Majestic Auto Ltd Upgraded to Sell on Technical Improvement Despite Weak Fundamentals

Quality Assessment: Weak Fundamentals Persist

Majestic Auto’s quality parameters remain under pressure, with the company exhibiting a weak long-term fundamental strength. Over the past five years, the compound annual growth rate (CAGR) of operating profits has declined by 14.37%, signalling deteriorating operational efficiency. The company’s ability to service debt is also concerning, with an average EBIT to interest coverage ratio of just 1.66, indicating limited buffer to meet interest obligations.

Profitability metrics further underscore the challenges faced by Majestic Auto. The average return on equity (ROE) stands at a modest 3.39%, reflecting low profitability relative to shareholders’ funds. The most recent quarterly results for Q2 FY25-26 reveal flat financial performance, with net sales at a low ₹13.12 crores and operating profit to interest ratio dropping to 0.64 times, the lowest recorded. The nine-month PAT has contracted by 22.42% to ₹13.16 crores, highlighting ongoing earnings pressure.

Valuation: Expensive Despite Weak Returns

Despite the subdued financial performance, Majestic Auto’s valuation remains elevated. The stock trades at a price-to-book value of 0.5, which is considered very expensive given the company’s low ROE of 1.4% in the latest period. This premium valuation is out of sync with the company’s fundamentals and is higher than the average historical valuations of its peers in the sector.

Over the past year, the stock has underperformed significantly, generating a negative return of 9.87%, while the broader BSE500 index has delivered a positive return of 9.00%. This divergence highlights investor concerns about the company’s growth prospects and profitability. Furthermore, profits have fallen sharply by 58.2% over the same period, reinforcing the disconnect between price and earnings.

Financial Trend: Flat to Negative Earnings Trajectory

The financial trend for Majestic Auto remains largely flat to negative. The company’s operating profit has shown a declining trajectory over the last five years, with a negative CAGR of 14.37%. The latest quarterly results confirm this trend, with net sales and operating profits at their lowest levels in recent periods. The nine-month profit after tax (PAT) has also declined by 22.42%, signalling persistent earnings challenges.

These trends are compounded by the company’s weak debt servicing capacity, as reflected in the low EBIT to interest coverage ratio. This ratio fell to 0.64 times in the latest quarter, indicating that operating profits are insufficient to comfortably cover interest expenses. Such financial strain raises concerns about the company’s ability to sustain operations without restructuring or additional capital infusion.

Technicals: Shift from Mildly Bearish to Mildly Bullish

The primary catalyst for the upgrade in Majestic Auto’s investment rating is the improvement in technical indicators. The technical grade has shifted from mildly bearish to mildly bullish, signalling a potential change in market sentiment. Key technical signals include a bullish Moving Average Convergence Divergence (MACD) on the weekly chart, a mildly bullish Bollinger Bands reading weekly, and bullish daily moving averages.

However, some monthly indicators remain cautious, with the MACD and Bollinger Bands showing mildly bearish signals, and the Know Sure Thing (KST) indicator remaining mildly bearish on both weekly and monthly timeframes. The Relative Strength Index (RSI) currently shows no clear signal, and Dow Theory analysis indicates no definitive trend on weekly or monthly charts.

Despite these mixed signals, the overall technical momentum has improved sufficiently to warrant a rating upgrade from Strong Sell to Sell. This suggests that while the company’s fundamentals remain weak, short-term price action and market dynamics may offer some trading opportunities or a potential base for recovery.

Stock Performance Relative to Market Benchmarks

Majestic Auto’s stock price has exhibited mixed returns over various time horizons. In the short term, the stock has outperformed the Sensex, delivering a 6.49% return over one week compared to the Sensex’s 2.94%, and a 7.96% return over one month versus the Sensex’s 0.59%. Year-to-date, the stock has gained 6.08%, while the Sensex has declined by 1.36%.

However, over longer periods, the stock’s performance has been less impressive. Over one year, the stock has declined by 9.87%, underperforming the Sensex’s 7.97% gain. Over three and five years, the stock has delivered strong cumulative returns of 139.49% and 219.86%, respectively, outperforming the Sensex’s 38.25% and 63.78% gains. Over ten years, the stock’s return of 236.48% slightly trails the Sensex’s 249.97%.

This mixed performance profile reflects the company’s cyclical nature and the impact of recent operational challenges on investor sentiment.

Shareholding and Market Capitalisation

Majestic Auto is majority-owned by promoters, which typically provides stability in shareholding patterns. The company’s market capitalisation grade stands at 4, reflecting its mid-cap status within the Diversified Commercial Services sector. Despite this, the stock’s Mojo Score remains low at 37.0, consistent with a Sell rating, though improved from the previous Strong Sell grade.

Today’s trading range for the stock was between ₹350.00 and ₹359.90, with a previous close of ₹356.95. The 52-week high and low stand at ₹403.65 and ₹271.00, respectively, indicating a wide trading band and some volatility in recent periods.

Conclusion: Cautious Optimism Amidst Fundamental Weakness

While Majestic Auto Ltd’s upgrade from Strong Sell to Sell reflects an improvement in technical indicators and short-term market sentiment, the company’s fundamental challenges remain significant. Weak financial trends, low profitability, and expensive valuation relative to earnings continue to weigh on the stock’s investment appeal.

Investors should approach the stock with caution, recognising that the technical improvement may offer limited relief unless accompanied by a sustained turnaround in operational performance and financial health. The company’s underperformance relative to market benchmarks over the past year further emphasises the need for careful analysis before committing capital.

Overall, the rating upgrade signals a modest improvement in outlook but does not yet indicate a full recovery or a strong buy opportunity.

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