With a market capitalisation of ₹297.00 crores and currently trading at ₹37.20, the stock has declined 27.30% over the past year, significantly underperforming the Sensex's 7.26% gain. The company operates in the garments and apparels sector, manufacturing acrylic staple fibre and tow under the VARLAN brand name. Despite a modest profit recovery in the latest quarter, the stock remains under pressure, trading in bearish territory and below all key moving averages.
The quarter's performance reveals a company struggling to generate meaningful operating profits from its core manufacturing business. Whilst revenue growth appears robust on the surface, the underlying operational metrics paint a concerning picture of margin compression and deteriorating capital efficiency.
Financial Performance: Revenue Growth Fails to Translate into Operating Profits
Vardhman Acrylics posted net sales of ₹89.40 crores in Q2 FY26, representing a strong sequential increase of 28.84% from ₹69.39 crores in Q1 FY26 and year-on-year growth of 26.59% from ₹70.62 crores in Q2 FY25. This revenue acceleration marks a notable improvement from the subdued performance witnessed in previous quarters. However, this topline expansion has failed to generate commensurate improvements in operational profitability.
| Quarter | Net Sales (₹ Cr) | QoQ Growth | Operating Profit Excl OI (₹ Cr) | Op. Margin % | Net Profit (₹ Cr) | PAT Margin % |
|---|---|---|---|---|---|---|
| Sep'25 | 89.40 | +28.84% | 0.17 | 0.19% | 2.50 | 2.80% |
| Jun'25 | 69.39 | -3.77% | -0.63 | -0.91% | 1.75 | 2.52% |
| Mar'25 | 72.11 | -11.82% | -0.01 | -0.01% | 1.96 | 2.72% |
| Dec'24 | 81.78 | +15.80% | 0.81 | 0.99% | 3.97 | 4.85% |
| Sep'24 | 70.62 | +23.79% | 0.76 | 1.08% | 1.56 | 2.21% |
| Jun'24 | 57.05 | -16.57% | 2.14 | 3.75% | 4.34 | 7.61% |
| Mar'24 | 68.38 | — | 4.56 | 6.67% | 5.29 | 7.74% |
The most alarming aspect of Q2 FY26's results is the operating profit excluding other income, which stood at a meagre ₹0.17 crores—translating to an operating margin of just 0.19%. Whilst this represents a sequential improvement from the negative operating profit of ₹0.63 crores in Q1 FY26, it remains drastically below the ₹0.76 crores recorded in Q2 FY25 and far removed from the ₹4.56 crores achieved in March 2024. The company's operating margins have collapsed from 6.67% in March 2024 to essentially zero today, indicating severe pricing pressure or cost inflation in the acrylic fibre business.
Net profit of ₹2.50 crores in Q2 FY26, whilst showing sequential improvement, was heavily supported by other income of ₹3.83 crores. This means that non-operating income constituted a staggering 118.21% of profit before tax, underscoring the company's inability to generate sustainable profits from its core manufacturing operations. The PAT margin of 2.80% remains well below the 7.74% achieved in March 2024, highlighting the structural erosion in profitability.
Operational Challenges: Margin Erosion and Capital Inefficiency
The deterioration in Vardhman Acrylics' operational performance extends beyond quarterly fluctuations. On an annual basis, FY25 witnessed net sales of ₹281.00 crores, down 5.40% from ₹297.00 crores in FY24. More concerning is the operating profit excluding other income, which plummeted to ₹3.00 crores in FY25 from ₹13.00 crores in FY24—a collapse of 76.92%. The operating margin contracted sharply from 4.40% in FY24 to just 1.10% in FY25, continuing a multi-year downtrend from the peak of 16.80% in FY21.
The company's return on equity (ROE) has deteriorated to 4.41% in the latest period, substantially below the five-year average of 8.32%. This already weak average ROE pales in comparison to industry standards and reflects poor capital allocation and profitability. The return on capital employed (ROCE) paints an even grimmer picture, turning negative at -3.84% in the latest period compared to a five-year average of 18.07%. Such negative ROCE indicates that the company is destroying value rather than creating it, earning returns below its cost of capital.
⚠️ Critical Operational Red Flags
Negative ROCE: Latest ROCE of -3.84% indicates the company is destroying shareholder value. Capital deployed is failing to generate adequate returns, raising serious questions about business viability.
Weak ROE: ROE of 4.41% is substantially below acceptable thresholds for equity investments, reflecting poor profitability and capital efficiency.
Margin Collapse: Operating margins have collapsed from 16.80% in FY21 to 1.10% in FY25, indicating severe competitive pressures or structural cost disadvantages.
Other Income Dependency: In Q2 FY26, other income of ₹3.83 crores exceeded operating profit of ₹0.17 crores by 22.5 times, highlighting unsustainable profit composition.
The balance sheet reveals shareholder funds of ₹238.65 crores as of March 2025, down from ₹242.97 crores in March 2024. The company operates with zero long-term debt, which is a positive aspect, but this debt-free status has not translated into superior returns. Fixed assets stood at ₹46.58 crores whilst investments totalled ₹64.38 crores, suggesting the company is holding significant liquid investments rather than deploying capital into productive manufacturing capacity.
