Lakshmi Mills Company Ltd Upgraded to Sell on Technical Improvements Despite Fundamental Challenges

Quality Assessment: Persistent Fundamental Weaknesses

Despite the recent upgrade in rating, Lakshmi Mills continues to exhibit weak long-term fundamental strength. The company’s average Return on Capital Employed (ROCE) stands at a modest 1.80%, signalling limited efficiency in generating profits from its capital base. This figure is considerably below industry averages, reflecting challenges in operational performance.

Net sales growth over the past five years has been moderate at an annualised rate of 9.40%, which, while positive, does not indicate robust expansion in a competitive textile and garments market. Furthermore, the company’s ability to service its debt remains a concern, with an average EBIT to interest coverage ratio of just 0.72 times. This suggests vulnerability to interest rate fluctuations and potential liquidity constraints.

Investor confidence is also reflected in shareholding patterns, where domestic mutual funds hold a negligible 0.01% stake. Given their capacity for detailed due diligence, this minimal exposure may indicate reservations about the company’s valuation or business prospects at current levels.

Valuation: Attractive Yet Reflective of Risks

From a valuation perspective, Lakshmi Mills presents an interesting case. The company’s ROCE of 0.2% combined with an enterprise value to capital employed ratio of 0.6 suggests that the stock is trading at a discount relative to its peers’ historical valuations. This discount may appeal to value investors seeking opportunities in the garments and apparels sector.

However, this valuation attractiveness is tempered by the company’s recent profit performance. Over the past year, while the stock price has appreciated by 27.12%, profits have declined sharply by 279.8%. This divergence between price appreciation and earnings deterioration raises questions about the sustainability of the current valuation and the underlying business momentum.

Financial Trend: Mixed Signals with Recent Quarterly Improvement

Financially, Lakshmi Mills has demonstrated some positive momentum in recent quarters. The Profit Before Tax excluding Other Income (PBT LESS OI) for the latest quarter stood at ₹1.14 crore, marking a robust growth of 135.5% compared to the previous four-quarter average. Similarly, Profit After Tax (PAT) rose to ₹2.52 crore, an increase of 139.4% over the same period.

Operating profit to interest coverage ratio for the quarter improved significantly to 2.87 times, indicating better capacity to meet interest obligations in the short term. These improvements, however, contrast with the company’s longer-term financial trends, which remain subdued.

Over the last year, the stock has outperformed the broader market, generating a return of 27.12% compared to the BSE500’s 9.12%. Over longer horizons, Lakshmi Mills has delivered exceptional returns, with a five-year return of 308.05% versus the Sensex’s 66.63%, and a ten-year return of 251.62% closely tracking the Sensex’s 245.70%. These figures highlight the company’s potential for market-beating performance despite fundamental challenges.

Technicals: Key Driver Behind Upgrade

The primary catalyst for the recent upgrade from Strong Sell to Sell is the improvement in technical indicators. The technical trend has shifted from bearish to mildly bearish, signalling a less negative momentum in the stock’s price action.

Weekly and monthly Moving Average Convergence Divergence (MACD) readings remain bearish and mildly bearish respectively, but the Bollinger Bands show a more encouraging picture with a mildly bearish weekly and bullish monthly stance. This suggests that while short-term momentum is cautious, medium-term technicals are improving.

Relative Strength Index (RSI) readings on both weekly and monthly charts show no clear signal, indicating a neutral momentum phase. The KST (Know Sure Thing) indicator remains bearish weekly but mildly bearish monthly, while Dow Theory analysis reveals a mildly bullish weekly trend and no clear monthly trend.

Daily moving averages continue to be bearish, but the overall technical summary points to a stabilising price action. The stock’s recent day change of 2.74% and intraday price range between ₹7,200 and ₹7,990 further reflect this cautious optimism.

These technical improvements have encouraged analysts to moderate their stance, upgrading the Mojo Grade from Strong Sell to Sell, with a current Mojo Score of 34.0. The Market Capitalisation Grade remains at 4, reflecting the company’s mid-sized market presence within the Garments & Apparels sector.

Comparative Performance and Market Context

When compared to the Sensex, Lakshmi Mills has shown mixed relative performance. While the stock outperformed the Sensex over one week (+4.06% vs +2.30%) and one year (+27.12% vs +8.49%), it underperformed over one month (-6.25% vs -2.36%) and year-to-date (-5.35% vs -1.74%). This volatility underscores the stock’s sensitivity to market cycles and sector-specific dynamics.

The company’s 52-week high of ₹10,059 and low of ₹4,900 indicate a wide trading range, reflecting significant price swings over the past year. The current price of ₹7,500.05 positions the stock closer to the mid-point of this range, suggesting potential for both upside and downside depending on future developments.

Outlook and Investor Considerations

Investors considering Lakshmi Mills should weigh the recent technical improvements against the company’s ongoing fundamental challenges. The upgrade to a Sell rating reflects a more balanced view, recognising stabilising price momentum but acknowledging weak long-term financial metrics and modest growth prospects.

While the stock’s valuation appears attractive relative to peers, the sharp decline in profits over the past year and limited institutional interest suggest caution. The company’s ability to sustain recent quarterly improvements and convert them into consistent long-term growth will be critical for any further rating upgrades.

Given the mixed signals, investors with a higher risk tolerance may view the current price as an entry point for a turnaround play, while more conservative investors might prefer to monitor further fundamental progress before committing capital.

Summary of Rating Change

The upgrade from Strong Sell to Sell on 3 February 2026 was primarily driven by a shift in technical indicators from bearish to mildly bearish, signalling a potential bottoming out of the stock’s downtrend. However, the company’s quality and financial trend parameters remain weak, with low ROCE, modest sales growth, and poor debt servicing capacity. Valuation metrics are attractive but reflect underlying risks. Overall, the rating change reflects a cautious optimism tempered by fundamental concerns.

Key Metrics at a Glance

• Mojo Score: 34.0 (Upgraded from Strong Sell)
• Market Cap Grade: 4
• Current Price: ₹7,500.05
• 52-Week High/Low: ₹10,059 / ₹4,900.05
• ROCE (5-year average): 1.80%
• Net Sales Growth (5-year CAGR): 9.40%
• EBIT to Interest Coverage (avg): 0.72 times
• Quarterly PBT LESS OI Growth: 135.5%
• Quarterly PAT Growth: 139.4%
• Operating Profit to Interest (Quarter): 2.87 times
• 1-Year Stock Return: +27.12% vs BSE500 +9.12%
• Profit Decline (1 year): -279.8%

Conclusion

Lakshmi Mills Company Ltd’s recent rating upgrade to Sell reflects a technical stabilisation in the stock’s price action, offering a more tempered outlook compared to the previous Strong Sell stance. However, investors should remain mindful of the company’s fundamental weaknesses and mixed financial trends. The stock’s attractive valuation and market-beating returns over longer periods provide some encouragement, but the path to sustained recovery will depend on improved operational performance and stronger financial health.

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