STEL Holdings Q2 FY26: Strong Quarterly Profit Masks Structural Concerns

The stock closed at ₹419.00 on October 31, 2025, gaining 3.01% on the day but remaining 24.48% below its 52-week high of ₹554.80. The company's highly seasonal business model—evident from the wild quarterly fluctuations—combined with weak return ratios and expensive valuations continue to raise questions about long-term value creation for shareholders.

Financial Performance: Extreme Seasonality Dominates

STEL Holdings' quarterly results reveal an extraordinary pattern of seasonality that makes meaningful quarter-to-quarter comparisons challenging. Net sales in Q2 FY26 stood at ₹9.07 crores, representing a staggering 1829.79% increase from Q1 FY26's ₹0.47 crores. This dramatic swing is characteristic of the company's business model, which appears heavily concentrated in specific quarters.

On a year-on-year basis, Q2 FY26 sales grew a more modest 16.58% from ₹7.78 crores in Q2 FY25. The operating profit margin excluding other income remained exceptionally high at 98.02%, virtually unchanged from 98.33% in the corresponding quarter last year. Net profit margins compressed marginally to 73.32% from 73.52%, primarily due to a slightly higher tax rate of 26.79% compared to 25.13% a year ago.

For the half-year period H1 FY26 (April-September 2025), the company generated net sales of ₹9.54 crores and net profit of ₹7.00 crores, compared to ₹8.17 crores and ₹5.81 crores respectively in H1 FY25. This represents growth of 16.77% in sales and 20.48% in profit on a like-for-like basis, suggesting underlying business momentum despite the quarterly volatility.

Operational Challenges: Weak Return Ratios Signal Value Destruction

Despite impressive profit margins, STEL Holdings faces a fundamental challenge: its capital is not working hard enough. The company's five-year average return on equity stands at a meagre 1.28%, whilst return on capital employed averages just 1.73%. These figures are particularly concerning for an NBFC, where efficient capital deployment is paramount.

The latest annual data shows ROE at 0.91% and ROCE at 1.23%—both well below acceptable thresholds for value creation. This suggests that despite generating healthy absolute profits, the company's substantial shareholder funds of ₹1,753.15 crores (as of March 2025) are significantly underutilised. The sales-to-capital-employed ratio of just 0.02x underscores the capital-intensive nature of the business relative to revenue generation.

On the positive side, STEL Holdings maintains a fortress balance sheet with zero debt and negative net debt-to-equity of -0.02, making it essentially a net cash company. Current assets of ₹1,911.75 crores dwarf current liabilities of ₹293.49 crores, providing substantial liquidity. The company's fixed assets remain minimal at ₹0.75 crores, consistent with its asset-light operating model.

Growth Trajectory: Single-Digit Expansion Over Five Years

STEL Holdings' long-term growth profile reveals a company expanding at a pedestrian pace. Over the past five years, net sales have grown at a compound annual rate of just 6.28%, whilst operating profit (EBIT) has expanded marginally faster at 6.62% annually. These growth rates barely keep pace with inflation and fall well short of what investors typically expect from mid-cap or small-cap stocks.

Annual revenue progression shows the company generated ₹21.00 crores in FY25, up 16.70% from ₹18.00 crores in FY24. Net profit reached ₹15.00 crores in FY25 compared to ₹13.00 crores in FY24, representing a 15.38% increase. However, this recent acceleration follows years of inconsistent performance, with revenue having contracted by 15.00% in FY23.

Peer Comparison: Premium Valuation Despite Inferior Metrics

When benchmarked against NBFC peers, STEL Holdings' positioning raises eyebrows. The company trades at a price-to-earnings ratio of 46.46x—significantly higher than the sector average and most direct competitors. This valuation appears difficult to justify given the company's inferior operational metrics.

STEL Holdings' ROE of 1.28% compares unfavourably with peers like A.K.Capital Services (10.17%) and Laxmi India Finance (12.56%). Even VLS Finance, trading at a lower P/E of 31.43x, delivers ROE of 7.37%—nearly six times higher than STEL. The only silver lining is the company's conservative price-to-book ratio of 0.43x, suggesting the market recognises the poor capital efficiency to some degree.

Valuation Analysis: Expensive Despite Book Value Discount

STEL Holdings presents a valuation paradox. Whilst the stock trades at just 0.43x book value—seemingly attractive—the P/E ratio of 46.46x and PEG ratio of 2.04x paint a different picture. The company's enterprise value-to-EBITDA multiple of 33.83x and EV-to-sales ratio of 32.86x both indicate stretched valuations relative to operational performance.

The stock's classification as "Very Expensive" by quality assessment frameworks appears justified. With earnings growing at a five-year CAGR of approximately 6-7%, a P/E multiple approaching 50x implies investors are paying roughly 7-8 times the growth rate—well above the traditional PEG ratio threshold of 1.0x for fair value.

