Zee Learn Q2 FY26: Losses Deepen Despite Revenue Growth as Costs Spiral

The quarter's results underscore a troubling pattern for Zee Learn: whilst the company has successfully expanded its revenue base, it faces mounting operational challenges that have prevented it from achieving sustainable profitability. The PAT margin collapsed to negative 8.27% in Q2 FY26 from a positive 1.75% in the preceding quarter, highlighting the severity of cost pressures. Employee expenses surged to ₹42.90 crores, representing 57.78% of revenues, whilst interest costs climbed to ₹12.73 crores, reflecting the company's high debt burden with a debt-to-equity ratio averaging 5.55 times over recent years.

Financial Performance: Revenue Growth Masks Profitability Crisis

Zee Learn's Q2 FY26 performance presents a stark dichotomy between top-line expansion and bottom-line deterioration. Net sales reached ₹74.25 crores, marking a robust 27.60% year-on-year growth from ₹58.19 crores in Q2 FY25. However, this figure represents a sequential decline of 31.48% from Q1 FY26's ₹108.37 crores, reflecting the seasonal nature of the education services business where the first quarter typically captures higher enrolment-driven revenues.

The operating profit before depreciation, interest, and tax (PBDIT), excluding other income, stood at ₹12.16 crores in Q2 FY26, yielding an operating margin of 16.38%. This represents a significant contraction from the 27.45% margin achieved in Q1 FY26 and compares with 11.22% in the year-ago quarter. The margin compression stems primarily from disproportionate growth in employee costs, which climbed 55.87% year-on-year to ₹42.90 crores, substantially outpacing the 27.60% revenue growth.

The company's gross profit margin deteriorated to 6.41% in Q2 FY26 from 16.51% in the previous quarter, whilst the PAT margin turned deeply negative at -8.27%. After accounting for interest expenses of ₹12.73 crores and depreciation of ₹10.57 crores, the company reported a pre-tax loss of ₹5.80 crores. With a minimal tax credit of ₹0.34 crores, the final net loss settled at ₹6.14 crores, marking the company's worst quarterly performance in recent periods.

Operational Challenges: Cost Structure Remains Unmanageable

Zee Learn's operational performance in Q2 FY26 reveals fundamental challenges in cost management that threaten the company's path to sustainable profitability. The employee cost-to-revenue ratio stood at 57.78%, an alarming level that leaves little room for other operational expenses and profit generation. This ratio has deteriorated significantly from 47.32% in Q2 FY25 and 40.05% in Q1 FY26, suggesting that the company's expansion efforts have come at the expense of operational efficiency.

The company's return on equity (ROE) averaged 7.49% over recent periods, substantially below the industry standard for profitable growth companies. The latest ROE of 10.83%, whilst showing some improvement, remains weak and reflects the company's struggle to generate adequate returns for shareholders given its capital base. The return on capital employed (ROCE) averaged just 4.84%, with the latest figure at 11.85% still indicating poor capital efficiency. These metrics underscore a business model that has yet to demonstrate consistent value creation.

The balance sheet presents additional concerns. Current liabilities of ₹877.47 crores as of March 2025 substantially exceeded current assets of ₹798.61 crores, creating a working capital deficit. The company's debt-to-EBITDA ratio averaged 11.20 times, indicating that it would take over eleven years of current EBITDA generation to pay down existing debt levels. Net debt-to-equity averaged 1.88 times, reflecting high leverage even after accounting for cash balances.

On a positive note, the company generated operating cash flow of ₹82.00 crores for the full year ending March 2025, demonstrating some ability to convert earnings into cash. However, this was achieved in a year that included an exceptional profit in Q4 FY24. The sustainability of positive cash generation remains questionable given the return to losses in recent quarters.

Industry Context: Competitive Pressures in Education Services

The education services sector in India has witnessed significant transformation post-pandemic, with increased competition from digital learning platforms and changing consumer preferences. Traditional players like Zee Learn face challenges in maintaining pricing power whilst managing the fixed costs associated with physical infrastructure and staffing. The company's revenue growth of 27.60% year-on-year suggests some success in capturing market share or expanding service offerings, but the inability to convert this into profitability raises questions about pricing strategy and competitive positioning.

The sector has seen consolidation and rationalisation, with well-capitalised players gaining market share whilst heavily indebted competitors struggle. Zee Learn's high leverage and weak profitability metrics place it in a vulnerable position within this competitive landscape. The company's operating margin of 16.38% in Q2 FY26, whilst positive, compares unfavourably with better-capitalised peers who can leverage scale advantages and technology investments to drive superior margins.

Peer Comparison: Valuation Discount Reflects Fundamental Weakness

Zee Learn's valuation metrics reflect the market's assessment of its challenged business model and weak financial profile. The stock trades at a price-to-earnings ratio of 13.45 times trailing twelve-month earnings, substantially below the industry average P/E of 40 times. Whilst this might appear attractive on the surface, the discount is justified by the company's negative earnings trend, high leverage, and weak return ratios.

The price-to-book ratio of 1.40 times suggests the market values Zee Learn at a modest premium to its net asset value of ₹6.00 per share. However, this premium appears generous given the company's weak ROE of 7.49%, which falls well short of the cost of capital. In contrast, better-performing peers like Career Point Education and Mach Conferences command substantially higher P/BV multiples of 10.08 times and 2.12 times respectively, justified by their superior ROE of 32.44% and 34.93%.

