Zodiac Energy Ltd Upgraded to Hold as Technicals and Financials Improve

Technical Trends Show Signs of Stabilisation

The primary catalyst for the upgrade lies in the technical assessment of Zodiac Energy’s stock. The technical grade has improved from a bearish stance to mildly bearish, indicating a potential bottoming out of the recent downtrend. Key technical indicators present a mixed but gradually improving picture. The Moving Average Convergence Divergence (MACD) remains bearish on a weekly basis but has softened to mildly bearish on the monthly chart, suggesting that downward momentum is easing.

Relative Strength Index (RSI) readings on both weekly and monthly timeframes currently show no clear signal, implying the stock is neither overbought nor oversold. Bollinger Bands also reflect a mildly bearish trend, consistent with a consolidation phase rather than a sharp decline. Daily moving averages continue to be bearish, but the KST (Know Sure Thing) indicator offers a bullish signal on the monthly scale, hinting at a possible medium-term recovery.

On balance, the technical outlook has shifted from outright negative to cautiously constructive, supporting the decision to upgrade the rating. The stock’s recent price action, with a day change of +3.34% and a current price of ₹256.50, further underlines this tentative improvement.

Valuation Remains Attractive Despite Market Underperformance

Zodiac Energy’s valuation metrics continue to favour a Hold rating. The company’s Return on Capital Employed (ROCE) stands at a healthy 15.7%, signalling efficient use of capital to generate profits. Its Enterprise Value to Capital Employed ratio is a modest 2.1, indicating the stock is trading at a discount relative to its peers’ historical valuations.

Despite the stock’s significant underperformance over the past year, with a return of -37.64% compared to the BSE500’s positive 9.12%, the company’s price-to-earnings growth (PEG) ratio is a compelling 0.4. This low PEG suggests that the stock is undervalued relative to its earnings growth potential, making it an attractive proposition for investors willing to look beyond short-term price fluctuations.

However, the 52-week high of ₹563.45 versus the current price of ₹256.50 highlights the steep correction the stock has undergone, warranting a cautious stance rather than an outright Buy recommendation.

Financial Trends Highlight Strong Growth Momentum

Financially, Zodiac Energy has demonstrated robust growth, particularly in the recent quarter Q2 FY25-26. Net sales surged by 83.40% quarter-on-quarter to ₹96.78 crores, while operating profit expanded by an impressive 49.21% annually. The company’s Profit After Tax (PAT) for the first nine months reached ₹14.81 crores, reflecting a 40.91% growth rate.

These figures underscore a healthy long-term growth trajectory, supported by a consistent increase in dividends per share (DPS), which reached a peak of ₹0.75 annually. Such financial strength bolsters the company’s quality rating, although the overall Mojo Score remains moderate at 51.0, with a Mojo Grade of Hold, upgraded from Sell.

It is worth noting that the majority shareholding remains with promoters, which often provides stability but also necessitates scrutiny regarding governance and strategic direction.

Quality Assessment and Market Context

Zodiac Energy’s quality grade reflects a balance between its solid financial performance and the challenges posed by market volatility and sector dynamics. The company operates within the engineering and industrial equipment segment of the construction industry, a sector that has faced headwinds due to fluctuating raw material costs and project delays.

Over a three-year horizon, the stock has delivered a remarkable 134.03% return, significantly outperforming the Sensex’s 37.63% gain, highlighting its potential for long-term investors. However, the recent one-year underperformance and negative year-to-date returns of -15.25% compared to the Sensex’s -1.74% temper enthusiasm.

These mixed signals justify the Hold rating, signalling that while the company’s fundamentals are improving, broader market and sector risks remain.

Technical and Market Outlook

From a technical perspective, the stock’s recent price movements suggest a tentative recovery phase. The daily trading range between ₹252.00 and ₹260.65, coupled with a closing price of ₹256.50, indicates some buying interest returning after a prolonged downtrend. The weekly On-Balance Volume (OBV) is mildly bullish, signalling accumulation by investors, although monthly OBV shows no clear trend.

Market participants should note that the Dow Theory signals remain neutral on both weekly and monthly charts, reflecting uncertainty in broader market direction. This reinforces the rationale for a Hold rating, as the stock has not yet demonstrated a definitive breakout or sustained upward momentum.

Investors are advised to monitor upcoming quarterly results and sector developments closely, as these will be critical in determining whether Zodiac Energy can convert its improving technicals and strong financials into sustained price appreciation.

Conclusion: A Cautious Optimism Prevails

Zodiac Energy Ltd’s upgrade from Sell to Hold reflects a comprehensive reassessment of its investment merits. The improved technical indicators, attractive valuation metrics, and strong financial growth underpin this more positive stance. However, the stock’s recent underperformance relative to the market and ongoing sector challenges counsel prudence.

For investors, this rating change suggests that while the stock is no longer a clear sell, it is not yet a compelling buy. The Hold rating encourages monitoring the company’s progress and market conditions before committing additional capital.

With a Mojo Score of 51.0 and a Market Cap Grade of 4, Zodiac Energy remains a stock to watch closely as it navigates the evolving construction industry landscape.

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