Kandagiri Spinning Mills Downgraded to Sell Amid Mixed Technicals and Weak Fundamentals

Quality Assessment: Weak Long-Term Fundamentals

Despite the recent technical upgrades, Kandagiri Spinning Mills continues to exhibit weak fundamental quality. The company reported flat financial performance in Q2 FY25-26, with no growth in operating profit over the last five years. Net sales have grown at a modest annual rate of 16.52%, but operating profit has stagnated at 0%, signalling operational challenges. More concerning is the negative book value, indicating that the company’s liabilities exceed its assets, a red flag for long-term investors.

Return on Capital Employed (ROCE) for the half-year period stands at a dismal -10.19%, underscoring inefficient capital utilisation. Cash and cash equivalents are critically low at just ₹0.03 crore, raising liquidity concerns. The company’s debt profile is notable, with an average Debt to Equity ratio of 0 times, which suggests minimal leverage; however, this does not offset the negative EBITDA and poor profitability metrics.

Valuation and Market Performance

Kandagiri Spinning Mills is currently trading at ₹46.27, down 1.39% from the previous close of ₹46.92. The stock’s 52-week high is ₹51.13, while the low is ₹26.50, indicating a wide trading range over the past year. Despite the weak fundamentals, the stock has delivered a remarkable 44.59% return over the last year, significantly outperforming the Sensex’s 7.62% return and the broader BSE500 index’s 5.24% return.

Over longer horizons, the stock’s performance has been even more impressive, with a 5-year return of 467.03% compared to Sensex’s 77.88%. However, the 10-year return is negative at -41.43%, contrasting sharply with the Sensex’s 224.76%, reflecting volatility and inconsistent long-term growth. The current valuation appears risky relative to historical averages, especially given the company’s negative EBITDA and flat operating profit.

Financial Trend: Flat to Negative Trajectory

The financial trend for Kandagiri Spinning Mills remains subdued. The company’s net sales growth of 16.52% annually over five years is overshadowed by zero growth in operating profit and a decline in profits by -9.4% over the past year. This indicates margin pressure and operational inefficiencies. The negative EBITDA further compounds concerns about the company’s ability to generate sustainable earnings.

Liquidity constraints are evident from the minimal cash reserves and negative ROCE, which may limit the company’s capacity to invest in growth or weather economic downturns. The flat financial results in the recent quarter reinforce the narrative of stagnation, making it difficult to justify a positive outlook based on fundamentals alone.

Technical Analysis: Mixed Signals with Bullish Momentum

The technical parameters for Kandagiri Spinning Mills have improved notably, prompting an upgrade in the technical grade from “does not qualify” to “bullish.” Key indicators such as the Moving Average Convergence Divergence (MACD) are bullish on both weekly and monthly charts, signalling positive momentum. The Moving Averages on a daily basis also support a bullish trend, while the Know Sure Thing (KST) indicator is bullish on weekly and monthly timeframes.

Bollinger Bands show mild bullishness on weekly and monthly charts, and the Dow Theory also reflects a mildly bullish stance. However, the Relative Strength Index (RSI) remains bearish on both weekly and monthly scales, suggesting some underlying weakness or potential overbought conditions. On Balance Volume (OBV) data is inconclusive, with no clear weekly or monthly trend.

Overall, the technical outlook is cautiously optimistic, with several momentum indicators pointing upwards despite some bearish signals from RSI. This divergence may indicate a potential short-term rally but does not fully offset the fundamental weaknesses.

Market Capitalisation and Industry Context

Kandagiri Spinning Mills holds a Market Cap Grade of 3, placing it in the small-cap category within the Garments & Apparels sector. The company’s Mojo Grade is Sell, reflecting the combined assessment of quality, valuation, financial trend, and technicals. The stock’s recent day change was negative at -1.39%, mirroring a slight market pullback.

Within the textile industry, Kandagiri faces stiff competition and operational challenges that have constrained profitability. While the stock’s market-beating returns over the past year are impressive, they are not supported by strong earnings growth or cash flow generation, which raises questions about sustainability.

Summary and Outlook

Kandagiri Spinning Mills’ recent downgrade to a Sell rating by MarketsMOJO reflects a nuanced evaluation. While technical indicators have improved, signalling potential short-term bullish momentum, the company’s fundamental profile remains weak. Negative book value, flat operating profits, negative EBITDA, and poor capital efficiency weigh heavily against the stock.

Investors should be cautious given the company’s liquidity constraints and lack of earnings growth despite strong stock price appreciation. The disparity between market returns and financial performance suggests speculative interest rather than fundamental strength. Until Kandagiri Spinning Mills demonstrates consistent profitability and improved financial health, the Sell rating is likely to remain appropriate.

For those considering exposure to the Garments & Apparels sector, it may be prudent to explore better-rated alternatives with stronger fundamentals and more stable financial trends.

Only Rs. 9,999 - Get MojoOne + Stock of the Week for 1 Year (MRP = Rs. 34,999) Start Saving Now →