Welspun Living Q2 FY26: Profit Plunges 93.5% as Margins Collapse Under Operational Stress

The stock, trading at ₹137.60 as of November 13, 2025, has declined 1.15% following the results announcement, reflecting investor concern over the dramatic erosion in profitability. With revenues declining 15.04% year-on-year to ₹2,440.91 crores in Q2 FY26 and operating margins compressing to multi-quarter lows, Welspun Living faces mounting operational challenges that have fundamentally altered its earnings trajectory.

The magnitude of this profit decline signals severe operational distress at India's premier home textile exporter, which supplies to 17 of the world's top 30 retailers across 50 countries. The compression in margins, combined with falling revenues, raises critical questions about demand conditions, pricing power, and cost management capabilities in an increasingly challenging global textile market.

Financial Performance: A Quarter of Margin Devastation

Welspun Living's Q2 FY26 results reveal a company grappling with multiple headwinds simultaneously. Net sales of ₹2,440.91 crores represented a 15.04% year-on-year decline, whilst also showing a modest 7.98% sequential improvement from Q1 FY26's ₹2,260.57 crores. However, this revenue trajectory pales in comparison to the margin erosion that has gutted profitability.

Operating profit excluding other income collapsed to ₹153.33 crores in Q2 FY26, down from ₹357.63 crores in the year-ago quarter—a staggering 57.13% decline. More alarmingly, operating margins contracted by 614 basis points year-on-year to just 6.28%, marking the lowest level in at least the past seven quarters. This represents a precipitous fall from the 12.45% margins achieved in Q2 FY25 and the 13.46% margins in Q1 FY25.

The profit before tax (PBT) of ₹23.82 crores in Q2 FY26 reflected a catastrophic 91.50% year-on-year decline from ₹280.32 crores. Interest costs remained elevated at ₹43.35 crores, whilst depreciation stood at ₹100.91 crores, together consuming the bulk of operating profits. The tax rate of 37.62% in Q2 FY26 was significantly higher than the 27.80% in the year-ago quarter, further pressuring net profitability.

Critically, other income provided some cushion at ₹14.75 crores in Q2 FY26, though this was substantially lower than the ₹62.93 crores recorded in Q2 FY25. The sharp decline in non-operating income removed a significant buffer that had previously supported bottom-line performance.

Quarterly Trend Analysis: Deteriorating Trajectory

A broader examination of quarterly performance reveals that Q2 FY26's results are not an isolated aberration but rather the culmination of a steadily worsening trend. Revenue has been on a declining trajectory since peaking at ₹2,873.09 crores in Q2 FY25, falling consistently across subsequent quarters before showing a modest sequential uptick in Q2 FY26.

The data clearly illustrates a concerning pattern: whilst revenues have declined 15.04% year-on-year, operating profits have fallen much more sharply at 57.13%, indicating severe operating leverage working against the company. The margin compression from 12-13% levels to just 6.28% suggests fundamental challenges in cost management, pricing power, or both.

Operational Challenges: Return Metrics Under Pressure

Beyond the immediate quarterly distress, Welspun Living's return metrics reveal deeper structural concerns about capital efficiency and profitability. The company's return on equity (ROE) of 12.63% and return on capital employed (ROCE) of 12.91% are both concerning for a business operating in the manufacturing sector, where higher returns are typically expected to justify capital intensity.

More troublingly, the half-yearly ROCE for H1 FY26 has fallen to just 10.21%, marking the lowest level recorded and indicating deteriorating capital productivity. This suggests that the company is generating increasingly inadequate returns on the capital deployed in its operations—a red flag for long-term value creation.

The company's interest coverage ratio, measured by operating profit to interest expense, has weakened dramatically to just 3.54 times in Q2 FY26, the lowest level in the trailing period. This represents a significant deterioration from the more comfortable 6.52 times coverage in Q2 FY25, raising concerns about the company's ability to service its debt obligations comfortably if operating performance does not improve.

