Patanjali Foods Ltd Downgraded to Sell Amid Technical Weakness and Valuation Concerns

Quality Assessment: Solid Operational Metrics Amid Rising Risks

Patanjali Foods continues to demonstrate robust operational quality, reflected in its recent quarterly financials for Q2 FY25-26. The company reported net sales of ₹9,798.84 crore, marking a healthy annual growth rate of 21.84%. Operating profit has also expanded at a strong pace of 27.88%, signalling effective cost management and operational efficiency. Profit before tax excluding other income stood at ₹453.86 crore, growing 21.4% compared to the previous four-quarter average, underscoring consistent earnings momentum.

Return on equity (ROE) remains respectable at 11.8%, indicating reasonable profitability relative to shareholder equity. Additionally, the company maintains a low Debt to EBITDA ratio of 0.62 times, highlighting a strong ability to service debt and a conservative capital structure. The dividend per share (DPS) is at a peak of ₹10.00 annually, reflecting management’s commitment to shareholder returns.

However, a significant risk factor impacting quality is the increase in promoter share pledging, which has risen by 37.77% over the last quarter. Currently, 37.77% of promoter shares are pledged, a level that could exert downward pressure on the stock price in volatile or falling markets. This elevated pledge ratio raises concerns about promoter confidence and potential liquidity risks.

Valuation: Expensive Price-to-Book Ratio Clouds Growth Prospects

Despite the encouraging financial results, Patanjali Foods’ valuation metrics have become a key concern prompting the downgrade. The stock currently trades at a Price to Book (P/B) ratio of 4.9, which is considered expensive relative to its historical averages and peer group valuations within the edible oil sector. This elevated valuation suggests that much of the company’s growth potential is already priced in, limiting upside for investors.

The Price/Earnings to Growth (PEG) ratio stands at 0.9, which is moderately attractive, indicating that earnings growth is somewhat aligned with the stock price. However, the company’s one-year stock return of -7.74% contrasts sharply with a 9.56% gain in the Sensex over the same period, signalling underperformance despite profit growth of 43.4%. This divergence between earnings growth and stock price performance raises questions about market sentiment and valuation sustainability.

Moreover, the stock’s market cap grade remains low at 2, reflecting its mid-cap status and limited liquidity compared to larger FMCG peers. The current price of ₹544.70 is down 1.58% from the previous close of ₹553.45, with a 52-week high of ₹663.96 and a low of ₹500.00, indicating a volatile trading range.

Financial Trend: Positive Earnings Growth but Mixed Returns

From a financial trend perspective, Patanjali Foods exhibits a mixed picture. The company’s long-term sales growth rate of 21.84% and operating profit growth of 27.88% are impressive, reflecting strong underlying business momentum. Profit before tax growth of 21.4% in the recent quarter further confirms this positive trajectory.

However, the stock’s market returns tell a different story. Over the past year, the stock has declined by 7.74%, underperforming the broader BSE500 index and the Sensex. In the short term, the stock’s one-week return was -5.30%, significantly worse than the Sensex’s -1.69%. Even over three years, the stock’s cumulative return of 40.82% slightly trails the Sensex’s 38.78%, though it has outperformed over five and ten years with returns of 153.34% and an extraordinary 5722.24% respectively.

This disparity between strong fundamental growth and weak price performance suggests that investors are cautious, possibly due to valuation concerns and technical weaknesses.

Technicals: Shift to Bearish Signals Triggers Downgrade

The most significant factor driving the downgrade to Sell is the deterioration in technical indicators. Patanjali Foods’ technical grade has shifted from mildly bearish to outright bearish, signalling increased downside risk in the near term.

Key technical signals include:

• MACD: Weekly readings are bearish, while monthly remain mildly bearish, indicating weakening momentum.


• Bollinger Bands: Both weekly and monthly bands show bearish trends, suggesting price volatility skewed to the downside.


• Moving Averages: Daily moving averages are bearish, confirming short-term negative price action.


• KST (Know Sure Thing): Weekly KST is bearish, with monthly mildly bearish, reinforcing momentum loss.


• Dow Theory: Weekly signals are mildly bullish but monthly are mildly bearish, reflecting mixed longer-term trends.


• RSI and OBV: Relative Strength Index shows no clear signal, while On-Balance Volume is bullish monthly but neutral weekly, indicating volume trends are inconclusive.

These technical factors collectively suggest that the stock is under selling pressure and may face further declines, justifying the downgrade from Hold to Sell.

Comparative Performance and Market Context

When benchmarked against the Sensex, Patanjali Foods’ stock performance has been lacklustre in recent periods. The stock’s one-month return of 1.39% slightly outperformed the Sensex’s -1.92%, but this short-term gain is overshadowed by longer-term underperformance. The year-to-date return is -0.27% versus the Sensex’s -1.87%, and the one-year return is -7.74% compared to the Sensex’s 9.56% gain.

Over three and five years, the stock has marginally outperformed the Sensex, with returns of 40.82% and 153.34% respectively, compared to 38.78% and 68.97%. The ten-year return is exceptional at 5722.24%, reflecting the company’s strong historical growth trajectory. However, recent trends indicate a deceleration in momentum and increased volatility.

Within the edible oil sector and FMCG industry, Patanjali Foods faces stiff competition and valuation scrutiny, which combined with technical weaknesses, have led to a more cautious stance by analysts and investors.

Conclusion: Downgrade Reflects Caution Amid Mixed Signals

The downgrade of Patanjali Foods Ltd from Hold to Sell by MarketsMOJO is a reflection of the complex interplay between solid financial fundamentals and deteriorating technical and valuation metrics. While the company’s quality remains intact with strong sales growth, profitability, and debt servicing ability, the expensive valuation and rising promoter share pledging pose significant risks.

The shift in technical indicators to a bearish stance signals potential near-term price weakness, which, combined with underwhelming recent stock returns relative to benchmarks, justifies a more cautious investment approach. Investors should weigh these factors carefully and monitor developments closely before considering exposure to Patanjali Foods.

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