Thomas Scott India Q2 FY26: Stellar Growth Momentum Continues Amid Premium Valuation

The quarter's standout performance was driven by expanding operating margins, which reached a multi-quarter high of 14.86%, up from 11.34% in Q1 FY26. Year-on-year comparisons remain equally impressive, with net sales advancing 39.98% and net profit climbing 66.78% versus Q2 FY25, underscoring the company's accelerating growth trajectory in India's competitive garments and apparels sector.

Thomas Scott's Q2 FY26 results mark the seventh consecutive quarter of revenue growth, with the company posting its highest-ever quarterly sales and operating profit. The apparel retailer, which was established in 2010 to take over the retail division of Bang Overseas Limited, has demonstrated remarkable resilience in scaling operations despite challenging macroeconomic conditions affecting discretionary consumer spending.

Financial Performance: Margin Expansion Drives Profitability

Thomas Scott's Q2 FY26 financial performance showcased impressive operational leverage, with the company achieving its highest-ever quarterly operating margin of 14.86%, representing a substantial 352 basis points expansion from Q1 FY26's 11.34%. This margin improvement, coupled with steady revenue growth of 5.64% quarter-on-quarter, propelled net profit to ₹4.72 crores—a 36.04% sequential increase and the highest quarterly profit in the company's history.

The year-on-year comparison reveals even more compelling growth dynamics. Net sales surged 39.98% from ₹40.67 crores in Q2 FY25 to ₹56.93 crores in Q2 FY26, whilst net profit jumped 66.78% from ₹2.83 crores to ₹4.72 crores over the same period. This outpacing of profit growth relative to revenue growth underscores the company's improving cost structure and operational efficiency.

Operating profit (PBDIT excluding other income) reached ₹8.46 crores in Q2 FY26, up 38.46% quarter-on-quarter and marking the highest quarterly operating profit on record. The company's gross profit margin stood at 13.88%, whilst PAT margin expanded to 8.29% from 6.44% in the previous quarter. Employee costs increased to ₹5.17 crores from ₹4.40 crores sequentially, reflecting ongoing business expansion and potential headcount additions to support growth.

The tax rate normalised to 35.34% in Q2 FY26 from 33.40% in Q1 FY26, resulting in a tax outgo of ₹2.58 crores. Interest costs increased to ₹0.56 crores from ₹0.35 crores sequentially, reflecting higher working capital requirements to support the expanding business scale. Depreciation remained relatively stable at ₹0.61 crores compared to ₹0.56 crores in Q1 FY26.

Operational Excellence: Scaling with Efficiency

Thomas Scott's operational metrics reveal a company successfully navigating the transition from rapid growth to profitable scaling. The company's return on equity (ROE) stands at 11.35% on an average basis, whilst return on capital employed (ROCE) registers at 14.56%—both metrics reflecting moderate capital efficiency that has room for improvement as the business matures.

The balance sheet demonstrates prudent financial management, with shareholder funds expanding to ₹105.95 crores as of March 2025 from ₹50.69 crores a year earlier. Long-term debt remains minimal at ₹2.42 crores, translating to a debt-to-equity ratio of just 0.12—providing substantial financial flexibility for future expansion. The company's debt-to-EBITDA ratio of 0.70 times indicates comfortable leverage levels, whilst EBIT-to-interest coverage of 5.24 times suggests adequate debt servicing capability.

Working capital dynamics warrant attention, however. The cash flow statement for FY25 reveals a significant working capital outflow of ₹59.00 crores, driven by inventory build-up and receivables expansion to support accelerating sales growth. This resulted in negative operating cash flow of ₹39.00 crores for the full year, which was funded through equity infusions and borrowings totalling ₹45.00 crores in financing activities.

Fixed assets increased to ₹11.75 crores as of March 2025 from ₹7.87 crores a year earlier, reflecting ongoing capital expenditure to expand retail footprint and enhance operational infrastructure. The company's capital employed efficiency, measured by sales-to-capital employed ratio of 2.48 times, demonstrates moderate asset turnover that could improve further as newer stores mature.

Industry Context: Outperforming a Struggling Sector

Thomas Scott's robust performance stands in stark contrast to the broader garments and apparels sector, which has faced significant headwinds. Over the past year, the sector delivered a negative return of 22.06%, making Thomas Scott's 95.98% stock price appreciation over the same period all the more remarkable—representing an outperformance of 118.04 percentage points versus its sector peers.

