses

Sri Ramakrishna Mills' Q2 FY26 financial performance reveals a troubling deterioration across all key metrics. Net sales for the quarter stood at ₹15.79 crores, declining 22.70% sequentially from ₹20.43 crores in Q1 FY26. This revenue contraction represents the sharpest quarterly decline in recent periods and pushed the company's top line 22.70% below the previous four-quarter average. The revenue weakness appears to be driven by challenging market conditions in the textile spinning sector, where demand headwinds and pricing pressures have intensified.

The impact on profitability has been severe. Operating profit before depreciation, interest, tax, and other income (PBDIT excluding OI) turned negative at ₹-0.08 crores in Q2 FY26, resulting in an operating margin of -0.51%. This represents the lowest operating margin on record for the company and a dramatic reversal from the 9.20% margin achieved in the previous quarter. The collapse in operating profitability reflects not only lower sales volumes but also adverse operating leverage, with fixed costs overwhelming the reduced revenue base.

At the bottom line, the company reported a net loss of ₹0.93 crores in Q2 FY26, compared to a profit of ₹0.60 crores in Q1 FY26, representing a 255.00% sequential deterioration. On a year-on-year basis, the company has swung from a profit of ₹0.84 crores in Q2 FY25 to a loss of ₹0.93 crores in Q2 FY26, marking a 210.71% decline. The profit after tax margin contracted sharply to -5.89% in Q2 FY26 from 2.94% in the previous quarter. Interest costs remained elevated at ₹0.91 crores for the quarter, consuming a significant portion of the operating cash flow and reflecting the burden of the company's high debt levels.

For the first half of FY26 (H1 FY26), the company reported a cumulative net loss of ₹0.33 crores on revenues of ₹36.22 crores. This compares unfavourably with H1 FY25, when the company had generated a profit of ₹1.54 crores on revenues of ₹34.80 crores. The half-yearly numbers underscore the accelerating deterioration in the company's financial health, with profitability eroding despite relatively stable revenue levels year-on-year.

Balance Sheet Strain: High Leverage Limits Financial Flexibility

Sri Ramakrishna Mills operates with a significantly leveraged balance sheet that constrains its ability to navigate the current downturn. As of March 2021 (the latest available annual balance sheet data), the company's shareholder funds stood at ₹9.46 crores against long-term debt of ₹8.48 crores, resulting in a debt-to-equity ratio of 1.75 times. This high leverage is particularly concerning given the company's micro-cap status and limited access to capital markets for refinancing or fresh equity infusion.

The company's debt servicing burden is substantial, with interest costs of ₹0.91 crores in Q2 FY26 representing a significant fixed obligation. The average EBIT-to-interest coverage ratio of just 1.70 times over the past five years indicates limited cushion for absorbing earnings volatility. With operating profits now turning negative, the company's ability to service debt from internal cash generation has become severely compromised, raising concerns about potential covenant breaches or the need for asset monetisation.

Return metrics reflect the structural challenges facing the business. The company's average return on equity (ROE) over recent years stands at 14.81%, which, while appearing reasonable on the surface, masks significant volatility. The latest ROE has turned negative at -12.35%, indicating value destruction for shareholders. Similarly, the return on capital employed (ROCE) of 11.60% in the latest period, down from an average of 14.24%, highlights deteriorating capital efficiency. These metrics are particularly concerning given the capital-intensive nature of the textile spinning business, which requires ongoing investments in machinery and working capital.

Sector Headwinds: Textile Industry Challenges Intensify

The textile spinning industry in India has faced a challenging operating environment in recent quarters, characterised by weak demand, elevated raw material costs, and intense competition. Cotton prices, a key input cost for spinning mills, have exhibited significant volatility, compressing margins for manufacturers unable to pass through cost increases to customers. Additionally, subdued demand from downstream garment manufacturers and exporters has limited volume growth opportunities.

Sri Ramakrishna Mills, with its combined installed capacity of 94,000 ring spindles and 1,440 rotors across three manufacturing locations in Coimbatore, Nagari, and Sathyamangalam, operates in a highly competitive segment. The company's inability to maintain positive operating margins in Q2 FY26 suggests challenges in capacity utilisation, pricing power, or both. The revenue decline of 22.70% quarter-on-quarter indicates either significant volume contraction or pricing pressure, with the negative operating margin pointing to inadequate cost absorption.

