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

Quality Assessment: Persistent Fundamental Weaknesses

Despite the recent upgrade, Lakshmi Mills’ quality parameters remain subdued. The company’s long-term fundamental strength is weak, with an average Return on Capital Employed (ROCE) of just 1.80%, indicating limited efficiency in generating returns from its capital base. This figure is significantly below industry averages, reflecting operational challenges and subdued profitability.

Net sales growth over the past five years has been modest at an annualised rate of 9.08%, which is underwhelming for a company in the dynamic garments and apparels sector. Furthermore, the company’s ability to service its debt is concerning, with an average EBIT to Interest ratio of 0.73, signalling that earnings before interest and tax are insufficient to comfortably cover interest expenses. This weak debt servicing capacity raises questions about financial stability in a rising interest rate environment.

Additionally, domestic mutual funds hold a negligible stake of 0.01% in Lakshmi Mills, suggesting limited institutional confidence. Given that mutual funds typically conduct thorough on-the-ground research, their minimal exposure may indicate reservations about the company’s valuation or business prospects.

Valuation: Attractive Yet Reflective of Risks

On the valuation front, Lakshmi Mills presents a mixed picture. The company’s ROCE of 0.2% and an Enterprise Value to Capital Employed ratio of 0.6 suggest that the stock is trading at a discount relative to its peers’ historical valuations. This discount could be attractive to value investors seeking turnaround opportunities.

However, this valuation attractiveness is tempered by the company’s deteriorating profitability. Over the past year, while the stock price has appreciated by 29.12%, profits have declined sharply by 140%. This divergence between price performance and earnings raises concerns about sustainability and the quality of earnings growth.

Comparatively, the stock has outperformed the broader market, with a one-year return of 29.12% versus the BSE500’s 14.19%. Over longer horizons, Lakshmi Mills has delivered impressive returns, including a 5-year return of 297.96% compared to the Sensex’s 61.20%. These figures highlight the stock’s potential for capital appreciation despite fundamental headwinds.

Financial Trend: Mixed Signals from Recent Quarterly Performance

Recent quarterly results for Q3 FY25-26 have shown some encouraging signs. Profit Before Tax excluding Other Income (PBT LESS OI) surged to ₹2.47 crores, representing a remarkable growth of 215.6% compared to the previous four-quarter average. Similarly, Profit After Tax (PAT) for the latest six months stood at ₹4.74 crores, indicating an improvement in bottom-line performance.

Operating profit to interest coverage ratio for the quarter reached a robust 3.50 times, the highest recorded, signalling enhanced ability to meet interest obligations in the short term. These positive trends suggest operational improvements and better cost management.

Nevertheless, the long-term financial trajectory remains challenging. The company’s average EBIT to interest ratio of 0.73 and low ROCE highlight structural issues that could limit sustainable growth. Investors should weigh these short-term gains against persistent fundamental weaknesses.

Technical Analysis: Upgrade Driven by Improved Market Indicators

The primary catalyst for the upgrade from Strong Sell to Sell is the improvement in technical indicators. The technical trend has shifted from bearish to mildly bearish, reflecting a stabilisation in price momentum. Key technical metrics present a nuanced picture:

• MACD (Moving Average Convergence Divergence) remains bearish on a weekly basis but has improved to mildly bearish on the monthly chart.
• Relative Strength Index (RSI) shows no clear signal on both weekly and monthly timeframes, indicating a neutral momentum.
• Bollinger Bands suggest a mildly bearish stance weekly but a bullish outlook monthly, hinting at potential upward price movement in the medium term.
• Moving averages on a daily basis are mildly bearish, while the KST (Know Sure Thing) indicator is bearish weekly and mildly bearish monthly.
• Dow Theory analysis shows no definitive trend on either weekly or monthly charts.

These mixed technical signals imply that while the stock is not yet in a strong uptrend, the worst of the downtrend may be over. The stock price closed at ₹7,605 on 26 February 2026, up 1.10% from the previous close of ₹7,522.40, with intraday highs reaching ₹7,648.00. The 52-week price range remains wide, from a low of ₹4,900.05 to a high of ₹10,059.00, reflecting significant volatility.

Overall, the technical upgrade reflects cautious optimism among traders, who may be positioning for a potential recovery after a prolonged bearish phase.

Comparative Performance: Outperforming Market Despite Profitability Concerns

When benchmarked against the Sensex, Lakshmi Mills has delivered superior returns over multiple timeframes. The stock’s one-year return of 29.12% significantly outpaces the Sensex’s 10.29%. Over three and five years, the stock has generated returns of 100.44% and 297.96%, respectively, compared to the Sensex’s 38.36% and 61.20%. Even over a decade, the stock’s 257.63% return is on par with the Sensex’s 258.10%.

This market-beating performance underscores the stock’s appeal to growth-oriented investors despite its fundamental challenges. However, the sharp decline in profits over the past year (-140%) signals caution, as earnings volatility may impact future valuations and investor confidence.

Conclusion: A Cautious Upgrade Reflecting Technical Recovery Amid Fundamental Risks

The upgrade of Lakshmi Mills Company Ltd’s investment rating from Strong Sell to Sell is primarily driven by improved technical indicators signalling a potential bottoming out of the stock price. While recent quarterly results show operational improvements and better interest coverage, the company’s long-term fundamental metrics remain weak, with low ROCE, modest sales growth, and poor debt servicing capacity.

Valuation metrics suggest the stock is attractively priced relative to peers, but the sharp decline in profitability tempers enthusiasm. Institutional investor interest remains minimal, reflecting ongoing concerns about the company’s business prospects.

Investors should approach Lakshmi Mills with caution, recognising the potential for a technical rebound but remaining mindful of the underlying financial risks. A balanced view that considers both the improved market signals and persistent fundamental weaknesses is essential for informed decision-making.

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