Zodiac Clothing Q2 FY26: Losses Deepen as Revenue Declines Amid Persistent Operational Challenges

The stock has reacted negatively to the persistent underperformance, trading at ₹95.40 as of November 14, 2025, down 13.43% over the past year and significantly underperforming the Sensex, which gained 8.42% during the same period. With the company posting consecutive quarterly losses and operating margins remaining deeply negative at -17.89%, investor confidence has eroded substantially, reflected in the stock's classification as a "Strong Sell" with a Mojo Score of just 1 out of 100.

The September 2025 quarter marks another disappointing chapter for Zodiac Clothing, as the company's financial trajectory continues its downward spiral. With operating losses before other income expanding to ₹6.53 crores and interest costs rising to ₹2.66 crores—the highest in recent quarters—the company faces mounting pressure on both operational execution and financial obligations. The absence of institutional investors and stagnant promoter holding at 71.40% suggests limited confidence from sophisticated market participants.

Financial Performance: Revenue Contraction and Margin Collapse

Zodiac Clothing's Q2 FY2026 performance represents a significant deterioration across all financial parameters. Net sales declined 6.62% quarter-on-quarter to ₹36.51 crores, marking the lowest revenue figure among recent quarters and reflecting a 14.80% year-on-year contraction. This revenue decline is particularly concerning given that Q2 typically represents a seasonally stronger period for garment exporters preparing for winter collections in international markets.

The operating margin story is equally alarming. Operating profit before depreciation, interest, tax, and other income (PBDIT excluding OI) deteriorated sharply to a loss of ₹6.53 crores in Q2 FY2026, translating to an operating margin of -17.89%—the worst performance in the past seven quarters. This represents a significant deterioration from the -9.97% margin recorded in Q1 FY2026 and indicates fundamental challenges in the company's cost structure and pricing power.

Employee costs remained elevated at ₹11.69 crores, representing 32.02% of net sales, whilst the company's total operating expenditure continues to exceed revenue generation capacity. The persistent negative operating leverage suggests that the company is unable to achieve economies of scale even as it attempts to maintain production levels. Other income of ₹3.30 crores provided some cushion, but this non-operating support cannot mask the underlying operational distress.

The net loss of ₹11.82 crores in Q2 FY2026, whilst representing a 16.05% year-on-year deterioration, actually worsened sequentially by 26.82% from the ₹9.32 crores loss in Q1 FY2026. The PAT margin of -32.37% underscores the severity of the profitability crisis, with interest costs of ₹2.66 crores and depreciation of ₹5.83 crores further eroding the already negative operating profit. The company's inability to generate positive earnings despite relatively low tax outflows (₹0.09 crores) highlights the structural nature of its challenges.

Operational Distress: Structural Challenges Mount

The operational challenges facing Zodiac Clothing extend far beyond cyclical headwinds, pointing to fundamental structural issues in the company's business model. The company's operating profit to interest coverage ratio stands at a deeply concerning -2.45 times in Q2 FY2026, indicating that operating losses are more than twice the interest obligations. This metric has consistently remained negative, raising serious questions about the sustainability of the current capital structure.

Return on equity (ROE) remains at 0.0% on an average basis, whilst the latest ROE stands at -18.09%, reflecting the company's inability to generate returns for shareholders. The return on capital employed (ROCE) paints an equally dismal picture at -14.32% for the latest period and -12.12% on an average basis. These profitability metrics place Zodiac Clothing amongst the poorest performers in the garment and apparel sector, where peers typically maintain positive returns despite industry challenges.

The balance sheet reveals a company under considerable strain. Shareholder funds have declined from ₹246.09 crores in March 2024 to ₹205.54 crores in March 2025, a reduction of ₹40.55 crores driven primarily by accumulated losses. Whilst long-term debt has been reduced to zero as of March 2025 (from ₹2.59 crores in March 2024), current liabilities have increased to ₹104.80 crores, with trade payables rising to ₹38.34 crores. The debt-to-equity ratio on a half-yearly basis stands at 0.62 times—the highest in recent periods—indicating increased reliance on short-term borrowings.

