Active Clothing Co Ltd Upgraded to Sell on Technical Improvements and Valuation Appeal

Quality Assessment: Mixed Signals Amidst Financial Performance

Active Clothing’s quality rating remains subdued, consistent with its overall Mojo Grade of 34.0, which still signals a Sell recommendation. The company’s Return on Capital Employed (ROCE) averaged 8.93% over the long term, indicating modest efficiency in generating returns from its capital base. However, the half-year ROCE peaked at 12.39%, suggesting some recent operational improvements. Despite this, the firm’s ability to service debt remains weak, with a high Debt to EBITDA ratio of 4.42 times, raising concerns about financial leverage and risk.

Net sales for the nine months ending December 2025 rose by a robust 30.03% to ₹215.58 crores, while profit after tax (PAT) increased to ₹8.55 crores, marking a 95.5% rise year-on-year. These figures demonstrate operational progress, yet the company’s fundamental strength is still considered weak relative to peers, which is reflected in the unchanged Quality Grade and the cautious stance of analysts.

Valuation: Attractive Discounts Amidst Market Underperformance

Valuation metrics have improved, contributing to the upgrade in the overall rating. Active Clothing trades at an Enterprise Value to Capital Employed ratio of 1.5, which is attractive compared to its sector peers’ historical averages. The company’s Price/Earnings to Growth (PEG) ratio stands at a low 0.2, indicating undervaluation relative to its earnings growth potential. This valuation appeal is particularly notable given the stock’s significant underperformance over the past year, with a negative return of -21.74%, compared to the BSE500’s positive 7.87% return in the same period.

Longer-term returns paint a more favourable picture, with the stock delivering a 5-year return of 927.57%, vastly outperforming the Sensex’s 65.60% over the same timeframe. This disparity highlights the stock’s cyclical nature and potential for recovery, which investors may find compelling at current price levels near ₹110, well below its 52-week high of ₹161.

Financial Trend: Positive Quarterly Momentum but Lingering Concerns

The company’s recent quarterly results for Q2 FY25-26 indicate positive momentum, with net sales and profits showing healthy growth. The PAT for the nine-month period rose to ₹8.55 crores, reflecting a 95.5% increase, while net sales grew by 30.03%. These improvements suggest that Active Clothing is gaining traction operationally, which supports a more optimistic short-term financial trend.

However, the long-term financial trend remains cautious due to the company’s high leverage and modest ROCE. The Debt to EBITDA ratio of 4.42 times signals elevated financial risk, which could constrain future growth and profitability if not addressed. This mixed financial trend has led analysts to maintain a Sell rating, despite the upgrade from Strong Sell, reflecting a balance between recent progress and structural challenges.

Technical Analysis: Shift from Bearish to Mildly Bearish Signals

The most significant driver behind the rating upgrade is the improvement in technical indicators. The technical grade has shifted from bearish to mildly bearish, signalling a potential stabilisation in the stock’s price trend. Key technical metrics reveal a nuanced picture:

• MACD (Moving Average Convergence Divergence) remains bearish on a weekly basis but is mildly bearish monthly, indicating some easing of downward momentum.
• RSI (Relative Strength Index) shows no clear signal on both weekly and monthly charts, suggesting a neutral momentum phase.
• Bollinger Bands are mildly bearish on weekly and monthly timeframes, reflecting moderate volatility but less pronounced selling pressure.
• Moving averages on a daily basis are mildly bearish, consistent with a cautious but improving trend.
• KST (Know Sure Thing) indicator is mildly bullish weekly but mildly bearish monthly, highlighting short-term strength amid longer-term caution.
• Dow Theory analysis shows no definitive trend on weekly or monthly charts, indicating consolidation.

These technical signals collectively suggest that while the stock is not yet in a strong uptrend, the worst of the bearish momentum may be abating. This technical stabilisation has been a key factor in the upgrade from Strong Sell to Sell, reflecting a more balanced risk profile for investors.

Stock Price and Market Context

Active Clothing’s current price stands at ₹109.95, up 3.92% on the day, with a trading range between ₹103.80 and ₹109.95. The stock remains well below its 52-week high of ₹161.00 but comfortably above its 52-week low of ₹82.55. This price action aligns with the technical indicators suggesting a mild recovery phase.

Comparatively, the Sensex has delivered a 6.66% return over the past year, while Active Clothing has lagged significantly with a -21.74% return. However, the stock’s longer-term performance remains impressive, with a three-year return of 129.06% and a five-year return exceeding 900%, underscoring its cyclical nature and potential for rebound.

Shareholding and Industry Position

The majority shareholding remains with promoters, providing stability in ownership and strategic direction. Operating within the garments and apparels sector, Active Clothing faces competitive pressures but benefits from a growing textile industry backdrop. Its recent financial improvements and valuation discounts may attract investors seeking value plays in this space, albeit with caution due to the company’s financial leverage.

Conclusion: Balanced Upgrade Reflecting Technical and Valuation Improvements

The upgrade of Active Clothing Co Ltd’s investment rating from Strong Sell to Sell reflects a careful reassessment of its technical outlook and valuation attractiveness against a backdrop of mixed financial fundamentals. While the company’s long-term financial strength remains weak, recent quarterly performance and improved technical indicators suggest a stabilising trend. The stock’s attractive valuation metrics, including a low PEG ratio and reasonable Enterprise Value to Capital Employed, further support this cautious optimism.

Investors should weigh the company’s operational progress and technical recovery against its high debt levels and historical underperformance relative to the broader market. The current Sell rating signals that while risks remain, the stock may be approaching a more favourable entry point for those willing to accept moderate risk in pursuit of potential gains.

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