The company's net sales reached a record ₹162.25 crores in Q3 FY26, registering sequential growth of 5.97% and year-on-year expansion of 19.67%. However, this top-line momentum failed to translate into bottom-line strength, as operating margins contracted sharply to 11.38% from 13.76% in the previous quarter and 17.83% in the year-ago period. The profit after tax margin compressed to 5.17%, down from 9.22% in Q2 FY26 and 10.21% in Q3 FY25, highlighting significant operational challenges.
The quarter witnessed a concerning divergence between revenue expansion and margin compression, with employee costs rising to ₹53.37 crores (representing 32.9% of sales) from ₹51.20 crores in Q2 FY26. This cost escalation, combined with higher depreciation charges of ₹4.37 crores (up from ₹2.19 crores sequentially), significantly eroded profitability despite the company achieving its highest-ever quarterly revenue.
| Quarter | Net Sales (₹ Cr) | QoQ Growth | Net Profit (₹ Cr) | QoQ Growth | Operating Margin | PAT Margin |
|---|---|---|---|---|---|---|
| Dec'25 | 162.25 | +5.97% | 8.89 | -41.13% | 11.38% | 5.17% |
| Sep'25 | 153.11 | +12.95% | 15.10 | +60.30% | 13.76% | 9.22% |
| Jun'25 | 135.56 | -11.51% | 9.42 | -38.11% | 12.06% | 7.20% |
| Mar'25 | 153.19 | +12.99% | 15.22 | +15.65% | 18.42% | 10.82% |
| Dec'24 | 135.58 | +1.60% | 13.16 | +10.50% | 17.83% | 10.21% |
| Sep'24 | 133.44 | +2.23% | 11.91 | +24.06% | 12.65% | 9.20% |
| Jun'24 | 130.53 | — | 9.60 | — | 14.11% | 7.36% |
Financial Performance: Margin Erosion Overshadows Revenue Momentum
Thejo Engineering's Q3 FY26 results present a troubling narrative of margin deterioration despite achieving record quarterly revenues. The company's net sales of ₹162.25 crores represented the highest quarterly turnover in its history, yet this achievement was completely overshadowed by a precipitous decline in profitability metrics across all levels of the income statement.
Operating profit excluding other income plunged to ₹18.46 crores from ₹21.07 crores in Q2 FY26, a sequential decline of 12.39%. More concerning is the year-on-year comparison, where operating profit contracted by 23.66% despite revenue growing by nearly 20%. This stark divergence indicates severe cost pressures and operational inefficiencies that have emerged in the current quarter.
The gross profit margin stood at 9.94% in Q3 FY26, down from 14.49% in the previous quarter and 16.93% in the year-ago period. This 450-basis-point sequential contraction and 700-basis-point year-on-year decline signals fundamental challenges in pricing power or raw material cost management. The company's ability to maintain competitive positioning whilst protecting margins appears increasingly strained.
Employee costs escalated to ₹53.37 crores in Q3 FY26, up from ₹51.20 crores in Q2 FY26 and ₹41.88 crores in Q3 FY25, representing a year-on-year surge of 27.43%. As a percentage of sales, employee costs now consume 32.9% of revenues, up from 33.4% in Q2 FY26 and 30.9% in Q3 FY25. This rising cost structure without commensurate revenue growth per employee raises questions about operational efficiency and workforce productivity.
Depreciation charges showed unusual volatility, jumping to ₹4.37 crores in Q3 FY26 from ₹2.19 crores in Q2 FY26, though remaining below the ₹4.76 crores recorded in Q3 FY25. This fluctuation suggests potential changes in asset capitalisation policies or accelerated depreciation on recent capital expenditures. The tax rate of 28.60% in Q3 FY26 increased from 29.41% in Q2 FY26, providing minimal relief to the compressed bottom line.
Operational Challenges: Declining Returns on Capital
Beyond the quarterly volatility, Thejo Engineering faces structural concerns regarding capital efficiency. The company's return on equity (ROE) of 17.76% on an average basis, whilst respectable in absolute terms, masks a deteriorating trend. The return on capital employed (ROCE) stood at 27.79% on average, but the half-yearly ROCE for H1 FY26 fell to 21.72%, marking the lowest level in recent periods. This decline in ROCE signals that the company is generating diminishing returns on the capital deployed in its business operations.
The balance sheet reveals a company with modest leverage and reasonable liquidity. Shareholder funds stood at ₹297.78 crores as of March 2025, up from ₹250.28 crores in the previous year. Long-term debt declined to ₹1.30 crores from ₹7.98 crores, reflecting deleveraging efforts. The company maintains a net cash position with an average net debt-to-equity ratio of -0.12, indicating more cash than debt on the books. Current assets of ₹305.84 crores comfortably exceed current liabilities of ₹98.14 crores, providing a current ratio of approximately 3.1 times.
