Shricon Industries Ltd Upgraded to Sell on Technical Improvements and Financial Stability

Quality Assessment: Strong Fundamentals Amidst Moderate Returns

Shricon Industries continues to demonstrate robust long-term fundamental strength, with an average Return on Equity (ROE) of 21.14%, signalling efficient capital utilisation over the years. The company’s quarterly results for Q2 FY25-26 further reinforce this quality, with Profit Before Depreciation, Interest and Taxes (PBDIT) and Profit Before Tax excluding Other Income (PBT less OI) both reaching a peak of ₹0.55 crore, and Profit After Tax (PAT) hitting ₹0.58 crore. These figures indicate steady operational performance and profitability.

However, the company’s recent one-year stock return of 1.26% lags behind the Sensex’s 8.51% gain, suggesting that despite solid fundamentals, market sentiment has been cautious. This divergence highlights a moderate quality rating, as the company’s operational strength has not fully translated into superior shareholder returns in the short term.

Valuation: Elevated Price Metrics Weigh on Appeal

Valuation remains a significant concern for investors. Shricon Industries trades at a Price to Book (P/B) ratio of 5.2, which is considered very expensive relative to its peers and historical averages within the NBFC sector. This premium valuation is not fully justified by the company’s modest profit growth of 2% over the past year and a high Price/Earnings to Growth (PEG) ratio of 11.5, indicating that earnings growth is not keeping pace with the elevated price.

Such stretched valuation metrics suggest limited upside potential and increased risk, especially in a sector where investors typically seek value opportunities. This factor contributes to the company’s Sell rating despite other positive attributes.

Financial Trend: Positive Quarterly Performance but Modest Growth

The financial trend for Shricon Industries shows a mixed picture. The company reported its highest quarterly PBDIT and PAT in the recent quarter, signalling operational improvements and effective cost management. Year-to-date (YTD) stock returns stand at 4.99%, outperforming the Sensex’s marginal decline of 0.04% over the same period, which is a positive sign.

However, the one-year profit growth of only 2% and a modest 1.26% stock return over the past year indicate that the company’s financial momentum is moderate. The PEG ratio of 11.5 further underscores that earnings growth is not robust enough to justify the current valuation. This tempered financial trend tempers enthusiasm and supports a cautious stance.

Technicals: Upgrade from Mildly Bearish to Sideways Trend

The most significant catalyst for the rating upgrade is the improvement in technical indicators. The technical grade has shifted from mildly bearish to a sideways trend, reflecting stabilisation in price movement and reduced downside risk. Key technical signals include a bullish Moving Average Convergence Divergence (MACD) on the weekly chart and bullish Bollinger Bands on both weekly and monthly timeframes.

Other indicators present a nuanced view: the Relative Strength Index (RSI) shows no clear signal, while the daily moving averages remain mildly bearish. The Know Sure Thing (KST) indicator is mildly bullish weekly but mildly bearish monthly, and Dow Theory signals are mildly bullish on both weekly and monthly charts. On-Balance Volume (OBV) shows no discernible trend, indicating a lack of strong volume-driven momentum.

These mixed but improving technical signals have encouraged analysts to upgrade the technical grade, which in turn has influenced the overall Mojo Score to rise from a Strong Sell to a Sell rating, now standing at 33.0. The market cap grade remains at 4, reflecting the company’s micro-cap status within the NBFC sector.

Market Performance and Shareholder Structure

Shricon Industries’ current market price is ₹192.55, up 4.99% from the previous close of ₹183.40, with a 52-week high of ₹214.00 and a low of ₹122.55. The stock has significantly outperformed the Sensex over longer periods, with a three-year return of 506.46% compared to the Sensex’s 40.02%, and a five-year return matching this 506.46% gain against the Sensex’s 77.96%. Over ten years, the stock has delivered 293.76% returns, surpassing the Sensex’s 225.63%.

Majority ownership remains with promoters, providing stability in governance and strategic direction. This shareholder structure supports confidence in the company’s long-term prospects despite short-term valuation and momentum challenges.

Conclusion: Balanced Outlook with Technical Optimism but Valuation Caution

The upgrade of Shricon Industries Ltd’s investment rating from Strong Sell to Sell reflects a cautious optimism driven primarily by improved technical indicators and positive quarterly financial results. While the company’s strong long-term fundamentals and operational performance provide a solid foundation, the elevated valuation metrics and modest profit growth temper enthusiasm.

Investors should weigh the company’s stabilising technical trend and recent price momentum against its expensive price-to-book ratio and high PEG ratio. The sideways technical outlook suggests limited downside risk in the near term, but the premium valuation calls for prudence. As such, Shricon Industries remains a sell-rated stock, suitable for investors with a higher risk tolerance or those seeking exposure to a fundamentally sound NBFC with improving technical signals.

Market participants are advised to monitor upcoming quarterly results and sector developments closely, as any significant changes in earnings growth or valuation could prompt further rating revisions.

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