Industry Context: Acrylic Fibre Sector Headwinds
The acrylic fibre industry has faced persistent challenges in recent years, including volatile raw material prices (particularly acrylonitrile, the key feedstock), competition from synthetic alternatives, and subdued demand from end-use sectors such as knitwear, carpets, and industrial textiles. The garments and apparels sector, in which Vardhman Acrylics operates, has witnessed sluggish growth domestically and internationally, with pricing power remaining limited.
The company's inability to maintain operating margins despite revenue growth suggests it is operating in a highly commoditised market with limited differentiation. The collapse in margins from over 16% in FY21 to barely above zero today indicates either severe pricing pressure from competitors or inability to pass on raw material cost increases to customers—both indicative of weak competitive positioning.
Peer Comparison: Valuation Discount Reflects Weak Fundamentals
Compared to peers in the garments and apparels sector, Vardhman Acrylics trades at relatively modest multiples, but this valuation discount appears justified given its inferior fundamentals. The company's ROE of 8.32% (five-year average) lags significantly behind peers such as Shree Karni Fabrics (16.25%) and Axita Cotton (40.07%), whilst being comparable only to struggling peers like Ashima (4.70%).
| Company | P/E (TTM) | Price to Book | ROE % | Dividend Yield | Debt to Equity |
|---|---|---|---|---|---|
| Vardhman Acrylics | 28.93 | 1.28 | 8.32% | 4.09% | -0.71 |
| Shree Karni Fabrics | 22.49 | 3.17 | 16.25% | — | 0.55 |
| Axita Cotton | 142.89 | 5.21 | 40.07% | — | 0.19 |
| Ashima | NA (Loss Making) | 1.12 | 4.70% | — | 0.02 |
| Saraswati Saree Depot | 8.86 | 1.49 | 16.84% | 5.20% | -0.12 |
Vardhman Acrylics trades at a P/E ratio of 28.93 times, which appears elevated given its weak ROE and negative ROCE. The price-to-book ratio of 1.28 times is below the peer average, reflecting the market's recognition of the company's deteriorating fundamentals. The dividend yield of 4.09% provides some income support, but the payout ratio of 91.66% is unsustainably high and leaves minimal room for reinvestment or dividend growth.
Valuation Analysis: Expensive Relative to Quality
At the current market price of ₹37.20, Vardhman Acrylics trades at a P/E ratio of 28.93 times trailing twelve-month earnings, which appears expensive given the company's weak operational performance and deteriorating return ratios. The price-to-book ratio of 1.28 times represents a modest premium to book value of ₹29.70 per share, but this premium is difficult to justify when ROCE is negative and ROE is below 5%.
The company's valuation grade has been classified as "Risky" since July 2025, downgraded from "Very Expensive" earlier. The EV/EBITDA multiple of 131.18 times is extraordinarily high, reflecting the company's minimal EBITDA generation. The negative EV/EBIT of -50.65 times indicates that the enterprise value calculation is distorted by the company's minimal operating profits and substantial cash holdings.
The stock trades 31.43% below its 52-week high of ₹54.25 and just 3.33% above its 52-week low of ₹36.00, indicating it is closer to its lows than highs. However, this proximity to 52-week lows does not necessarily present a buying opportunity given the fundamental deterioration. The valuation appears expensive relative to the company's operational quality and growth prospects.
Shareholding Pattern: Stable Promoter Base, Minimal Institutional Interest
The shareholding pattern reveals a stable ownership structure dominated by promoters. Promoter holding has remained constant at 74.97% over the past five quarters, indicating no dilution or stake reduction. The promoter group is led by Vardhman Textiles Limited (70.74%), with no pledging of shares—a positive indicator of promoter confidence.
| Quarter | Promoter % | FII % | MF % | Insurance % | Non-Institutional % |
|---|---|---|---|---|---|
| Sep'25 | 74.97% | 0.02% | 0.00% | 0.00% | 25.01% |
| Mar'25 | 74.97% | 0.13% | 0.00% | 0.00% | 24.90% |
| Dec'24 | 74.97% | 0.13% | 0.00% | 0.00% | 24.90% |
| Sep'24 | 74.97% | 0.19% | 0.00% | 0.00% | 24.83% |
| Jun'24 | 74.97% | 0.18% | 0.00% | 0.00% | 24.85% |
However, institutional interest remains virtually non-existent. Foreign institutional investors (FII) hold just 0.02% as of September 2025, down from 0.13% in March 2025 and 0.19% in September 2024—indicating gradual exit by the limited foreign investors present. Mutual funds and insurance companies have zero holdings, reflecting the company's exclusion from institutional portfolios. This absence of institutional participation is a significant red flag, as sophisticated investors have clearly avoided the stock despite its micro-cap status potentially offering diversification benefits.
Stock Performance: Sustained Underperformance Across All Timeframes
Vardhman Acrylics has delivered deeply disappointing returns across virtually all investment horizons. The stock has declined 27.30% over the past year, significantly underperforming the Sensex's 7.26% gain and generating negative alpha of -34.56%. This underperformance has been consistent, with the stock falling 28.63% over six months (versus Sensex's +1.11% gain) and 8.42% over three months (versus Sensex's -2.01%).