The Indian apparel retail landscape remains highly fragmented and competitive, with both organised and unorganised players vying for market share. Consumer discretionary spending has faced pressure from inflation and economic uncertainty, yet Thomas Scott has managed to buck the trend through strategic positioning and operational execution. The company's ability to deliver consistent quarter-on-quarter revenue growth of 5.64% to 48.76% over the past seven quarters demonstrates resilience in capturing wallet share.

The company's sales-to-capital employed ratio of 2.48 times reflects moderate asset efficiency compared to best-in-class retailers, suggesting opportunities to enhance productivity through improved inventory management, store productivity metrics, and supply chain optimisation. As Thomas Scott continues expanding its retail footprint, maintaining margin discipline whilst scaling operations will be critical to sustaining profitability.

Peer Comparison: Premium Valuation Relative to Quality

Thomas Scott's valuation metrics reveal a significant premium relative to most peers in the garments and apparels sector, though this premium appears partially justified by superior growth momentum. At a trailing P/E ratio of 40.08 times, Thomas Scott trades at a substantial premium to the sector average, commanding higher multiples than peers such as Credo Brands (9.82x) and Borana Weaves (17.90x), though below the stratospheric valuation of Bizotic Commercial (165.84x).

However, Thomas Scott's ROE of 11.35% lags significantly behind sector leaders like Borana Weaves (48.03%) and trails the peer group average of approximately 25%. This ROE underperformance relative to valuation suggests investors are pricing in substantial future improvements in capital efficiency and profitability, banking on the company's growth trajectory to drive returns enhancement.

The price-to-book ratio of 5.81 times positions Thomas Scott in the middle of the peer range, below Sunrakshakk Industries (13.61x) and Borana Weaves (8.34x) but above Vishal Fabrics (1.15x) and Credo Brands (1.64x). With minimal debt (debt-to-equity of 0.12), Thomas Scott maintains one of the strongest balance sheets in the peer group, providing downside protection and financial flexibility that partially justifies the valuation premium.

Valuation Analysis: Expensive Entry Point Despite Growth

Thomas Scott's current valuation of ₹419.40 per share places the stock in "Very Expensive" territory based on proprietary valuation metrics, with the company trading at a P/E ratio of 40.08 times trailing twelve-month earnings. This represents a significant premium to the industry average P/E of 33 times, reflecting market expectations of sustained high growth and margin expansion.

The EV/EBITDA multiple of 23.50 times and EV/Sales ratio of 3.08 times further underscore the premium valuation, suggesting limited margin of safety at current levels. The PEG ratio of 3.55 indicates the stock is trading at 3.55 times its expected growth rate—well above the theoretical fair value threshold of 1.0, implying investors are paying a substantial premium for growth that may already be reflected in the current price.

The stock's journey through valuation grades reveals increasing market enthusiasm. Thomas Scott's valuation grade changed from "Fair" to "Expensive" multiple times between August and September 2024, before settling into "Very Expensive" territory since September 16, 2024. This escalation in valuation reflects the market's recognition of the company's growth momentum, though it also suggests reduced upside potential from current levels absent further earnings acceleration.

At ₹419.40, Thomas Scott trades 16.21% below its 52-week high of ₹500.55 but commands a substantial 127.69% premium over its 52-week low of ₹184.20. This wide trading range over the past year reflects both the volatility inherent in small-cap growth stories and the dramatic re-rating the stock has experienced as growth has materialised.

Shareholding Pattern: Stable Promoter Base, Minimal Institutional Interest

Thomas Scott's shareholding structure reveals a stable promoter base alongside minimal institutional participation—a pattern that presents both opportunities and risks. Promoter holding stood at 52.15% as of September 2025, remaining unchanged from June 2025 but down from 57.85% in December 2024. This gradual reduction of 570 basis points over three quarters suggests promoters have been monetising stakes, potentially to fund personal requirements or diversification, though the absence of pledging (0% pledged shares) mitigates concerns about financial stress.

Foreign institutional investor (FII) presence remains negligible at 0.02% as of September 2025, having declined from 0.84% in March 2025. The complete absence of mutual fund holdings (0.00%) and insurance company participation (0.00%) highlights the stock's limited institutional discovery, which could present both opportunity and risk. On one hand, increased institutional interest as the growth story gains credibility could provide significant upside; on the other, the lack of institutional support suggests higher volatility and liquidity constraints.