Margin Pressure Alert
Operating margins have contracted by 645 basis points year-on-year to 11.38%, the lowest level in seven quarters. Employee costs now consume 32.9% of revenues, up from 30.9% a year ago. The debtors turnover ratio reached 4.21 times in H1 FY26, the highest level, suggesting faster collections but potentially indicating aggressive credit terms to drive revenue growth. The combination of margin compression and elevated working capital intensity raises concerns about the sustainability of the current growth trajectory.
Fixed assets stood at ₹79.25 crores as of March 2025, down from ₹82.30 crores in the previous year, indicating limited capacity expansion despite revenue growth. The sales-to-capital-employed ratio of 1.81 times suggests moderate asset intensity, though this metric has remained relatively stable over recent years. The company's ability to scale operations without proportionate capital investment will be crucial for improving returns going forward.
Industry Context: Underperforming the Manufacturing Sector
Thejo Engineering operates in the industrial manufacturing sector, which has faced headwinds in recent quarters. The company's stock has underperformed both the broader market and its sector peers over the past year, delivering returns of 3.38% compared to the Sensex's 9.13% gain. More tellingly, whilst the industrial manufacturing sector declined by 6.71% over the past year, Thejo's relative outperformance of 10.09 percentage points provides scant comfort given the absolute underperformance against broader indices.
Over longer time horizons, the picture becomes more nuanced. The stock has delivered returns of 36.28% over three years, marginally trailing the Sensex's 39.03% gain. However, over a five-year period, Thejo has significantly lagged, returning 27.88% against the Sensex's 64.43% appreciation. This sustained underperformance reflects concerns about the company's growth trajectory and profitability sustainability.
The company's five-year sales growth of 6.14% annually and operating profit growth of 15.68% annually highlight the challenge: whilst operating profit has grown at a healthy pace, revenue growth remains anaemic. This suggests that past margin expansion drove profitability, a trend that has now reversed sharply in recent quarters. The current margin compression therefore represents not just a cyclical challenge but potentially a structural reset to more normalised profitability levels.
| Period | Stock Return | Sensex Return | Alpha | Sector Return |
|---|---|---|---|---|
| 1 Year | +3.38% | +9.13% | -5.75% | -6.71% |
| 2 Years | -5.87% | +17.84% | -23.71% | — |
| 3 Years | +36.28% | +39.03% | -2.75% | — |
| 5 Years | +27.88% | +64.43% | -36.55% | — |
| 10 Years | +780.35% | +255.10% | +525.25% | — |
Peer Comparison: Premium Valuation Despite Weaker Fundamentals
When benchmarked against peers in the industrial manufacturing space, Thejo Engineering presents a mixed picture. The company's ROE of 17.76% stands above the peer average of approximately 10%, indicating superior capital efficiency relative to competitors. However, this advantage is offset by concerns about sustainability given the recent margin pressures.
From a valuation perspective, Thejo trades at a price-to-earnings ratio of 35.76 times trailing twelve-month earnings, below the peer average of approximately 43 times but still elevated in absolute terms. The price-to-book ratio of 5.86 times compares reasonably with the peer average of 5.9 times, suggesting the market is pricing in similar growth expectations across the sector.
| Company | P/E (TTM) | P/BV | ROE (%) | Div Yield (%) | Debt/Equity |
|---|---|---|---|---|---|
| Thejo Engineering | 35.76 | 5.86 | 17.76 | 0.29 | -0.12 |
| Hind Rectifiers | 51.13 | 12.80 | 13.59 | 0.14 | 1.05 |
| Honda India | 30.27 | 2.66 | 10.49 | 5.81 | -0.63 |
| Windsor Machines | NA (Loss Making) | 3.14 | 1.84 | 0.00 | 0.02 |
| Indian Hume Pipe | 19.82 | 1.50 | 7.98 | 1.48 | -0.12 |
| Aimtron | 69.41 | 9.22 | 16.60 | 0.00 | -0.14 |
The dividend yield of 0.29% remains amongst the lowest in the peer group, with only Hind Rectifiers offering a comparable yield. Honda India's 5.81% dividend yield highlights the income opportunity cost of holding Thejo shares. The company's dividend payout ratio of 5.80% suggests significant retained earnings, though the recent profit decline raises questions about the sustainability of even this modest payout.