The current market price of ₹419.00 represents a 24.48% decline from the 52-week high of ₹554.80, but remains 35.07% above the 52-week low of ₹310.20. Given the company's structural challenges and weak return profile, further downside appears more likely than a sustained rally back to previous highs.

Shareholding Pattern: Promoter Consolidation Continues

Promoter holding in STEL Holdings has shown a gradual upward trend, increasing from 69.15% in September 2024 to 70.83% in September 2025. The most recent quarter saw a 1.36 percentage point increase, suggesting continued confidence from the controlling shareholders—primarily the RPG group entities led by Rainbow Investments Limited (24.50%) and Instant Holdings Limited (8.70%).

Institutional participation remains minimal, with total institutional holdings at just 0.18%. Foreign institutional investors have virtually exited the stock, holding a negligible 0.01% as of September 2025, down from 0.13% a year ago. Mutual fund and insurance company holdings have remained stable at 0.04% and 0.12% respectively. The lack of institutional interest reflects concerns about the company's growth prospects and capital efficiency.

Positively, there is no promoter pledging, indicating financial stability at the ownership level. The high promoter holding of over 70% provides management continuity but also limits free float and potentially impacts liquidity.

Stock Performance: Significant Long-Term Gains Mask Recent Weakness

STEL Holdings' stock performance presents a tale of two timelines. Over longer periods, returns have been spectacular—the stock has delivered 1388.45% returns over 10 years and 683.91% over five years, massively outperforming the Sensex's 217.07% and 113.36% returns respectively during these periods. This translates to an alpha of +1171.38 percentage points over 10 years.

However, recent performance tells a more concerning story. The stock has declined 18.65% over the past year, underperforming the Sensex by 25.11 percentage points. Year-to-date returns of just 2.83% lag the Sensex's 8.17% gain by 5.34 percentage points. This recent underperformance coincides with the market's growing recognition of the company's structural challenges.

The stock's beta of 1.50 indicates high volatility—it tends to move 50% more than the broader market. With an annualised volatility of 41.92%, STEL Holdings falls into the "high risk, low return" category based on one-year risk-adjusted metrics. The negative Sharpe ratio underscores that investors are not being adequately compensated for the volatility they're bearing.

Technical Outlook: Mildly Bearish Momentum Prevails

From a technical perspective, STEL Holdings entered a "Mildly Bearish" trend on October 30, 2025, at ₹406.35, transitioning from a sideways pattern. The stock is currently trading below all major moving averages—5-day (₹411.91), 20-day (₹412.66), 50-day (₹448.15), 100-day (₹431.71), and 200-day (₹413.59)—indicating weak momentum across multiple timeframes.

Technical indicators present a mixed picture. The MACD shows bearish signals on both weekly and monthly charts, whilst Bollinger Bands indicate bearish positioning. The KST oscillator reflects mildly bearish sentiment across timeframes. However, the Dow Theory shows mildly bullish signals on the weekly chart, and OBV (On-Balance Volume) suggests bullish accumulation on the monthly timeframe, creating conflicting signals.

Immediate support lies at the 52-week low of ₹310.20, approximately 26% below current levels. Resistance is clustered around the ₹412-₹432 zone, encompassing the 20-day and 100-day moving averages. A decisive break above ₹432 would be needed to improve the technical outlook, whilst a breach of ₹400 could trigger further selling pressure towards the ₹350-₹360 support zone.

Investment Thesis: Quality Concerns Outweigh Financial Strength

STEL Holdings' investment thesis rests on shaky foundations despite some positive attributes. The company benefits from zero debt, strong promoter backing through the RPG group, and a track record of consistent profitability. The fortress balance sheet provides downside protection and financial flexibility.

However, these positives are overshadowed by fundamental weaknesses. The company's ROE of just 1.28% and ROCE of 1.73% indicate severe capital inefficiency. Management's inability to generate acceptable returns on the ₹1,753 crores of shareholder capital represents a critical failure of value creation. The business model's extreme seasonality adds operational unpredictability, whilst single-digit growth rates offer limited upside potential.

Outlook: What to Monitor Going Forward

For investors considering STEL Holdings, several key metrics and developments warrant close monitoring. The company's ability to improve capital efficiency stands as the most critical factor—any meaningful improvement in ROE towards double-digit levels would transform the investment case. Similarly, evidence of management taking steps to optimise the massive investment portfolio could signal a strategic shift.

The upcoming quarters will be crucial in determining whether the Q2 FY26 performance represents genuine momentum or merely seasonal strength. Investors should particularly watch for consistency in quarterly results and any management commentary on capital allocation strategy. The technical picture requires improvement, with a sustained move above ₹432 needed to shift sentiment positively.