Cash flow generation remains severely impaired. For FY2025, the company reported negative operating cash flow of ₹14.00 crores, a significant deterioration from the ₹5.00 crores negative cash flow in FY2024. The company has been forced to rely on cash flow from investing activities (₹27.00 crores in FY2025, likely from asset sales or investment liquidation) to partially offset operational cash burn. With closing cash of just ₹7.00 crores as of March 2025, the company's liquidity position appears precarious given the ongoing operational losses.

Industry Context: Garment Export Headwinds Persist

Zodiac Clothing operates in the highly competitive and price-sensitive garment and apparel export sector, where Indian manufacturers face intense competition from Bangladesh, Vietnam, and other low-cost Asian producers. The company's 100% export-oriented unit model, whilst providing certain fiscal benefits, exposes it to currency fluctuations, changing international demand patterns, and the bargaining power of large international retailers.

The broader garment sector has faced challenges from weakening demand in key Western markets, inventory corrections by major retailers, and rising input costs including cotton prices and labour expenses. However, Zodiac Clothing's underperformance significantly exceeds typical industry challenges. The company's revenue decline of 14.80% year-on-year in Q2 FY2026 contrasts sharply with the garment and apparel sector's 1-year return of 3.39%, highlighting company-specific execution issues rather than purely sectoral headwinds.

The company's inability to maintain pricing power or secure profitable orders suggests either a lack of product differentiation, quality issues affecting client relationships, or operational inefficiencies that prevent competitive pricing. The persistent negative operating margins indicate that the company is either accepting unprofitable orders to maintain capacity utilisation or facing cost structures that are fundamentally uncompetitive in the current market environment.

Peer Comparison: Significant Underperformance Evident

When benchmarked against peers in the garment and apparel sector, Zodiac Clothing's financial metrics reveal a company struggling at the bottom of the performance spectrum. The company's ROE of 0.0% (average basis) compares unfavourably to sector peers, several of whom maintain positive returns despite industry challenges. The company's price-to-book ratio of 1.20x might appear reasonable in isolation, but given the negative ROE and persistent losses, this valuation represents significant risk rather than value.

The peer comparison reveals that whilst several companies in the garment sector face profitability challenges, Zodiac Clothing's consistent loss-making status and deteriorating trends position it as a particularly weak performer. Companies like Axita Cotton demonstrate that strong ROE (37.81%) is achievable in this sector with proper execution, whilst others like VIP Clothing and DCM Nouvelle maintain modest but positive returns. Zodiac Clothing's inability to achieve even marginal profitability despite years of operations raises fundamental questions about business viability.

The company's debt-to-equity ratio of 0.41 is moderate compared to some peers, but this metric becomes less meaningful when the equity base itself is eroding through accumulated losses. With the company ranked sixth amongst its peer group by market capitalisation at ₹246 crores, the micro-cap status limits access to capital markets for potential turnaround funding, further constraining strategic options.

Valuation Analysis: Value Trap Territory

Zodiac Clothing's valuation metrics paint the picture of a classic value trap—superficially cheap multiples masking fundamental business deterioration. The company trades at a price-to-book value of 1.20x, which might appear attractive at first glance. However, with the book value itself declining due to accumulated losses and ROE deeply negative at -18.09%, this P/BV ratio offers no margin of safety. The book value per share of ₹79.07 is eroding quarterly as losses mount, making the current market price of ₹95.40 increasingly difficult to justify on asset backing alone.

Traditional valuation metrics like P/E ratio are not applicable given the company's loss-making status. The EV/EBITDA multiple of -17.68x and EV/EBIT of -8.23x are negative, reflecting the company's negative operating profits. The EV/Sales ratio of 1.95x appears elevated for a loss-making company with declining revenues, suggesting the market has yet to fully price in the severity of operational challenges. The company's overall valuation grade has been classified as "Risky" since September 2015, with prior classifications of "Very Expensive" and "Expensive" indicating a long history of valuation concerns.

The stock's 52-week performance underscores the market's loss of confidence. Trading at ₹95.40, the stock is down 38.19% from its 52-week high of ₹154.35, though it has recovered modestly from the 52-week low of ₹81.00. The stock's high volatility of 51.04% and negative risk-adjusted return of -0.26 classify it as a "High Risk Low Return" investment—the worst possible risk-return profile. With a beta of 1.50, the stock exhibits significantly higher volatility than the broader market, amplifying downside risk during market corrections.