On a more positive note, the company maintains a relatively manageable debt profile with a debt-to-EBITDA ratio of 2.46 times and net debt-to-equity of 0.39 times. Long-term debt stood at ₹879.42 crores as of March 2025, whilst shareholder funds totalled ₹4,821.09 crores. The absence of promoter pledging (0%) is another reassuring factor, indicating confidence from the controlling shareholders.

Non-Operating Income Dependency: A Worrying Trend

One of the most concerning aspects of Q2 FY26's performance is the elevated contribution of non-operating income to overall profitability. Other income of ₹14.75 crores represented 61.92% of profit before tax of ₹23.82 crores in the quarter. This heavy reliance on non-operating income to support profitability is unsustainable and masks the true weakness in core operating performance.

When excluding other income, profit before tax from operations was a mere ₹9.07 crores in Q2 FY26—the lowest level in the trailing period. This stark figure underscores that the company's core home textile business is generating minimal profits at current revenue and cost structures, with non-operating income providing critical support to prevent losses.

The decline in other income itself—from ₹62.93 crores in Q2 FY25 to ₹14.75 crores in Q2 FY26—has been a significant contributor to the profit decline. This 76.56% year-on-year drop in non-operating income has removed a substantial buffer that had previously supported earnings, exposing the underlying weakness in operational profitability.

Peer Comparison: Lagging Industry Leadership

When benchmarked against peers in the garments and apparels sector, Welspun Living's operational challenges become even more apparent. The company's ROE of 12.63% significantly lags behind industry leaders such as Page Industries (43.38%), K P R Mill Ltd. (21.04%), and Trent (19.25%), highlighting a substantial gap in profitability and capital efficiency.

On valuation metrics, Welspun Living trades at a P/E ratio of 25.00 times trailing earnings, which appears reasonable compared to the peer group average of approximately 54 times. However, this seemingly attractive valuation multiple must be viewed in the context of sharply deteriorating earnings quality and trajectory. The company's price-to-book ratio of 2.81 times is also below the peer average, reflecting market scepticism about the sustainability of current book value given operational challenges.

The comparison reveals that Welspun Living is struggling to generate the superior returns that would justify premium valuations. Whilst peers like Page Industries command P/E multiples of 59 times on the back of 43% ROE, Welspun Living's modest 12.63% ROE justifies only moderate valuation multiples—and even these may be at risk if profitability continues to deteriorate.

Valuation Analysis: Attractive Price, Concerning Fundamentals

At the current market price of ₹137.60, Welspun Living trades at a P/E ratio of 25.00 times trailing twelve-month earnings, an EV/EBITDA multiple of 13.08 times, and a price-to-book ratio of 2.81 times. These multiples appear reasonable on an absolute basis and are below historical averages, contributing to the stock's "Attractive" valuation grade.

The stock has corrected 26.73% from its 52-week high of ₹187.80, whilst trading 31.05% above its 52-week low of ₹105.00. This positioning suggests that much of the bad news may be priced in, with the market having already discounted significant operational challenges. The dividend yield of 1.22% provides some income support, though the payout ratio of just 1.43% indicates limited cash distribution relative to earnings.

However, valuation attractiveness must be balanced against fundamental deterioration. With earnings having collapsed 93.54% year-on-year in Q2 FY26, the trailing P/E ratio may not accurately reflect forward earnings power. If current quarterly run-rates persist, full-year FY26 earnings could be substantially below FY25 levels, implying that the forward P/E is significantly higher than the trailing multiple suggests.

The company's enterprise value to capital employed ratio of 2.30 times and EV to sales of 1.50 times indicate that the market is ascribing relatively modest value to the business's assets and revenue base. This tempered valuation reflects investor concerns about the sustainability of current profitability levels and uncertainty about when—or if—margins will recover to historical norms.

Shareholding Pattern: Institutional Caution

The shareholding pattern reveals a stable promoter base holding 66.24% of equity, unchanged across the last five quarters. This consistency indicates continued commitment from the controlling Welspun Group, despite operational challenges. The absence of promoter pledging further reinforces confidence at the ownership level.