The company's long operational history—incorporated in 1946—and membership in the South India Textile Research Association (SITRA) provide some technical capabilities and industry connections. However, these advantages have proven insufficient to offset the current sector headwinds. The company's decision to reduce 3,080 obsolete spindles in 1994-95 demonstrates past willingness to rationalise capacity, though no recent capacity adjustments have been disclosed despite the current challenges.

Within its peer group of garments and apparels companies, Sri Ramakrishna Mills stands out for having the highest average ROE at 14.81%, though this figure is now outdated given the recent losses. The company's price-to-book value ratio of 1.54 times is moderate compared to peers, though the current loss-making status renders traditional valuation metrics less meaningful. The company's debt-to-equity ratio of 1.75 times is among the highest in the peer group, highlighting the elevated financial risk profile.

Valuation Analysis: Risky Proposition with Limited Upside Visibility

Sri Ramakrishna Mills trades at a price-to-book value of 1.54 times based on a book value per share of ₹13.30 and current market price of ₹48.43. With the company currently loss-making, traditional earnings-based valuation metrics such as the P/E ratio are not applicable. The company's valuation grade has been classified as "Risky" since August 2025, reflecting the deteriorating fundamental performance and elevated financial leverage.

The stock's 52-week range of ₹39.50 to ₹78.70 indicates significant volatility, with the current price 38.46% below the 52-week high. This decline reflects growing investor concerns about the company's ability to return to profitability. The enterprise value-to-EBITDA multiple of 46.52 times appears elevated on the surface, though this is distorted by the extremely low EBITDA base. More concerning is the negative EV-to-EBIT ratio of -73.03 times, reflecting operating losses.

The company's valuation history shows a pattern of grade changes reflecting volatile business performance. The valuation grade improved from "Very Expensive" to "Attractive" in November 2024, only to deteriorate back to "Risky" by August 2025 as the financial performance weakened. This volatility in valuation assessments underscores the uncertainty surrounding the company's earnings trajectory and the difficulty in establishing a stable fair value estimate.

With no dividend payments (dividend yield of NA) and a zero dividend payout ratio, the company provides no income support to shareholders. The absence of dividends is understandable given the current losses and need to conserve cash for debt servicing and working capital requirements. However, this eliminates one potential source of return for investors, leaving capital appreciation as the sole return driver—a challenging proposition given the current negative momentum.

Shareholding Pattern: Stable Promoter Base Amid Institutional Absence

The shareholding pattern of Sri Ramakrishna Mills reveals a stable promoter holding of 64.01% that has remained unchanged over the past five quarters through September 2025. The promoter group includes key family members—Lakshminarayanaswamy D. (22.24%), Nagaswarna L (13.40%), Suhasini L. (8.73%), and Swathy L. (7.91%)—along with group entities such as Suhasini Spinners Limited (5.17%), Swathy Processors Limited (4.59%), and Sri Ramakrishna Yarn Carriers Ltd (1.96%). Importantly, there is no promoter pledging, which eliminates one potential risk factor.

The complete absence of institutional investors—with zero holdings from foreign institutional investors (FIIs), mutual funds, insurance companies, and other domestic institutional investors (DIIs)—is a significant red flag. The 0.00% institutional holding indicates a lack of confidence from professional investors who conduct rigorous due diligence before committing capital. This absence of institutional participation limits liquidity, increases volatility, and suggests that sophisticated investors have identified concerns that outweigh any potential upside.

The remaining 35.99% shareholding classified as "Non-Institutional" comprises retail and non-institutional investors. The complete lack of change in shareholding across all categories over five quarters suggests limited trading activity and poor market interest in the stock. This static shareholding pattern, combined with low trading volumes (just 1,532 shares traded on November 18, 2025), indicates a highly illiquid stock where even small trades can cause significant price movements.

Stock Performance: Severe Underperformance Across All Timeframes

Sri Ramakrishna Mills' stock performance has been deeply disappointing over the past year, with the stock declining 36.98% compared to the Sensex's 9.48% gain, resulting in a negative alpha of -46.46 percentage points. The year-to-date (YTD) performance is similarly weak, with the stock down 26.94% against the Sensex's 8.36% gain, yielding a negative alpha of -35.30 percentage points. This severe underperformance reflects deteriorating investor confidence as the company's financial troubles have mounted.

