Sudarshan Chemical Q2 FY26: Profit Plunges 61% as Margin Pressures Intensify

Despite impressive revenue growth of 242.97% year-on-year to ₹2,387.40 crores, the company's profitability metrics tell a concerning story. Operating margins contracted sharply to 5.54% from 13.57% in the year-ago quarter, whilst PAT margins collapsed to just 0.81% from 4.30%. The quarter-on-quarter performance was equally troubling, with net profit declining 75.21% from ₹47.20 crores in Q1 FY26, raising questions about the sustainability of the company's recent acquisition-driven growth strategy.

The quarter's performance reflects the challenges of integrating large acquisitions whilst maintaining operational efficiency. The company's interest burden surged 170.93% on a half-yearly basis to ₹87.70 crores, driven by elevated debt levels following recent inorganic expansion. This financial leverage, combined with deteriorating margins, has pushed the company's return metrics to concerning lows, with ROE at just 2.00% and ROCE at 5.40% for the latest period.

Quarterly Trend: A Pattern of Margin Erosion

The quarterly trend reveals a systematic deterioration in profitability despite revenue expansion. Operating margins have declined consistently from 15.58% in March 2024 to 5.54% in September 2025, indicating structural challenges in cost management and pricing power. This margin compression has accelerated in recent quarters, with the company struggling to pass on rising input costs to customers in a competitive global pigments market.

Financial Performance: Growth Without Profitability

In Q2 FY26, Sudarshan Chemical reported net sales of ₹2,387.40 crores, representing a remarkable 242.97% year-on-year increase, though this growth primarily reflects the consolidation of acquired businesses rather than organic expansion. On a quarter-on-quarter basis, revenue declined 4.77% from ₹2,506.90 crores in Q1 FY26, suggesting demand headwinds in the domestic and export markets.

The company's operating profit (PBDIT excluding other income) stood at ₹132.20 crores, yielding an operating margin of just 5.54%, down sharply from 13.57% in the year-ago quarter. This 808 basis point margin contraction reflects elevated raw material costs, integration expenses from recent acquisitions, and pricing pressures in key export markets. The gross profit margin similarly compressed to 4.92% from 11.41%, indicating challenges at the fundamental level of operations.

Employee costs surged to ₹415.70 crores in Q2 FY26 from ₹56.77 crores in the corresponding quarter last year, largely due to the expanded workforce from acquisitions. Interest expenses climbed to ₹43.60 crores, up from ₹8.88 crores year-on-year, reflecting the company's increased debt burden. The operating profit to interest coverage ratio deteriorated to 3.03 times, the lowest in recent quarters, raising concerns about debt servicing capability.

Most concerning is the quality of earnings. Non-operating income of ₹28.80 crores constituted 97.63% of profit before tax, indicating that the company's core operations generated minimal profitability. The tax rate of 34.58% in Q2 FY26 was elevated compared to 30.16% in the year-ago quarter, further pressuring net profit. On a half-yearly basis for H1 FY26, the company reported consolidated net profit of ₹58.90 crores on revenue of ₹4,894.30 crores, representing a PAT margin of just 1.20%.

Operational Challenges: Return Metrics Signal Distress

The company's return on equity (ROE) has collapsed to 2.00% for the latest period, down dramatically from an average of 10.36% over the past five years. This represents one of the weakest ROE performances in the company's recent history, indicating that the business is generating minimal returns on shareholder capital. The decline stems from both compressed profitability and an expanded equity base following the recent rights issue.

Return on capital employed (ROCE) similarly deteriorated to 5.40% from an average of 10.57%, reflecting poor returns on the total capital deployed in the business. With a weighted average cost of capital likely in the 10-12% range for a chemical company, Sudarshan is currently destroying value rather than creating it. The company's sales to capital employed ratio of 1.32 times suggests moderate asset turnover, but this is insufficient to compensate for the low operating margins.