However, institutional investor behaviour reveals growing caution. Foreign institutional investors (FIIs) have reduced their stake from 7.08% in September 2024 to 4.97% in September 2025, though there was a modest 0.22% sequential increase in Q2 FY26. Mutual fund holdings declined from 3.23% to 2.59% during the quarter, suggesting that domestic institutional investors are reducing exposure amid deteriorating fundamentals.

The overall institutional holding of 13.56% is relatively modest for a company of Welspun Living's size and market capitalisation, indicating limited institutional conviction. The presence of 112 FIIs and 21 mutual funds suggests reasonably broad institutional participation, but the declining stake levels point to waning confidence in the near-term earnings trajectory.

Stock Performance: Significant Underperformance

Welspun Living's stock performance reflects the fundamental challenges facing the business, with the stock significantly underperforming both the broader market and its sector over most meaningful timeframes. Over the past year, the stock has declined 7.77%, underperforming the Sensex's 8.95% gain by 16.72 percentage points and lagging the garments and apparels sector return of 6.20% by 13.97 percentage points.

The recent three-month performance shows a sharp 20.17% gain, significantly outperforming the Sensex's 5.10% return by 15.07 percentage points. This short-term bounce appears to be a technical rebound from oversold levels rather than a fundamental recovery, as the underlying business performance continues to deteriorate. The stock's high beta of 1.35 indicates that it is significantly more volatile than the broader market, amplifying both gains and losses.

From a risk-adjusted perspective, the one-year risk-adjusted return of -0.18 combined with high volatility of 44.37% places Welspun Living in the "high risk, low return" category—an unfavourable combination for investors. The negative Sharpe ratio indicates that the stock has failed to adequately compensate investors for the elevated risk undertaken.

Technical Analysis: Sideways Consolidation

From a technical standpoint, Welspun Living's stock trend shifted to "Sideways" on November 12, 2025, from a previously "Mildly Bearish" stance. The stock is currently trading above all major moving averages—5-day (₹132.50), 20-day (₹128.66), 50-day (₹122.81), 100-day (₹126.64), and 200-day (₹129.41)—suggesting short-term momentum has turned positive following the recent bounce from lows.

However, technical indicators present a mixed picture. The MACD shows "Mildly Bullish" on weekly charts but "Mildly Bearish" on monthly charts, whilst Bollinger Bands indicate "Bullish" weekly but "Mildly Bearish" monthly. The On-Balance Volume (OBV) remains "Bullish" on both timeframes, suggesting that volume is supporting recent price gains. The Dow Theory indicator shows "Mildly Bullish" on both weekly and monthly charts.

Immediate resistance lies at the 20-day moving average area of ₹128.66, with major resistance at ₹129.41 (200 DMA) and strong resistance at the 52-week high of ₹187.80. Support is anchored at the 52-week low of ₹105.00. The recent surge in delivery volumes—up 631.23% versus the 5-day average—indicates heightened retail participation, though whether this represents accumulation or distribution remains to be seen.

Investment Thesis: Attractive Valuation Meets Fundamental Concerns

Welspun Living presents a complex investment case where attractive valuation metrics clash with deteriorating fundamental performance. The company's proprietary Mojo Score of 40 out of 100 places it firmly in "SELL" territory, reflecting the challenging combination of negative financial trends, average quality metrics, and poor recent market performance despite attractive valuations.

The four-pillar Mojo analysis reveals the following assessment: Near-term drivers are "Mixed" with negative quarterly financial trends and sideways technicals; Quality is rated "Average" with weak return metrics but manageable leverage; Valuation is "Attractive" at current levels; and the overall assessment remains "Mixed" given conflicting signals across parameters.

The key investment question centres on whether the current attractive valuation—with the stock trading 26.73% below its 52-week high and at moderate multiples—adequately compensates for the substantial operational challenges and earnings uncertainty. The 93.54% year-on-year profit decline in Q2 FY26 is not merely a temporary blip but rather the culmination of steadily worsening trends across margins, returns, and profitability.

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