Tarmat Ltd Downgraded to Strong Sell Amid Mixed Financial and Technical Signals

Financial Performance: Mixed Signals Amid Positive Quarterly Results

Tarmat’s financial trend rating has shifted from very positive to positive, signalling a moderation in momentum despite encouraging recent results. The company reported a higher Profit After Tax (PAT) of ₹2.59 crores over the latest six months and achieved its highest quarterly PBDIT at ₹1.75 crores. Cash and cash equivalents also reached a peak of ₹12.75 crores in the half-year period, indicating improved liquidity. Additionally, operational efficiency metrics such as the debtors turnover ratio stood at a robust 13.86 times, and operating profit to net sales ratio hit a quarterly high of 6.41%.

However, these positive quarterly indicators contrast with a decline in the overall financial score from 26 to 17 over the past three months. This suggests that while short-term performance has improved, longer-term financial health remains under pressure. The company’s ability to service debt is weak, with an average EBIT to interest coverage ratio of just 1.87, raising concerns about financial stability. Furthermore, Tarmat’s operating profits have contracted at a -22.16% CAGR over the last five years, highlighting persistent challenges in sustaining growth.

Valuation: Expensive Despite Low Profitability

Valuation metrics paint a cautious picture. Tarmat’s Price to Book Value ratio stands at 0.8, which is relatively fair compared to peers but still reflects an expensive valuation given the company’s low return on equity (ROE). The average ROE over recent years is a modest 3.63%, with the latest figure at 1.9%, indicating limited profitability per unit of shareholder funds. This disconnect between valuation and profitability underpins the downgrade in the company’s mojo grade from Sell to Strong Sell.

Moreover, the stock has underperformed the broader market significantly. Over the past year, Tarmat’s share price has declined by 23.94%, while the BSE500 index has gained 7.71%. Despite this, the company’s profits have surged by 145.2% in the same period, resulting in a low PEG ratio of 0.3. This divergence suggests that the market remains sceptical about the sustainability of profit growth and the company’s long-term prospects.

Technical Analysis: Shift Towards Bearish Momentum

The technical trend for Tarmat has shifted from sideways to mildly bearish, reflecting growing caution among traders. Weekly MACD readings remain mildly bullish, but monthly MACD and KST indicators have turned bearish, signalling weakening momentum over the longer term. The Relative Strength Index (RSI) shows no clear signal on a weekly basis but is bullish monthly, indicating some underlying strength.

Bollinger Bands present a mixed picture with weekly signals bullish but monthly trends mildly bearish. Daily moving averages are mildly bearish, reinforcing the cautious stance. On balance, the technical indicators suggest a market grappling with uncertainty, with short-term optimism tempered by longer-term bearish signals.

Quality and Promoter Confidence: A Silver Lining

Despite the downgrade, there are positive signs in terms of promoter confidence and operational quality. Promoters have increased their stake by 1.49% in the previous quarter, now holding 30.13% of the company’s shares. This uptick in promoter holding is often interpreted as a vote of confidence in the company’s future prospects.

Operationally, Tarmat has delivered positive results for four consecutive quarters, underscoring some stability in earnings. However, the company’s weak long-term fundamentals and low profitability metrics continue to weigh heavily on its overall quality grade, which remains low in the MarketsMOJO assessment framework.

Stock Price and Market Performance

At the time of the rating change, Tarmat’s stock price was ₹53.15, down 5.06% on the day from a previous close of ₹55.98. The stock’s 52-week high and low stand at ₹72.40 and ₹45.03 respectively, reflecting significant volatility. Short-term returns have outperformed the Sensex, with a 1-month return of 7.31% versus the Sensex’s -1.74%, and a 1-week return of 2.55% compared to the Sensex’s 1.59%. However, over longer horizons, the stock has lagged considerably, with a 1-year return of -23.94% against the Sensex’s 7.07% and a 5-year return of just 1.24% versus the Sensex’s 64.75%.

Conclusion: Downgrade Reflects Caution Amid Contrasting Signals

The downgrade of Tarmat Ltd’s mojo grade from Sell to Strong Sell reflects a nuanced assessment of the company’s current position. While recent quarterly financials show improvement and promoter confidence is rising, the company’s weak long-term fundamentals, expensive valuation relative to profitability, and mixed technical signals have prompted a more cautious stance.

Investors should weigh the short-term operational gains against the broader challenges of sustained growth and market underperformance. The stock’s negative one-year return and subdued five-year growth relative to the Sensex highlight the risks involved. Until Tarmat can demonstrate consistent improvement in its financial health and technical momentum, the Strong Sell rating is likely to remain in place.

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