Shareholding Pattern: Stable but Uninspiring

The shareholding pattern of Zodiac Clothing has remained remarkably stable over the past five quarters, with promoter holding steady at 71.40% and no institutional participation whatsoever. This stability, however, should not be confused with strength—rather, it reflects a lack of interest from sophisticated investors who typically conduct rigorous due diligence before committing capital.

The complete absence of foreign institutional investors (FIIs), mutual funds, insurance companies, and other domestic institutional investors (DIIs) is a significant red flag. Institutional investors typically avoid companies with persistent operational losses, weak governance, or limited turnaround prospects. The 28.60% non-institutional holding represents primarily retail investors, many of whom may be trapped at higher price levels given the stock's significant decline from historical highs.

On a positive note, there is no promoter pledging, indicating that the promoter group has not leveraged their shareholding for borrowings. However, the promoters' apparent inability or unwillingness to inject fresh capital to support turnaround efforts, despite holding a commanding 71.40% stake, raises questions about their confidence in the company's recovery prospects. The stable but inactive shareholding pattern suggests a company in stasis, with neither fresh capital inflows nor significant exits—a typical characteristic of distressed micro-cap situations.

Stock Performance: Consistent Underperformance Across Timeframes

Zodiac Clothing's stock price performance has been consistently disappointing across virtually all timeframes, significantly underperforming both the Sensex and its sector peers. The stock has declined 13.43% over the past year, whilst the Sensex gained 8.42%, resulting in a negative alpha of -21.85 percentage points. This underperformance is not a recent phenomenon but a persistent trend spanning multiple years.

The longer-term performance is particularly stark. Over five years, the stock has declined 4.26% whilst the Sensex surged 92.75%, representing a massive negative alpha of -97.01 percentage points. The 10-year performance is catastrophic, with the stock down 62.62% compared to the Sensex's 228.43% gain—a staggering underperformance of -291.05 percentage points. This systematic value destruction over extended periods reflects the company's persistent operational struggles and inability to adapt to changing market conditions.

The stock's year-to-date performance of -26.28% versus the Sensex's 7.64% gain highlights accelerating underperformance in 2025. The stock also underperformed its immediate sector, with the garment and apparel sector delivering 3.39% returns over the past year, 16.82 percentage points better than Zodiac Clothing. This sector-relative underperformance confirms that the company's challenges are company-specific rather than industry-wide.

From a technical perspective, the stock is in a confirmed bearish trend, trading below all key moving averages including the 5-day (₹97.00), 20-day (₹98.03), 50-day (₹99.59), 100-day (₹102.53), and 200-day (₹102.73) moving averages. The technical indicator summary shows bearish signals across MACD, Bollinger Bands, and moving averages on both weekly and monthly timeframes. The stock's high beta of 1.50 amplifies volatility, making it particularly vulnerable during broader market corrections.

Investment Thesis: Multiple Red Flags Outweigh Limited Positives

The investment thesis for Zodiac Clothing is overwhelmingly negative, with fundamental, technical, and valuation parameters all pointing towards significant risk. The company's Mojo Score of 1 out of 100 and "Strong Sell" rating reflect a comprehensive assessment across multiple dimensions, all of which paint a troubling picture.

The quality assessment classifies Zodiac Clothing as a "Below Average" company based on long-term financial performance. The 5-year sales growth of just 4.83% and negative 5-year EBIT growth of -0.67% indicate a company that has failed to grow profitably over an extended period. The average EBIT to interest coverage of -4.97x demonstrates the company's inability to service debt from operations, whilst the average ROCE of -12.12% and average ROE of 0.0% confirm chronic capital inefficiency.

The financial trend has been classified as "Negative" since August 2025, driven by deteriorating quarterly performance across virtually all metrics. The company's PAT has fallen 28.70% compared to the previous four-quarter average, operating profit to net sales is at its lowest level, and debt-equity ratio is at its highest. The technical trend turned "Bearish" on November 13, 2025, confirming the negative momentum from a chart perspective as well.

Key Strengths & Risk Factors

Outlook: What to Watch

The road ahead for Zodiac Clothing appears exceptionally challenging. Without significant operational improvements, the company faces the risk of continued equity erosion and potential financial distress. The absence of institutional investors limits access to growth capital, whilst the micro-cap status constrains strategic options. Any meaningful turnaround would require substantial improvements in order book quality, aggressive cost restructuring, and likely external capital support—none of which appear imminent based on current trends.