Lakshmi Mills Downgraded to Strong Sell Amid Weak Fundamentals and Bearish Technicals

Quality Assessment: Weak Long-Term Fundamentals

Despite Lakshmi Mills’ established presence in the textile industry, its long-term fundamental strength remains underwhelming. The company’s average Return on Capital Employed (ROCE) stands at a mere 1.80%, signalling inefficient capital utilisation relative to peers. This low ROCE is a critical factor weighing on the quality rating, as it suggests limited profitability from the company’s asset base over time.

Moreover, the company’s net sales have grown at an annualised rate of 9.40% over the past five years, which is modest for a firm of its scale and sector. This slow growth trajectory raises concerns about the company’s ability to expand its market share or improve operational leverage in a competitive environment.

Debt servicing capacity is another area of weakness. The average EBIT to interest coverage ratio is 0.72, indicating that earnings before interest and tax are insufficient to comfortably cover interest expenses. This poor ratio signals financial stress and heightens risk for creditors and investors alike.

Adding to the quality concerns is the minimal stake held by domestic mutual funds, which collectively own only 0.01% of Lakshmi Mills. Given that mutual funds typically conduct thorough due diligence and favour companies with robust fundamentals, their negligible holding suggests a lack of confidence in the company’s prospects at current valuations.

Valuation: Attractive but Reflective of Underperformance

From a valuation standpoint, Lakshmi Mills appears attractively priced relative to its capital employed and peer group. The company’s Enterprise Value to Capital Employed ratio is 0.6, which is low and suggests the stock is trading at a discount compared to historical averages within the sector. This valuation discount is likely a reflection of the company’s weak fundamentals and subdued growth outlook.

However, this apparent bargain is tempered by the company’s recent profit performance. Over the past year, while the stock price has delivered a positive return of 17.79%, the company’s 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 health.

Furthermore, the stock’s current price of ₹7,350 is significantly below its 52-week high of ₹10,059, indicating a substantial correction from peak levels. The recent day’s trading saw a decline of 2.13%, with the price moving between ₹7,156 and ₹7,947, reflecting ongoing volatility and investor uncertainty.

Financial Trend: Mixed Quarterly Performance Amid Long-Term Challenges

On the financial trend front, Lakshmi Mills reported a positive quarter in Q2 FY25-26, with Profit Before Tax (PBT) excluding other income at ₹1.14 crore, growing by 135.5% compared to the previous four-quarter average. Net Profit After Tax (PAT) also rose sharply by 139.4% to ₹2.52 crore in the same period. Additionally, the operating profit to interest coverage ratio improved to 2.87 times, the highest in recent quarters, signalling better short-term debt servicing ability.

Despite these encouraging quarterly results, the company’s long-term financial trajectory remains weak. The average ROCE of 0.2 for the quarter is far below industry standards, and the modest sales growth rate of 9.40% annually over five years underscores the lack of robust expansion. These factors contribute to a cautious outlook on the company’s financial health.

Comparing stock returns with the broader market, Lakshmi Mills has outperformed the Sensex over longer horizons, delivering 17.79% over one year, 87.83% over three years, and an impressive 287.06% over five years. However, short-term returns have lagged, with a 4.37% decline over the past month and a 7.24% drop year-to-date, signalling recent headwinds.

Technicals: Downgrade Driven by Bearish Momentum

The most significant trigger for the downgrade to Strong Sell is the deterioration in technical indicators. The technical grade shifted from mildly bearish to outright bearish, reflecting growing negative momentum in the stock’s price action.

Key technical signals include a bearish Moving Average Convergence Divergence (MACD) on the weekly chart and mildly bearish readings on the monthly chart. The Relative Strength Index (RSI) currently shows no clear signal on both weekly and monthly timeframes, indicating a lack of strong directional momentum but no immediate oversold conditions either.

Bollinger Bands present a mixed picture: bearish on the weekly scale but bullish monthly, suggesting short-term pressure amid longer-term consolidation. Daily moving averages are bearish, reinforcing the downward trend in recent trading sessions.

Other technical tools such as the Know Sure Thing (KST) indicator are bearish weekly and mildly bearish monthly, while Dow Theory analysis shows no definitive trend on either timeframe. The On-Balance Volume (OBV) data is inconclusive, providing no clear volume-based confirmation of trend direction.

Overall, these technical factors point to sustained selling pressure and a lack of positive momentum, justifying the downgrade in the technical grade and contributing heavily to the overall Strong Sell rating.

Conclusion: Caution Advised Amid Mixed Signals

In summary, Lakshmi Mills Company Ltd’s downgrade to Strong Sell reflects a confluence of factors across quality, valuation, financial trends, and technical analysis. While the company has demonstrated some positive quarterly earnings growth and trades at an attractive valuation relative to capital employed, its weak long-term fundamentals, poor debt servicing capacity, and deteriorating technical momentum weigh heavily against it.

Investors should be wary of the stock’s recent volatility and the divergence between price performance and profit decline. The minimal institutional interest further underscores the cautious stance prevailing in the market. Until there is a clear improvement in operational efficiency, financial health, and technical indicators, Lakshmi Mills is likely to remain under pressure.

For those seeking exposure in the Garments & Apparels sector, it may be prudent to explore alternatives with stronger fundamentals and more favourable technical setups.

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