Thejo's net cash position (negative debt-to-equity of -0.12) provides a competitive advantage over more leveraged peers like Hind Rectifiers (debt-to-equity of 1.05). This balance sheet strength offers flexibility for future investments or acquisitions, though the company must first address its margin challenges before pursuing growth initiatives.
Valuation Analysis: Premium Multiples Unjustified by Current Performance
At the current market price of ₹1,751.90, Thejo Engineering trades at a price-to-earnings ratio of 35.76 times trailing earnings, a valuation that appears expensive given the deteriorating financial trends. The company's PEG ratio of 11.86 times suggests that the market is pricing in growth expectations that seem increasingly difficult to achieve given the 6.14% five-year sales growth rate.
The price-to-book ratio of 5.86 times implies that investors are paying nearly six times the company's net asset value, a premium typically reserved for businesses with sustainable competitive advantages and consistent profitability. However, Thejo's recent performance raises questions about whether such a premium is warranted. The stock has fallen 29.52% from its 52-week high of ₹2,485.80, suggesting the market is beginning to reassess these valuations.
The enterprise value-to-EBITDA multiple of 20.65 times and EV-to-EBIT multiple of 25.16 times further reinforce the expensive valuation narrative. These multiples are typically associated with high-growth businesses or those with significant competitive moats, neither of which appears to characterise Thejo's current situation. The valuation grade has fluctuated between "Expensive" and "Very Expensive" over the past year, currently sitting at "Expensive" as of August 2025.
Shareholding Pattern: Stable Promoter Holding, Limited Institutional Interest
The shareholding pattern reveals a promoter-dominated structure with stable ownership but limited institutional participation. Promoter holding stood at 53.61% as of December 2025, down marginally by 0.01 percentage points from the previous quarter. This minimal change suggests promoter confidence remains intact despite the recent operational challenges.
| Shareholder Category | Dec'25 | Sep'25 | Jun'25 | QoQ Change |
|---|---|---|---|---|
| Promoter Holding | 53.61% | 53.62% | 53.62% | -0.01% |
| FII Holding | 0.79% | 0.66% | 0.65% | +0.13% |
| Mutual Fund Holding | 0.56% | 1.97% | 1.89% | -1.41% |
| Other DII Holdings | 2.58% | 1.37% | 1.31% | +1.21% |
| Non-Institutional | 42.46% | 42.38% | 42.53% | +0.08% |
More concerning is the sharp decline in mutual fund holdings, which fell from 1.97% in September 2025 to just 0.56% in December 2025, a reduction of 1.41 percentage points. This exodus of institutional investors coincides with the deteriorating quarterly results, suggesting that sophisticated investors are losing confidence in the company's near-term prospects. The total institutional holding stands at just 3.93%, indicating limited coverage from major investment houses.
Foreign institutional investor (FII) holding increased marginally to 0.79% from 0.66%, though this remains negligible in absolute terms. Other domestic institutional investor (DII) holdings rose to 2.58% from 1.37%, partially offsetting the mutual fund redemptions. The non-institutional shareholding of 42.46% suggests significant retail investor participation, which can contribute to higher volatility during periods of weak performance.
Technical Outlook: Mildly Bearish Trend with Multiple Resistance Levels
From a technical perspective, Thejo Engineering's stock exhibits a "Mildly Bearish" trend as of February 2026, having transitioned from a "Bearish" classification in early January. The stock trades below all key moving averages, with the 200-day moving average at ₹1,865.82 representing strong resistance approximately 6.5% above current levels.
The stock's beta of 1.35 indicates higher volatility than the broader market, with a one-year volatility of 39.08% significantly exceeding the Sensex's 11.54%. This elevated volatility, combined with a Sharpe ratio indicating "High Risk Low Return" characteristics, suggests that the stock presents an unfavourable risk-reward profile for investors at current levels.
Key technical levels include immediate support at the 52-week low of ₹1,446.00, approximately 17.5% below current levels. Resistance levels are stacked at ₹1,780.94 (20-day moving average), ₹1,750.89 (100-day moving average), and ₹1,865.82 (200-day moving average). The stock would need to decisively break above these moving averages to signal a meaningful trend reversal.
Investment Thesis: Quality Concerns Override Balance Sheet Strength
Thejo Engineering's investment case rests on several pillars, some supportive and others deeply concerning. The company maintains a strong balance sheet with zero net debt, providing financial flexibility. The average ROCE of 27.79% and ROE of 17.76% indicate historically efficient capital deployment. Zero promoter pledging and stable promoter holding suggest alignment with minority shareholders.
