Faze Three Ltd Upgraded to Sell on Technical and Valuation Shifts

Technical Trends Signal Stabilisation After Bearish Phase

The primary driver behind the upgrade is a marked improvement in the technical grade, which shifted from mildly bearish to sideways. This suggests that the stock’s downward momentum has paused, offering a more neutral outlook in the near term. Key technical indicators present a mixed but cautiously optimistic picture. The Moving Average Convergence Divergence (MACD) remains bearish on a weekly basis and mildly bearish monthly, indicating some residual selling pressure. However, the Relative Strength Index (RSI) shows no clear signal, implying neither overbought nor oversold conditions.

Bollinger Bands have turned bullish on both weekly and monthly charts, signalling increased volatility with a positive bias. The daily moving averages remain mildly bearish, but the KST (Know Sure Thing) indicator shows a bullish trend monthly, offsetting the weekly bearishness. Dow Theory readings are mildly bullish weekly but mildly bearish monthly, reflecting short-term optimism tempered by longer-term caution. On-Balance Volume (OBV) is bullish across weekly and monthly timeframes, suggesting accumulation by investors despite recent price fluctuations.

Overall, these technical signals underpin the decision to upgrade the stock’s rating, as the sideways trend may provide a platform for potential recovery or consolidation after a period of decline.

Valuation Grade Downgraded to Expensive Amid Elevated Multiples

Contrasting the technical improvement, Faze Three’s valuation grade has deteriorated from fair to expensive. The company currently trades at a price-to-earnings (PE) ratio of 37.76, which is significantly higher than many of its peers in the textile industry. For context, competitors such as R&B Denims and SBC Exports sport PE ratios of 45.29 and 63.74 respectively, but these companies also carry higher PEG ratios, indicating more growth expectations priced in.

Other valuation metrics reinforce this expensive status: the enterprise value to EBITDA ratio stands at 19.50, and the EV to EBIT ratio is 30.76. The price-to-book value is 3.00, while the EV to capital employed is a modest 2.34. Return on capital employed (ROCE) and return on equity (ROE) are relatively low at 7.6% and 7.94% respectively, which does not justify the premium valuation. Dividend yield data is not available, further limiting income-oriented appeal.

Despite the expensive valuation, the stock price has shown resilience, trading at ₹525.95 with a 52-week high of ₹747.00 and a low of ₹318.00. The stock’s recent trading range, with a daily high of ₹563.20 and low of ₹507.95, reflects some volatility but also investor interest at current levels.

Financial Trends Remain Weak with Negative Quarterly Performance

Faze Three’s financial performance continues to be a concern, with the company reporting very negative results in Q2 FY25-26. Net sales declined by 2.35%, marking the third consecutive quarter of negative results. Operating profit growth over the past five years has been a modest 11.44% annually, which is underwhelming for a company in a competitive sector.

Operating cash flow for the latest year is at a low ₹12.27 crores, while profit after tax (PAT) for the last six months stands at ₹7.57 crores, reflecting a sharp decline of 47.28%. Profit before tax excluding other income (PBT less OI) fell by 159.3% compared to the previous four-quarter average, signalling deteriorating core profitability.

Despite these setbacks, the company maintains a strong debt servicing ability, with a low debt to EBITDA ratio of 1.40 times. This financial discipline provides some cushion against volatility and supports the company’s ability to meet obligations without stress.

Long-Term Returns Outperform Sensex Despite Recent Challenges

One of the more positive aspects of Faze Three’s profile is its market-beating returns over the long term. The stock has delivered a remarkable 670.62% return over five years and an extraordinary 2,821.94% over ten years, vastly outperforming the Sensex’s 64.22% and 238.44% returns respectively over the same periods. Even in the last one year, the stock returned 26.96%, compared to the Sensex’s 6.44%.

Shorter-term returns are also impressive, with a 1-month gain of 30.88% and a 1-week surge of 39.84%, while the Sensex posted negative returns over these intervals. This strong relative performance indicates investor confidence in the company’s growth potential despite recent financial headwinds.

Quality Assessment and Market Position

Faze Three’s overall quality rating remains low, reflected in its Mojo Score of 31.0 and a Mojo Grade of Sell, albeit improved from Strong Sell. The company’s market capitalisation grade is 4, indicating a mid-sized entity within its sector. Notably, domestic mutual funds hold no stake in the company, which may suggest limited institutional conviction or concerns about valuation and business fundamentals.

The company operates in the textile industry, a sector known for cyclical demand and margin pressures. Its ability to sustain growth and improve profitability will be critical to upgrading its quality rating further.

Investor Takeaway: Cautious Optimism Amid Mixed Signals

Faze Three Ltd’s upgrade from Strong Sell to Sell reflects a cautious optimism driven primarily by stabilising technical indicators. The sideways technical trend and bullish signals from Bollinger Bands and OBV suggest the stock may be forming a base for potential recovery. However, the expensive valuation and continued negative financial results temper enthusiasm.

Investors should weigh the company’s strong long-term returns and solid debt servicing capacity against its recent operational challenges and high multiples. The absence of institutional backing further underscores the need for careful analysis before committing capital.

For those considering exposure to the Garments & Apparels sector, Faze Three offers an intriguing but risky proposition. Monitoring upcoming quarterly results and valuation adjustments will be key to reassessing the stock’s investment merit in the coming months.

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