The debt-to-equity comparison is particularly striking. Zee Learn's leverage ratio of 1.88 times stands in sharp contrast to peers who operate with minimal or negative net debt. This high leverage constrains strategic flexibility and makes the company vulnerable to any deterioration in operating performance or adverse changes in interest rates. The absence of any dividend yield further highlights the company's inability to reward shareholders, with the last dividend paid in September 2019.

Valuation Analysis: Discount Justified by Weak Fundamentals

Zee Learn's current valuation reflects a market that has priced in significant execution risks and fundamental challenges. At ₹8.07 per share, the stock trades 27.62% below its 52-week high of ₹11.15 and 53.71% above its 52-week low of ₹5.25. The valuation grade of "Very Attractive" assigned by quantitative models must be viewed with considerable scepticism given the company's deteriorating financial performance and structural challenges.

The enterprise value-to-EBITDA multiple of 5.89 times appears reasonable on the surface, but this metric fails to capture the quality of earnings and sustainability concerns. The EV-to-EBIT multiple of 9.15 times more accurately reflects the company's challenged profitability, as it accounts for depreciation charges. With an EV-to-sales ratio of 1.61 times, the market is assigning a relatively modest revenue multiple, acknowledging the company's inability to convert sales into sustainable profits.

The proprietary Mojo Score of 38 out of 100 places Zee Learn firmly in "SELL" territory, recently downgraded from "STRONG SELL" at 28 points. This score reflects the combination of negative financial trends, below-average quality metrics, high leverage, and mixed technical signals. Whilst the valuation appears attractive on traditional metrics, the score appropriately weights the significant risks that make this a value trap rather than a value opportunity.

Shareholding Pattern: Stable Base with Minimal Institutional Interest

Zee Learn's shareholding structure reveals a stable promoter base but conspicuous absence of institutional conviction. Promoter holding has remained constant at 29.16% over the past five quarters, with no buying or selling activity. This stability provides some governance comfort, though the pledging of 29.16% of promoter shares raises concerns about financial stress at the promoter level.

Foreign institutional investor (FII) holding has shown marginal improvement, rising from 5.98% in September 2024 to 6.57% in September 2025. However, this modest increase of 0.59 percentage points over four quarters hardly constitutes a vote of confidence. The complete absence of mutual fund holdings is particularly telling, as domestic institutional investors typically conduct thorough due diligence and their avoidance signals significant concerns about the company's prospects.

The retail and non-institutional investor base comprises 78.42% of the shareholding, making the stock highly susceptible to sentiment-driven volatility. With just 11 FII holders and minimal institutional participation, the stock lacks the anchor investors who typically provide stability and liquidity. This ownership structure contributes to the stock's high volatility, with a beta of 1.50 indicating 50% greater price swings than the broader market.

Stock Performance: Persistent Underperformance Across Timeframes

Zee Learn's stock price performance paints a picture of sustained value destruction across multiple timeframes. The stock has declined 18.57% over the past year, significantly underperforming the Sensex's 4.04% gain and generating negative alpha of -22.61 percentage points. This underperformance accelerates over longer periods, with the stock down 24.30% over five years whilst the Sensex surged 99.62%, and down a catastrophic 74.58% over ten years against the Sensex's 218.39% gain.

The six-month return of 35.63% stands as an anomaly, driven by speculative interest and hope around a turnaround that has failed to materialise. This brief outperformance has reversed sharply in recent months, with the stock down 18.81% over the past three months and 12.28% over the past month. The stock currently trades below all key moving averages—5-day (₹8.42), 20-day (₹8.64), 50-day (₹9.02), 100-day (₹9.28), and 200-day (₹8.26)—indicating weak technical momentum across all timeframes.

The risk-adjusted return profile is equally concerning. Over the past year, Zee Learn generated a risk-adjusted return of -0.37 with volatility of 50.57%, placing it firmly in the "HIGH RISK LOW RETURN" category. This compares unfavourably with the Sensex's risk-adjusted return of 0.32 with volatility of just 12.45%. The stock's beta of 1.50 indicates it amplifies market movements by 50%, making it unsuitable for risk-averse investors.

Investment Thesis: Attractive Valuation Insufficient to Offset Fundamental Risks

The investment case for Zee Learn rests on a foundation of attractive valuation metrics that must be weighed against significant fundamental and operational challenges. The company's below-average quality grade reflects its weak financial performance over the long term, with negative sales growth of 2.01% and negative EBIT growth of 0.56% over five years. The financial trend remains negative as of September 2025, with the company posting losses despite revenue growth.

The technical picture shows a mildly bullish trend as of November 3, 2025, but this must be viewed with scepticism given the stock's persistent underperformance and weak fundamentals. Technical indicators present mixed signals, with MACD showing mildly bearish on weekly charts but bullish on monthly, whilst RSI shows no clear signal. The stock's position below all major moving averages suggests any technical bounce is likely to face significant resistance.

Key Strengths & Risk Factors

Outlook: Critical Monitoring Points for Turnaround Assessment

The path forward for Zee Learn requires significant operational improvements and deleveraging to achieve sustainable profitability. Investors should monitor specific metrics to assess whether management can execute a credible turnaround or whether the current trajectory of value destruction will continue.

The company's ability to navigate these challenges will determine whether the current valuation represents a contrarian opportunity or a value trap. Given the weight of evidence—persistent losses, unsustainable leverage, weak return ratios, and institutional avoidance—the balance of probabilities tilts heavily towards continued underperformance rather than a successful turnaround.