MarketsMOJO downgrades Rajapalayam Mills to 'Sell' due to low profitability and high debt

On April 8, 2024, MarketsMOJO downgraded its stock call on Rajapalayam Mills to 'Sell'. The textile company, which falls under the microcap category, has been facing challenges in terms of management efficiency and debt servicing.

According to MarketsMOJO, Rajapalayam Mills has a low Return on Capital Employed (ROCE) of 1.28%, indicating low profitability per unit of total capital. Additionally, the company has a high Debt to EBITDA ratio of 13.05 times, which means it may struggle to service its debt. The Return on Equity (ROE) of 4.83% also reflects low profitability per unit of shareholders' funds.

The company's financial results for the last quarter of 2023 showed a decline in net sales by -8.95%, leading to a negative performance. In fact, Rajapalayam Mills has declared negative results for the past six consecutive quarters. The Profit After Tax (PAT) for the quarter was at Rs -0.91 crore, a significant decrease of -111.6%, while the Net Sales for the quarter stood at Rs 202.64 crore, with a growth rate of -8.95%. The company's interest expenses were also at a high of Rs 20.98 crore.

Despite being a microcap company, Rajapalayam Mills has only 0.77% of its shares held by domestic mutual funds. This could indicate that these funds are either not comfortable with the company's current stock price or its business.

On the positive side, the company has shown healthy long-term growth with an annual rate of 58.69% in operating profit. The stock is also technically in a Mildly Bullish range, with multiple factors such as MACD, Bollinger Band, and KST indicating a bullish trend.

With a ROCE of 1.5, the stock is currently trading at an attractive valuation with an Enterprise value to Capital Employed ratio of 0.6. It is also trading at a discount compared to its average historical valuations. However, despite generating a return of 66.38% in the past year, the company's profits have fallen by -26.4%.

In conclusion, while Rajapalayam Mills has shown market-beating performance in the past year, its recent financial results and low mutual fund holdings suggest a cautious approach for investors. MarketsMOJO's 'Sell' rating also highlights the current challenges faced by the company.