Thomas Scott India Ltd Upgraded to Hold as Quality Improves Amid Mixed Technicals

Quality Upgrade: From Average to Good

The most significant driver behind the rating upgrade is the enhancement in Thomas Scott’s quality grade, which has moved from average to good. This improvement is underpinned by robust long-term financial growth and operational efficiency. Over the past five years, the company has delivered an impressive sales growth rate of 69.97% and an even more remarkable EBIT growth of 94.90%. These figures highlight the company’s ability to expand its top and bottom lines consistently.

Thomas Scott’s financial health is further evidenced by its strong interest coverage ratio, with EBIT to interest averaging 5.78 times, signalling comfortable debt servicing capacity. The company maintains a conservative leverage profile, with an average Debt to EBITDA ratio of 1.36 and a Net Debt to Equity ratio of just 0.39, indicating prudent capital structure management.

Operational efficiency is also reflected in the sales to capital employed ratio of 2.47, suggesting effective utilisation of capital resources. The company’s return metrics are robust, with an average Return on Capital Employed (ROCE) of 17.20% and Return on Equity (ROE) of 19.70%, both comfortably above industry averages. Additionally, a tax ratio of 29.48% aligns with standard corporate tax rates, and the absence of pledged shares (0.00%) reassures investors about promoter confidence and shareholding stability.

Compared to its peers in the Garments & Apparels sector, Thomas Scott stands out with a good quality rating, while many competitors remain at average or below average levels. This relative strength in quality metrics has been a key factor in the upgrade decision.

Valuation: Fair and Discounted Relative to Peers

Thomas Scott’s valuation profile supports the Hold rating, reflecting a fair price relative to its capital employed and peer group. The company’s ROCE of 16.2% pairs with an enterprise value to capital employed multiple of 3.2, indicating reasonable valuation levels. Notably, the stock trades at a discount compared to the average historical valuations of its peers, offering potential value for investors willing to look beyond short-term price movements.

Despite the stock’s recent price weakness, with a current price of ₹313.95 against a 52-week high of ₹474.35 and a low of ₹280.65, the underlying fundamentals remain strong. The company’s Price/Earnings to Growth (PEG) ratio stands at 1.3, suggesting that earnings growth is reasonably priced in the market. This valuation metric, combined with the company’s consistent profit growth, underpins the rationale for upgrading the rating from Sell to Hold.

Financial Trend: Strong Quarterly Performance and Consistent Growth

Thomas Scott has demonstrated very positive financial performance in the third quarter of FY25-26, with net sales reaching a quarterly high of ₹66.25 crores and profit after tax (PAT) at ₹5.21 crores. Earnings per share (EPS) also hit a peak of ₹3.39 for the quarter. The company has reported positive results for 12 consecutive quarters, underscoring its operational resilience and growth trajectory.

Year-on-year, net sales grew by 16.37%, while profits surged by 56.5%, reflecting strong margin expansion and operational leverage. This sustained growth trend is a key factor in the improved financial trend assessment, which supports the Hold rating despite the stock’s underperformance relative to the broader market.

However, it is important to note that Thomas Scott has underperformed the BSE500 index over the last year, generating a negative return of -23.18% compared to the index’s positive 13.31%. This divergence highlights market scepticism or sector-specific challenges that have weighed on the stock price despite solid fundamentals.

Technical Analysis: Bearish Signals Temper Optimism

On the technical front, the outlook remains cautious with the technical trend downgraded from mildly bearish to bearish. Key indicators such as the Moving Average Convergence Divergence (MACD) show a bearish signal on the weekly chart and mildly bearish on the monthly chart. Bollinger Bands also indicate bearish trends on both weekly and monthly timeframes, while daily moving averages confirm a bearish stance.

The Relative Strength Index (RSI) currently shows no clear signal, but the KST (Know Sure Thing) indicator is bearish weekly and mildly bearish monthly. Dow Theory assessments align with a mildly bearish outlook on both weekly and monthly charts. On-Balance Volume (OBV) trends are neutral weekly but mildly bearish monthly, suggesting subdued buying interest.

These technical signals suggest that while the company’s fundamentals have improved, short-term price momentum remains weak, which may limit upside potential in the near term. The stock’s recent trading range between ₹300.05 and ₹320.05 on the day of analysis reflects this uncertainty.

Long-Term Performance: Exceptional Growth Over Years

Over longer horizons, Thomas Scott has delivered extraordinary returns, far outpacing the Sensex. The stock has generated a staggering 5,294.33% return over five years and 3,427.53% over ten years, compared to Sensex returns of 59.83% and 259.08% respectively. Even over three years, the stock’s return of 613.52% dwarfs the Sensex’s 35.81% gain. This long-term outperformance highlights the company’s ability to create shareholder value over time despite recent volatility.

Nevertheless, the recent one-year underperformance and bearish technicals warrant a cautious stance, justifying the Hold rating rather than a more bullish upgrade.

Shareholding and Market Capitalisation

Thomas Scott’s promoter group remains the majority shareholder, with institutional holdings at a modest 2.45%. The company has zero pledged shares, which is a positive sign of promoter confidence. The market capitalisation grade stands at 4, reflecting a mid-sized company with reasonable liquidity and market presence.

Despite the recent 1.58% decline in the stock price, the company’s fundamentals and quality improvements provide a solid base for investors to consider holding the stock while monitoring technical developments closely.

Conclusion: Balanced Outlook with Quality and Valuation Strengths

The upgrade of Thomas Scott India Ltd’s investment rating from Sell to Hold is primarily driven by a marked improvement in quality metrics and a fair valuation relative to peers. The company’s strong financial performance, highlighted by robust sales and profit growth, low leverage, and efficient capital utilisation, supports this more positive stance.

However, bearish technical indicators and recent market underperformance temper enthusiasm, suggesting that investors should adopt a cautious approach. The Hold rating reflects this balanced view, recognising the company’s strengths while acknowledging near-term risks.

For investors focused on long-term growth and quality, Thomas Scott remains a compelling option within the Garments & Apparels sector, especially given its consistent quarterly delivery and proven staying power.

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