Tirupati Forge Q3 FY26: Strong Revenue Growth Masks Margin Pressures

The micro-cap forging specialist demonstrated strong sequential momentum, with revenues climbing 22.51% quarter-on-quarter from ₹39.67 crores in Q2 FY26. However, the company's operating margin excluding other income compressed to 10.47% in Q3 FY26 from 16.14% in Q2 FY24, reflecting the challenges of scaling operations whilst managing input costs. Net profit margins similarly deteriorated to 4.16% from 8.95% a year earlier, raising questions about operational efficiency amid aggressive expansion.

Financial Performance: Growth Outpaces Profitability

Tirupati Forge's Q3 FY26 performance showcased impressive top-line expansion, with net sales reaching an all-time quarterly high of ₹48.60 crores, representing 22.51% sequential growth and 85.92% year-on-year expansion. This marked the company's seventh consecutive quarter of revenue growth, underscoring robust demand for its forged components across automotive, bearing, and industrial applications. On a nine-month basis for FY26, revenues stood at ₹120.57 crores, already surpassing the full-year FY25 figure of ₹114.00 crores.

However, the profitability narrative proved less compelling. Operating profit before depreciation, interest, tax, and other income (PBDIT excluding OI) reached ₹5.09 crores in Q3 FY26, yet the corresponding margin of 10.47% represented a significant contraction from 16.14% in Q2 FY24 and 14.99% in Q3 FY24. This margin compression persisted through to the bottom line, with PAT margins declining to 4.16% from 8.95% a year earlier, despite absolute profit growth of 54.20% YoY.

The quarter witnessed rising operational costs, with employee expenses climbing to ₹2.39 crores from ₹1.41 crores in Q2 FY24, whilst interest costs nearly tripled to ₹0.87 crores from ₹0.31 crores year-on-year. Depreciation charges surged to ₹2.14 crores, reflecting the company's aggressive capital expenditure programme. Tax expenses of ₹0.71 crores represented an effective rate of 25.91%, broadly in line with historical averages.

Operational Challenges: Capital Intensity Strains Returns

Tirupati Forge's return metrics reveal the strain of rapid expansion on capital efficiency. Return on equity (ROE) stood at 16.94% on average over recent periods, though the latest half-yearly figure deteriorated sharply. More concerning, return on capital employed (ROCE) compressed to just 5.75% in the most recent period from an average of 13.57%, indicating that incremental capital deployed is generating substantially lower returns than the existing asset base.

The company's balance sheet expanded significantly during FY25, with shareholder funds more than doubling to ₹107.06 crores from ₹49.92 crores in FY24, driven by a preferential allotment that increased share capital to ₹23.66 crores. Fixed assets jumped to ₹28.72 crores from ₹17.09 crores, whilst current assets surged to ₹88.78 crores, reflecting substantial working capital requirements. Long-term debt rose modestly to ₹9.31 crores, maintaining a conservative debt-to-equity ratio of 0.05.

Cash flow dynamics remained challenging, with operating cash flow of just ₹5.00 crores in FY25 despite profit before tax of ₹10.00 crores, hampered by negative working capital changes of ₹7.00 crores. The company deployed ₹38.00 crores in capital expenditure, funded largely through equity infusion (₹60.00 crores from financing activities), resulting in closing cash of ₹33.00 crores. This aggressive expansion strategy, whilst positioning the company for future growth, has weighed on near-term returns.

Industry Context: Forging Ahead Amid Sector Headwinds

The castings and forgings sector has experienced robust demand from automotive and industrial segments, though margin pressures from raw material volatility and energy costs have challenged profitability across the industry. Tirupati Forge's revenue growth trajectory significantly outpaces sector averages, reflecting market share gains and capacity expansion, yet its margin profile lags behind more established peers.

The company's product portfolio spans automotive components, bearings, gears, and industrial flanges manufactured from mild steel, carbon steel, and stainless steel. This diversification provides some insulation from sector-specific downturns, though automotive exposure remains substantial. The company's ISO 9001:2008 certification and established customer relationships position it favourably for sustained growth, provided it can address operational efficiency concerns.

Peer Comparison: Valuation Premium Difficult to Justify

Tirupati Forge trades at a significant premium to sector peers on price-to-earnings multiples, despite delivering inferior profitability metrics. The stock's P/E ratio of 85.01x compares unfavourably with Steelcast at 25.83x, Nelcast at 24.15x, and Kalyani Forge at 29.26x. This valuation gap appears particularly stretched given Tirupati's ROE of 16.94% trails peers such as ANB Metal (40.10%) and Steelcast (24.87%).