Other domestic institutional investors (DII) increased their stake to 2.46% in September 2025 from 1.97% in June 2025, representing a positive incremental change of 49 basis points. Meanwhile, non-institutional holdings—comprising retail and high-net-worth individuals—stood at 45.36%, down 52 basis points from 45.88% in the previous quarter. The promoter group is led by Brijgopal Bang (22.54%) and Vandana Brijgopal Bang (11.59%), with the balance distributed amongst family members and Bodywave Fashions (India) Private Limited.

Stock Performance: Exceptional Returns with High Volatility

Thomas Scott has delivered extraordinary returns across multiple timeframes, significantly outperforming both the Sensex and its sector peers. Over the past year, the stock has surged 95.98%, generating an alpha of 86.98 percentage points versus the Sensex's 9.00% return. This outperformance extends across longer periods, with three-year returns of 919.20% (alpha: 881.98%) and five-year returns of 6,494.34% (alpha: 6,400.56%)—returns that place Thomas Scott amongst the top-performing small-cap stocks in the Indian market.

However, these stellar returns come with substantial volatility. The stock's beta of 1.50 indicates it is 50% more volatile than the broader market, whilst the one-year volatility of 56.07% places it firmly in the "high risk, high return" category. The risk-adjusted return of 1.71 over the past year, whilst positive, reflects the significant price swings investors must endure to capture the upside.

Recent price action reveals this volatility in stark terms. After touching a 52-week high of ₹500.55, the stock has corrected 16.21% to the current price of ₹419.40, including a sharp 7.00% single-day decline following the Q2 results. The one-week return of -2.14% and year-to-date return of -9.17% underscore the choppy near-term trajectory, even as medium-term returns remain robust (one-month: +26.36%, three-month: +24.77%).

Technical indicators paint a mixed picture. The overall trend remains bullish, having shifted from sideways to bullish on October 31, 2025, at ₹407.05. Weekly MACD signals bullish momentum, whilst moving averages across all timeframes (5-day to 200-day) remain below the current price, suggesting technical strength. However, monthly MACD shows mildly bearish signals, and the stock trades above all major moving averages, indicating potential for near-term consolidation or correction.

Investment Thesis: Growth Story with Valuation Concerns

Thomas Scott presents a compelling growth narrative underpinned by consistent operational execution, expanding margins, and robust revenue momentum. The company's proprietary investment score of 71 out of 100 places it in "BUY" territory, reflecting positive near-term drivers (bullish technical trend and positive financial trend), though tempered by expensive valuation and average quality metrics.

The bull case centres on the company's ability to sustain high growth rates whilst expanding margins. With seven consecutive quarters of revenue growth, operating margins reaching record levels, and a minimal debt burden providing financial flexibility, Thomas Scott appears well-positioned to continue capturing market share in India's fragmented apparel retail landscape. The 73.51% five-year sales CAGR and 92.63% EBIT CAGR demonstrate the company's capacity for sustained expansion.

However, the bear case cannot be ignored. At a P/E of 40.08 times and PEG ratio of 3.55, the stock offers limited margin of safety, with much of the growth story already priced in. The modest ROE of 11.35% and ROCE of 14.56% suggest capital efficiency improvements are necessary to justify the valuation premium. Negative operating cash flow of ₹39.00 crores in FY25, driven by working capital build-up, raises questions about the sustainability of growth without continued equity dilution or debt accumulation.

Key Strengths & Risk Factors

Outlook: What to Watch

The path forward for Thomas Scott hinges on the company's ability to translate top-line growth into sustainable cash generation whilst maintaining margin discipline. Investors should monitor quarterly cash flow statements closely, looking for signs that working capital intensity is moderating as the business scales. Any improvement in ROE towards the 15% threshold would provide fundamental support for the premium valuation.

Management commentary on store expansion plans, same-store sales growth, and inventory management will be critical in assessing the sustainability of the growth trajectory. Additionally, any increase in institutional shareholding would be a positive signal, potentially reducing volatility and improving liquidity. Conversely, further promoter stake reductions without clear rationale or continued negative operating cash flow would warrant caution.