Shree Krishna Paper Mills Downgraded to Sell Amid Valuation and Financial Concerns

Quality Assessment: Mixed Signals Amid Financial Strength

Shree Krishna Paper Mills & Industries Ltd operates within the Paper, Forest & Jute Products sector and has demonstrated a very positive financial performance in the recent quarter Q2 FY25-26. The company reported its highest quarterly net sales at ₹62.25 crores and a profit before tax (excluding other income) of ₹0.97 crore, marking a continuation of positive results for four consecutive quarters. The nine-month profit after tax stood at ₹2.55 crores, reflecting a strong upward trajectory in profitability.

However, the company’s long-term fundamental strength remains weak, with an average Return on Capital Employed (ROCE) of 8.01%, which is modest compared to industry standards. The latest ROCE figure is slightly improved at 10.12%, but still does not inspire confidence in the company’s capital efficiency. Return on Equity (ROE) is also subdued at 7.62%, indicating limited shareholder returns relative to equity invested.

Another concern is the company’s high debt servicing risk, with a Debt to EBITDA ratio of 4.21 times, signalling potential liquidity pressures. Additionally, 84.38% of promoter shares are pledged, which could exert downward pressure on the stock price in volatile or falling markets.

Valuation: Downgrade to Very Expensive Status

The primary trigger for the downgrade is the sharp deterioration in valuation metrics. Shree Krishna Paper Mills & Industries Ltd’s valuation grade has shifted from ‘Expensive’ to ‘Very Expensive’. The company currently trades at a price-to-earnings (PE) ratio of 48.87, significantly higher than many of its peers in the paper products industry. For context, competitors such as Pudumjee Paper and Satia Industries trade at PE ratios of 8.31 and 9.63 respectively, highlighting the premium investors are paying for Shree Krishna Paper.

Enterprise value to EBITDA (EV/EBITDA) stands at 15.24, which is elevated compared to industry averages, and the EV to Capital Employed ratio is 2.48. The Price to Book Value ratio is 3.72, further underscoring the expensive nature of the stock. Despite a low PEG ratio of 0.21, which suggests earnings growth is not fully priced in, the overall valuation is considered stretched given the company’s moderate return metrics and debt levels.

These valuation concerns have led to a downgrade in the Mojo Grade from Hold to Sell, with the overall Mojo Score now at 48.0, reflecting a cautious stance on the stock.

Financial Trend: Strong Profit Growth but Underlying Risks Persist

Over the past year, Shree Krishna Paper Mills & Industries Ltd has delivered an impressive stock return of 111.99%, significantly outperforming the Sensex’s 8.49% return over the same period. Over three and five years, the stock has generated returns of 299.20% and 368.87% respectively, dwarfing the Sensex’s 37.63% and 66.63% returns. Over a decade, the stock’s return is an extraordinary 1,197.65%, reflecting strong long-term capital appreciation.

Profit growth has been equally robust, with profits rising by 233.5% in the last year. The company’s PEG ratio of 0.21 indicates that earnings growth is strong relative to the price, which is a positive sign for growth investors. Net sales grew by 12.59% in the recent quarter, reinforcing the company’s ability to expand its top line.

Despite these encouraging trends, the company’s weak ability to service debt and high promoter share pledging remain significant concerns. These factors temper enthusiasm for the stock’s financial trajectory and contribute to the cautious investment rating.

Technicals: Price Movements and Market Sentiment

Technically, the stock price closed at ₹99.40 on 3 February 2026, up 0.86% from the previous close of ₹98.55. The day’s trading range was ₹94.00 to ₹99.50, indicating some volatility but a generally stable price near the upper end of the range. The 52-week high is ₹135.20, while the 52-week low is ₹29.70, showing a wide trading band and significant appreciation over the year.

Short-term returns have been negative, with a one-month decline of 22.95% and a one-week drop of 2.83%, contrasting with the broader market’s positive returns over these periods. This suggests some recent profit-taking or market caution despite the company’s strong fundamentals and long-term performance.

Overall, technical indicators suggest a mixed market sentiment, with recent weakness possibly reflecting concerns over valuation and debt risks rather than fundamental deterioration.

Comparative Industry Context and Outlook

Within the Paper, Forest & Jute Products sector, Shree Krishna Paper Mills & Industries Ltd’s valuation stands out as notably high. While some peers such as Pudumjee Paper and Satia Industries are rated as ‘Attractive’ or ‘Very Attractive’ based on their valuation multiples and financial metrics, Shree Krishna Paper is classified as ‘Very Expensive’. This premium valuation is not fully supported by its moderate ROCE and ROE figures, nor by its elevated debt levels.

The company’s EV to EBIT ratio of 24.53 and EV to EBITDA of 15.24 further highlight the stretched valuation compared to peers like T N Newsprint, which trades at an EV/EBITDA of 6.26 and is rated ‘Very Attractive’. This disparity suggests that investors are paying a significant premium for Shree Krishna Paper’s growth prospects, which may not be justified given the underlying risks.

Moreover, the high percentage of pledged promoter shares adds an additional layer of risk, as any forced selling could exacerbate price volatility. Investors should weigh these factors carefully against the company’s strong recent earnings growth and long-term stock performance.

Conclusion: Cautious Stance Recommended

In summary, the downgrade of Shree Krishna Paper Mills & Industries Ltd’s investment rating from Hold to Sell is primarily driven by a sharp deterioration in valuation metrics, which have moved the stock into the ‘Very Expensive’ category. While the company has delivered strong financial results and impressive stock returns over the past year and longer term, its weak long-term fundamental strength, high debt servicing risk, and significant promoter share pledging warrant caution.

Investors should consider these factors carefully and monitor the company’s ability to sustain profit growth while managing its debt levels. Given the current valuation premium and associated risks, a cautious approach is advisable until more favourable valuation levels or improved financial metrics emerge.

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