The recent price action shows some short-term recovery, with the stock gaining 3.00% over the past week compared to the Sensex's 0.96% gain. However, this minor bounce does little to offset the broader downtrend, with the stock declining 2.63% over the past month and 1.46% over the past three months. The stock's current price of ₹48.43 trades below all key moving averages—5-day (₹48.47), 20-day (₹50.01), 50-day (₹50.31), 100-day (₹52.70), and 200-day (₹50.26)—indicating persistent selling pressure across multiple timeframes.

The longer-term performance picture is more complex. Over two years, the stock has gained 58.53% compared to the Sensex's 28.69% gain, yielding a positive alpha of +29.84 percentage points. Similarly, the three-year return of 72.96% significantly outpaced the Sensex's 37.31% gain. However, these historical gains appear to reflect a different operating environment and have been significantly eroded in recent quarters as the business fundamentals have deteriorated.

From a risk perspective, the stock exhibits high volatility with a beta of 1.50, indicating 50% greater price swings than the broader market. The one-year volatility of 56.64% is exceptionally high compared to the Sensex's 12.26% volatility. The risk-adjusted return of -0.65 for the past year places the stock in the "HIGH RISK LOW RETURN" category—the worst possible quadrant for investors. The negative Sharpe ratio confirms that investors have not been compensated for the elevated risk they have assumed.

Technical Analysis: Bearish Trend with Limited Support

From a technical perspective, Sri Ramakrishna Mills is firmly entrenched in a bearish trend, with the trend officially changing to "Bearish" on November 17, 2025, at ₹47.99 from the previous "Mildly Bearish" classification. Multiple technical indicators confirm the negative momentum. The MACD (Moving Average Convergence Divergence) shows bearish signals on both weekly and monthly timeframes, while Bollinger Bands indicate mildly bearish to bearish conditions. The KST (Know Sure Thing) indicator similarly reflects bearish to mildly bearish readings across timeframes.

The stock's position relative to key moving averages reinforces the bearish technical picture. Trading at ₹48.43, the stock sits below all major moving averages, including the critical 200-day moving average at ₹50.26. The immediate resistance level is at ₹50.01 (20-day moving average area), with major resistance at ₹52.70 (100-day moving average). The 52-week high of ₹78.70 represents a distant resistance level, 62.5% above current levels.

On the downside, immediate support exists at the 52-week low of ₹39.50, approximately 18.4% below current levels. The stock's recent low of ₹45.00 on November 18, 2025, suggests some near-term support in the ₹45-46 zone. However, with limited institutional buying and weak fundamentals, technical support levels may prove fragile if negative news flow continues.

Investment Thesis: Multiple Red Flags Warrant Caution

The investment case for Sri Ramakrishna Mills is severely compromised by multiple concurrent challenges. The company's Mojo score of just 17 out of 100 places it firmly in "Strong Sell" territory, reflecting the confluence of negative factors across valuation, quality, financial trends, and technical indicators.

The quality assessment of "Below Average" reflects long-term fundamental weaknesses. While the company has achieved respectable sales growth of 29.59% over five years, EBIT growth has contracted sharply at -168.10% over the same period, indicating margin compression. The weak EBIT-to-interest coverage of just 1.70 times leaves minimal buffer for earnings volatility, whilst the elevated debt-to-EBITDA ratio of 6.54 times signals unsustainable leverage. The average ROCE of 14.24% and ROE of 14.81%, whilst appearing reasonable, mask recent deterioration, with the latest ROE turning negative at -12.35%.

The financial trend classification of "Negative" captures the recent operational deterioration. Net sales in Q2 FY26 fell 22.70% below the previous four-quarter average, whilst operating profit turned negative at its lowest level on record. The nine-month profit for FY26 has declined 25.13% year-on-year, and earnings per share (EPS) for the quarter hit a record low of ₹-1.31. These metrics collectively point to a business under severe stress.

Outlook: Critical Monitoring Points for Investors

The outlook for Sri Ramakrishna Mills remains challenging, with the company needing to demonstrate a swift return to operating profitability to avoid further deterioration in its financial position. The combination of operating losses, high debt burden, and weak cash generation creates a precarious situation that requires immediate management attention.

Investors should closely monitor the company's Q3 FY26 results for signs of stabilisation or further deterioration. Key metrics to watch include revenue trends, operating margin recovery, interest coverage, and working capital management. Any improvement in these areas could provide early signals of a turnaround, whilst continued weakness would reinforce the negative outlook.