Aarti Drugs Ltd Upgraded to Sell on Technical Improvement Despite Mixed Financials

Quality Assessment: Operational Efficiency Amidst Profit Decline

Despite the recent upgrade, Aarti Drugs continues to face headwinds in its financial performance. The company reported a disappointing quarter in Q3 FY25-26, with a net profit after tax (PAT) of ₹40.54 crores, marking a sharp decline of 18.6% compared to the previous four-quarter average. Operating profit has contracted at an annualised rate of -8.44% over the past five years, underscoring persistent challenges in growth momentum.

However, the company’s operational efficiency remains a relative bright spot. Aarti Drugs boasts a robust return on capital employed (ROCE) of 15.44%, indicating effective utilisation of capital resources. Additionally, the firm maintains a conservative capital structure with an average debt-to-equity ratio of 0.46 times, which is favourable in the capital-intensive pharmaceutical sector. The operating profit to interest coverage ratio, although at a low 5.92 times, still suggests manageable debt servicing capacity.

Valuation: Attractive Metrics Amidst Discounted Pricing

Valuation metrics have played a significant role in the recent rating upgrade. The company’s ROCE of 12.5% combined with an enterprise value to capital employed (EV/CE) ratio of 1.9 positions Aarti Drugs attractively relative to its peers. The stock is trading at a discount compared to historical averages within the Pharmaceuticals & Biotechnology sector, offering potential value for investors willing to look beyond short-term earnings volatility.

Moreover, the company’s price-to-earnings growth (PEG) ratio stands at a compelling 0.5, reflecting a favourable balance between valuation and earnings growth prospects. Despite a negative one-year stock return of -4.34%, profits have risen by 32.7% over the same period, suggesting underlying operational improvements that the market may not have fully priced in.

Financial Trend: Mixed Signals with Profitability Under Pressure

Financial trends for Aarti Drugs reveal a complex picture. While the company’s long-term growth trajectory remains subdued, with operating profits shrinking at nearly 8.5% annually over five years, recent profit growth of 32.7% year-on-year indicates some recovery in earnings power. However, the elevated interest expense of ₹9.29 crores in the latest quarter—the highest recorded—raises concerns about rising financial costs.

Stock returns have lagged behind broader market benchmarks. Over the past year, Aarti Drugs delivered a negative return of -4.34%, underperforming the BSE Sensex’s 9.35% gain and the BSE500 index over three years. The five-year return of -42.16% starkly contrasts with the Sensex’s 62.73% appreciation, highlighting the company’s struggles to keep pace with market leaders.

Technical Analysis: Shift from Bearish to Mildly Bearish Outlook

The upgrade in Aarti Drugs’ rating is largely attributable to improvements in its technical profile. The technical trend has shifted from bearish to mildly bearish, signalling a potential stabilisation in price momentum. Key indicators present a mixed but cautiously optimistic view:

• MACD remains bearish on both weekly and monthly charts, indicating continued downward momentum.
• Relative Strength Index (RSI) shows no clear signal on weekly or monthly timeframes, suggesting a neutral momentum phase.
• Bollinger Bands indicate a mildly bearish stance weekly, but remain bearish monthly, reflecting some volatility and pressure on prices.
• Moving averages on the daily chart remain bearish, consistent with the recent downtrend.
• Key technical indicators such as the KST oscillator and Dow Theory present a mixed picture: weekly KST is bearish but monthly KST is mildly bullish; weekly Dow Theory is mildly bullish while monthly remains mildly bearish.
• On-balance volume (OBV) readings are encouraging, with weekly OBV mildly bullish and monthly OBV bullish, suggesting accumulation by investors despite price weakness.

These technical nuances underpin the decision to upgrade the stock’s rating, reflecting a less pessimistic outlook and potential for price consolidation or modest recovery.

Stock Price and Market Performance

As of 23 February 2026, Aarti Drugs was trading at ₹371.65, marginally up 0.22% from the previous close of ₹370.85. The stock’s 52-week high stands at ₹574.95, while the 52-week low is ₹312.50, indicating a wide trading range and significant volatility over the past year. Daily price action shows a high of ₹373.80 and a low of ₹366.45, reflecting relatively tight intraday movement.

Comparative returns against the Sensex reveal underperformance across most timeframes, with the exception of a modest 0.28% gain over three years versus the Sensex’s 36.45%. The stark contrast in five-year returns (-42.16% versus Sensex’s 62.73%) highlights the stock’s challenges in delivering sustained shareholder value.

Shareholding and Industry Context

Aarti Drugs remains majority-owned by promoters, which often provides stability in strategic direction and governance. Operating within the Pharmaceuticals & Biotechnology sector, the company faces intense competition and regulatory challenges that have impacted its growth trajectory. Its market capitalisation grade stands at 3, reflecting a mid-tier valuation relative to peers.

While the company’s Mojo Grade has improved from Strong Sell to Sell, the overall score of 34.0 still signals caution for investors. The upgrade reflects a recognition of technical stabilisation and valuation appeal but does not yet indicate a full turnaround in fundamentals or market sentiment.

Conclusion: A Cautious Upgrade Reflecting Mixed Fundamentals

The recent upgrade of Aarti Drugs Ltd’s investment rating to Sell from Strong Sell is driven primarily by a shift in technical indicators and an attractive valuation relative to peers. Despite ongoing financial headwinds, including declining operating profits and elevated interest expenses, the company’s strong ROCE and low debt levels provide some reassurance on operational efficiency and balance sheet strength.

Investors should weigh the modest technical improvements and valuation discounts against the company’s underwhelming long-term growth and recent profit declines. The stock’s performance relative to broader market indices remains weak, underscoring the need for cautious optimism. For those considering exposure to the Pharmaceuticals & Biotechnology sector, Aarti Drugs presents a complex risk-reward profile that merits close monitoring as market conditions evolve.

Limited Period Only. Start at Rs. 9,999 - Get MojoOne for 1 Year + 3 Months FREE (60% Off) Get 71% Off →