The company's price-to-book ratio of 4.03x appears more reasonable relative to peers, though still commands a premium over Nelcast (1.99x) and Kalyani Forge (2.42x). Tirupati's minimal leverage (debt-to-equity of 0.05) represents a competitive advantage, providing financial flexibility for future expansion without the burden of significant interest costs that constrain peers.

Valuation Analysis: Premium Pricing Requires Margin Recovery

At the current price of ₹37.79, Tirupati Forge trades at a P/E multiple of 85.01x trailing twelve-month earnings, representing a substantial premium to both sector averages and broader market valuations. The stock's enterprise value-to-EBITDA ratio of 36.54x and EV-to-sales multiple of 3.67x similarly reflect optimistic growth expectations embedded in current pricing.

The company's price-to-book value of 4.03x suggests the market values the business at approximately four times its net asset value of ₹8.26 per share. Whilst this premium may be justified by growth prospects, the recent deterioration in returns on capital raises questions about the sustainability of such elevated multiples. The stock has corrected 23.66% from its 52-week high of ₹49.50, though remains 33.96% above its 52-week low of ₹28.21.

The valuation grading has fluctuated between "Fair" and "Expensive" over recent months, currently assessed as "Fair" following the October 2025 correction. However, with margin pressures persisting and returns on capital declining, the current valuation appears optimistic absent a clear pathway to profitability improvement.

Shareholding Pattern: Stable Promoter Base, Minimal Institutional Interest

Promoter holdings in Tirupati Forge have remained stable at 48.93% over the past three quarters, following an increase of 83 basis points in October 2025 from 48.10%. This demonstrates continued promoter confidence in the business, with no pledging of shares providing additional comfort. The promoter group is led by Bhargavi Manojbhai Thummar (14.71%), Chetna Mukeshbhai Thumar (13.36%), and Hiteshkumar Gordhanbhai Thummar (9.71%).

Institutional participation remains negligible, with foreign institutional investors holding just 0.02% and no meaningful presence from mutual funds or insurance companies. This absence of institutional validation represents a concern, as sophisticated investors have largely overlooked the stock despite its growth trajectory. The high public shareholding of 51.04% suggests retail investor dominance, which can contribute to volatility.

Stock Performance: Underperformance Reflects Margin Concerns

Tirupati Forge's stock has declined 13.86% over the past year, significantly underperforming both the Sensex (up 10.41%) and the Castings & Forgings sector (up 22.50%). This 24.27% negative alpha versus the broader market and 36.36% underperformance versus sector peers reflects investor concerns about margin sustainability and capital efficiency.

The stock's beta of 1.50 indicates higher volatility than the broader market, with annualised volatility of 52.16% classifying it as a high-risk investment. Recent momentum has improved, with the stock gaining 5.44% over the past week and 4.39% over the month, though the six-month return of -2.12% versus the Sensex's 4.50% gain highlights persistent underperformance.

Technical indicators present a mixed picture, with the stock currently in a "Mildly Bearish" trend that commenced on February 3, 2026. The stock trades above all key moving averages (5-day, 20-day, 50-day, 100-day, and 200-day), providing some technical support. Immediate resistance sits at the 52-week high of ₹49.50, whilst support exists at the 52-week low of ₹28.21.

Investment Thesis: Growth Potential Tempered by Execution Risks

The investment case for Tirupati Forge rests on several pillars: exceptional revenue growth momentum (36.89% five-year CAGR), minimal leverage (0.05 debt-to-equity), no promoter pledging, and exposure to growing automotive and industrial end-markets. The company's quality grade of "Good" reflects these fundamental strengths, particularly its healthy long-term growth trajectory and conservative balance sheet management.

However, significant concerns temper this optimistic narrative. The sharp deterioration in operating margins from 16.14% to 10.47% year-on-year, coupled with ROCE compression to just 5.75%, suggests that incremental capital is generating inadequate returns. The nine-month PAT decline of 27.18% despite strong revenue growth highlights execution challenges in translating top-line expansion into bottom-line performance.

Outlook: What to Watch

The forward trajectory for Tirupati Forge hinges critically on management's ability to restore operating margins to historical levels of 13-15% whilst sustaining revenue growth momentum. Investors should monitor quarterly margin trends closely, as continued compression would undermine the growth narrative and necessitate valuation de-rating.