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | -0.56% | -1.15% | +0.59% |
| 1 Month | -0.91% | -2.66% | +1.75% |
| 3 Months | -8.42% | -2.01% | -6.41% |
| 6 Months | -28.63% | +1.11% | -29.74% |
| YTD | -7.37% | -3.00% | -4.37% |
| 1 Year | -27.30% | +7.26% | -34.56% |
| 2 Years | -41.69% | +15.74% | -57.43% |
| 3 Years | -28.87% | +36.36% | -65.23% |
| 5 Years | -0.80% | +66.02% | -66.82% |
The longer-term picture is equally concerning. Over two years, the stock has fallen 41.69% whilst the Sensex gained 15.74%, resulting in negative alpha of -57.43%. Over three years, the stock is down 28.87% against the Sensex's 36.36% gain. Even over five years, the stock has essentially been flat (-0.80%) whilst the Sensex surged 66.02%, delivering negative alpha of -66.82%.
The stock currently trades below all major moving averages—5-day (₹37.35), 20-day (₹37.95), 50-day (₹38.44), 100-day (₹40.86), and 200-day (₹42.97)—indicating sustained bearish momentum. The technical trend is classified as "Bearish" with all major indicators (MACD, Bollinger Bands, KST) flashing bearish signals. The stock's beta of 1.50 indicates it is 50% more volatile than the market, amplifying downside risk during market corrections.
"A company generating near-zero operating profits, negative ROCE, and sustained stock underperformance presents a compelling case for avoidance rather than accumulation."
Investment Thesis: Weak Quality, Risky Valuation, Deteriorating Trends
The investment thesis for Vardhman Acrylics is decidedly negative across multiple parameters. The company's quality grade is assessed as "Average" but this appears generous given the negative ROCE and sub-5% ROE. The five-year sales growth of just 2.03% and EBIT growth of -164.13% underscore the fundamental deterioration in the business.
The financial trend is classified as "Positive" for the latest quarter based on sequential improvement in profit, but this ignores the underlying operational weakness and dependency on other income. The technical trend remains firmly "Bearish" with the stock in a sustained downtrend. The valuation is classified as "Risky"—a designation that appears appropriate given the elevated P/E multiple relative to poor quality metrics.
Key Strengths & Risk Factors
✓ Key Strengths
- Debt-Free Balance Sheet: Zero long-term debt provides financial flexibility and eliminates solvency risk
- Stable Promoter Holding: Consistent 74.97% promoter stake with no pledging demonstrates ownership commitment
- Dividend Yield: 4.09% yield provides income support, though payout ratio is unsustainably high
- Cash-Rich Position: Investments of ₹64.38 crores provide liquidity cushion
- Sequential Improvement: Q2 FY26 showed recovery from Q1's negative operating profit
⚠ Key Concerns
- Negative ROCE: Latest ROCE of -3.84% indicates value destruction and capital inefficiency
- Margin Collapse: Operating margins crashed from 16.80% (FY21) to 1.10% (FY25), now near zero
- Other Income Dependency: Profitability heavily reliant on non-operating income rather than core business
- Weak ROE: ROE of 4.41% is substantially below acceptable investment thresholds
- Zero Institutional Interest: Complete absence of mutual fund and insurance holdings signals quality concerns
- Sustained Underperformance: Negative alpha across all timeframes from 1 year to 5 years
- High Dividend Payout: 91.66% payout leaves no room for reinvestment or growth
Outlook: What to Watch
Positive Catalysts
- Sustained improvement in operating margins above 3-4% for multiple quarters
- ROCE turning positive and trending towards double digits
- Reduction in other income dependency with core business profitability improving
- Entry of institutional investors (mutual funds or FIIs) signalling quality recognition
Red Flags to Monitor
- Further deterioration in operating margins or return to negative territory
- Continued decline in ROCE or ROE metrics
- Reduction in promoter holding or emergence of pledging
- Dividend cut due to unsustainable payout ratio
- Further FII exit reducing already minimal institutional presence
The Verdict: Avoid This Value Trap
Score: 31/100
For Fresh Investors: Avoid initiating positions. The company's negative ROCE, near-zero operating margins, and heavy dependency on other income for profitability represent a classic value trap. The modest valuation discount does not compensate for the fundamental deterioration and absence of visible catalysts for operational turnaround.
For Existing Holders: Consider exiting on any price strength. The 4.09% dividend yield provides limited compensation for the capital erosion risk. The unsustainable 91.66% payout ratio suggests potential dividend cuts ahead. With the stock in a sustained bearish trend and fundamentals deteriorating, holding serves little purpose unless there is conviction in a major operational turnaround.
Fair Value Estimate: ₹30.00 (19.35% downside from current price of ₹37.20). This estimate is based on a P/B multiple of 1.0x applied to book value of ₹29.70, reflecting the company's negative ROCE and weak profitability warranting a discount to book value rather than a premium.
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 advisor before making any investment decisions.