However, these positives are increasingly overshadowed by deteriorating operational metrics. The company's quality grade of "Good" masks recent performance challenges, with the financial trend turning "Negative" as of December 2025. The proprietary Mojo score of 38 out of 100 places the stock in "Sell" territory, down from "Hold" in October 2025. The combination of expensive valuation (PEG ratio of 11.86), bearish technicals, and negative financial trends creates a challenging environment for investors.
KEY STRENGTHS
- Strong Balance Sheet: Net cash position with debt-to-equity of -0.12 provides financial flexibility
- Robust ROCE: Average return on capital employed of 27.79% demonstrates efficient capital utilisation historically
- Zero Promoter Pledging: Entire 53.61% promoter stake remains unpledged, indicating confidence
- Record Revenue: Q3 FY26 sales of ₹162.25 crores represent highest quarterly turnover achieved
- Consistent Revenue Growth: Year-on-year sales growth of 19.67% in Q3 FY26
- Improved Collections: Debtors turnover ratio reached 4.21 times in H1 FY26, the highest level
- Long-Term Performance: Ten-year stock returns of 780.35% significantly outpaced Sensex's 255.10%
KEY CONCERNS
- Severe Margin Compression: Operating margins collapsed to 11.38% from 17.83% year-on-year
- Profit Decline: Consolidated net profit fell 41.13% QoQ and 32.45% YoY despite revenue growth
- Rising Employee Costs: Employee expenses increased 27.43% YoY, consuming 32.9% of revenues
- Deteriorating ROCE: Half-yearly ROCE fell to 21.72%, the lowest level in recent periods
- Expensive Valuation: P/E of 35.76x and PEG ratio of 11.86x appear unjustified by fundamentals
- Institutional Exodus: Mutual fund holdings plunged from 1.97% to 0.56% in Q3 FY26
- Weak Long-Term Growth: Five-year sales CAGR of just 6.14% indicates sluggish expansion
Outlook: Critical Monitoring Points Ahead
The coming quarters will be crucial in determining whether Thejo Engineering's margin compression represents a temporary aberration or a structural shift in profitability. Investors should closely monitor several key metrics to assess the company's trajectory and potential for recovery or further deterioration.
POSITIVE CATALYSTS
- Stabilisation of operating margins above 14-15% levels
- Employee cost ratio declining below 30% of revenues
- Return of institutional investors, particularly mutual funds
- Maintenance of revenue growth momentum above 15% YoY
- ROCE improvement back towards 25-27% range
RED FLAGS TO WATCH
- Further margin compression below 10% operating margin
- Sequential revenue decline in upcoming quarters
- Continued institutional selling or promoter stake reduction
- Working capital deterioration or cash flow pressures
- ROCE falling below 20% on a sustained basis
The company's ability to reverse margin trends whilst maintaining revenue growth will determine whether the current valuation premium can be justified. Management commentary on cost control initiatives, pricing power, and order book visibility will be critical factors for investors to assess in upcoming quarters.
The Verdict: Exit Recommended on Fundamental Deterioration
Score: 38/100
For Fresh Investors: Avoid initiating positions. The combination of expensive valuation (P/E of 35.76x, PEG ratio of 11.86x), deteriorating margins (operating margin down to 11.38% from 17.83% YoY), and negative financial trends creates an unfavourable risk-reward profile. The 41.13% QoQ profit decline despite record revenues signals fundamental operational challenges that require resolution before considering entry.
For Existing Holders: Consider exiting positions or significantly reducing exposure. The sharp margin compression, institutional investor exodus (mutual fund holdings fell from 1.97% to 0.56%), and bearish technical setup suggest further downside risk. The stock trades 29.52% below its 52-week high with multiple resistance levels overhead. Only those with very high risk tolerance and long investment horizons should consider holding through this challenging period.
Fair Value Estimate: ₹1,400-1,500 (20-25% downside risk from current levels of ₹1,751.90)
Rationale: Whilst Thejo Engineering maintains balance sheet strength and zero debt, the severe margin deterioration, expensive valuation multiples, and negative momentum across financial, technical, and institutional parameters warrant a cautious stance. The company must demonstrate margin recovery and sustainable profitability before the investment case improves materially.
Note: ROCE = (EBIT - Other income)/(Capital Employed - Cash - Current Investments)
⚠️ Investment Disclaimer
This article is for educational and informational purposes only and should not be construed as financial advice. Investors should conduct their own due diligence, consider their risk tolerance and investment objectives, and consult with a qualified financial adviser before making any investment decisions. Past performance is not indicative of future results. The views expressed are those of the author and do not necessarily reflect the views of any affiliated organisations.