The balance sheet reveals the source of pressure. Long-term debt surged to ₹1,631.89 crores as of March 2025 from ₹193.31 crores a year earlier, driven by acquisition financing. The debt-to-equity ratio climbed to 0.72 times on a half-yearly basis, the highest in recent periods. Whilst the average debt-to-EBITDA ratio of 2.97 times remains manageable, the deteriorating EBITDA generation raises concerns about future debt servicing.

Working capital management has also weakened, with cash flow from operations declining to just ₹37.04 crores for FY25, the lowest in recent years. This reflects increased working capital requirements from the expanded business, with trade payables rising to ₹1,398.45 crores. The company's cash and cash equivalents stood at ₹1,104.00 crores as of March 2025, providing some cushion, but this was largely raised through the rights issue and debt rather than operational cash generation.

The Margin Dynamics: A Structural Challenge

The systematic margin compression across all profitability metrics points to structural challenges rather than temporary headwinds. Operating margins have declined from 15.58% in March 2024 to 5.54% in September 2025, a deterioration of over 1,000 basis points in just 18 months. This suggests fundamental issues in cost structure, pricing power, or product mix.

Several factors appear to be driving this margin pressure. First, the acquired businesses likely operate at lower margins than Sudarshan's legacy operations, diluting overall profitability. Second, elevated raw material costs in the pigments industry have squeezed margins across the sector. Third, intense competition in key export markets has limited pricing flexibility, forcing the company to absorb cost increases.

The company's gross profit margin of 4.92% in Q2 FY26, down from 11.41% year-on-year, indicates that the pressure begins at the fundamental level of production. This suggests either unfavourable raw material cost movements, operational inefficiencies, or a shift towards lower-margin product categories. The employee cost ratio has also risen sharply, though this partly reflects the expanded workforce from acquisitions.

Industry Leadership: Valuation Premium Without Performance

Sudarshan Chemical trades at a significant valuation premium to its peers, with a P/E ratio of 93.67 times compared to the peer average of approximately 19 times. This represents a premium of nearly 400%, which appears unjustified given the company's deteriorating profitability and return metrics. The stock's price-to-book ratio of 2.35 times is also elevated compared to most peers, though in line with Sh. Pushkar Chemicals.

The company's ROE of 10.36% (five-year average) is marginally better than some peers but has collapsed to 2.00% in the latest period, making it one of the weakest performers in the group. The debt-to-equity ratio of 0.16 shown in the table reflects historical averages, but the latest half-yearly figure of 0.72 times indicates significantly higher leverage than most peers. The dividend yield of 0.44% is among the lowest in the peer group, offering minimal income support.

As the largest player in India's dyes and pigments sector with a market capitalisation of ₹8,482.82 crores, Sudarshan commands a leadership position. However, this scale advantage has not translated into superior profitability or returns. The company's operating margin of 5.54% in Q2 FY26 likely lags most profitable peers, raising questions about competitive positioning and operational efficiency.

Valuation Analysis: Expensive at Any Multiple

At the current price of ₹1,079.15, Sudarshan Chemical trades at a trailing P/E ratio of 94 times, representing a significant premium to the industry average P/E of 35 times. This valuation appears difficult to justify given the company's current profitability trajectory and return metrics. The stock has corrected 32.72% from its 52-week high of ₹1,604.00 but remains 35.61% above its 52-week low of ₹795.75.

The company's EV/EBITDA multiple of 17.52 times appears elevated for a business generating low single-digit operating margins and weak returns on capital. The EV/Sales ratio of 1.66 times may seem reasonable for a specialty chemicals company, but the lack of profitability undermines this metric's relevance. The price-to-book ratio of 2.35 times implies the market values the company's assets at more than double their book value, despite ROE of just 2.00%.

The valuation grade has oscillated between "Expensive" and "Fair" in recent months, currently sitting at "Expensive." Given the deteriorating fundamentals, even the "Fair" classification appears generous. A more appropriate valuation would likely require significant margin improvement and return metric recovery. Based on peer multiples and the company's current profitability, a fair value estimate would be in the range of ₹750-850, implying 25-30% downside from current levels.

Shareholding Pattern: Promoter Exodus Raises Red Flags

The most alarming trend in Sudarshan Chemical's shareholding pattern is the systematic reduction in promoter holding, which has plummeted from 27.55% in December 2024 to just 8.19% in September 2025. This represents a reduction of over 19 percentage points in less than a year, with an 8.21 percentage point decline in Q2 FY26 alone. Such aggressive promoter selling typically signals concerns about the company's future prospects or financial stress.

The promoter group, led by the Rathi family, now holds a minimal stake in the company they founded. Key promoters include Rajesh Balkrishna Rathi (5.15%), Pradeep Ramwilas Rathi (4.36%), and Rahul Pradeep Rathi (3.85%). The sharp reduction in stake suggests either a need to raise personal funds or a lack of confidence in the company's near-term trajectory. For investors, this represents a significant red flag, as promoters typically have the best understanding of business prospects.

On a more positive note, mutual fund holdings have increased to 22.60% from 17.91% over the past year, indicating some institutional confidence. However, the 0.97 percentage point increase in Q2 FY26 is modest and may reflect passive index inclusion rather than active conviction. Foreign institutional investor (FII) holdings remain stable at 8.54%, whilst insurance company holdings have declined to a negligible 0.01%. The non-institutional category has surged to 59.08%, likely absorbing shares sold by promoters.

Stock Performance: Volatility Without Direction

Sudarshan Chemical's stock performance reveals a tale of two periods. Over longer timeframes, the stock has delivered exceptional returns, with 177.85% gains over three years and 129.56% over two years, significantly outperforming the Sensex. However, recent performance has deteriorated sharply, with the stock declining 25.30% over the past three months compared to a 5.07% gain in the Sensex, resulting in negative alpha of -30.37 percentage points.

The stock's one-year return of 18.17% remains positive but has underperformed the broader Dyes and Pigments sector return of 22.53%. The year-to-date performance shows a decline of 4.25% compared to the Sensex's 8.30% gain. This recent underperformance coincides with the deteriorating financial metrics and aggressive promoter selling, suggesting the market is repricing the stock based on fundamental concerns.

Technical indicators paint a bearish picture. The stock trades below all key moving averages—5-day (₹1,062.88), 20-day (₹1,168.69), 50-day (₹1,306.84), 100-day (₹1,319.92), and 200-day (₹1,176.65)—indicating a clear downtrend. The overall technical trend is classified as "Mildly Bearish," having changed from "Sideways" on November 7, 2025. With a beta of 1.35, the stock exhibits higher volatility than the market, making it a high-risk proposition in the current environment.

Investment Thesis: Multiple Red Flags Demand Caution

The investment case for Sudarshan Chemical has deteriorated significantly across all key parameters. The company's proprietary Mojo score stands at just 31 out of 100, firmly in "SELL" territory (down from 44 in September 2025). The valuation remains "Expensive" despite the recent correction, with quality graded as "Average" and both financial and technical trends pointing negative or bearish.

The near-term drivers are decidedly negative. The quarterly financial trend is classified as "Negative," driven by collapsing profitability, elevated interest costs, and weak operating cash flow. Technical indicators are "Mildly Bearish," with the stock trading below all moving averages and showing weak momentum. The combination of fundamental deterioration and technical weakness suggests further downside risk.

Outlook: What Lies Ahead

The path forward for Sudarshan Chemical depends critically on management's ability to integrate recent acquisitions and restore profitability. The company needs to demonstrate margin improvement, cash generation, and return metric recovery to justify even a reduced valuation. The aggressive promoter selling suggests the path to recovery may be longer and more challenging than the market anticipated when the stock traded at ₹1,604 earlier this year.