Why is HFCL falling/rising?

Recent Price Movement and Market Context

HFCL’s recent price action has been notably weak, with the stock trading just 3.61% above its 52-week low of ₹68.58. This proximity to the annual low underscores the sustained selling pressure. The stock has underperformed its sector by 2.4% on the latest trading day and has consistently traded below all key moving averages, including the 5-day, 20-day, 50-day, 100-day, and 200-day averages. Such technical indicators suggest a bearish trend with limited short-term support levels.

Despite this, investor participation has shown signs of rising interest, as evidenced by a 68.46% increase in delivery volume on 21 Nov compared to the five-day average. This heightened activity, however, has not translated into price gains, indicating that selling pressure may be outweighing buying interest.

Financial Performance and Valuation Concerns

HFCL’s share price decline is closely linked to its deteriorating financial fundamentals. The company has reported negative results for four consecutive quarters, signalling ongoing operational challenges. Net sales for the nine-month period stand at ₹2,715.08 crore, reflecting a steep contraction of 24.12% year-on-year. Meanwhile, interest expenses have surged by 25.11% to ₹167.58 crore, adding to the financial strain.

Operating profit has declined at an annualised rate of 8.15% over the past five years, highlighting poor long-term growth prospects. The company’s return on capital employed (ROCE) is notably low, with the half-year figure at 4.75% and a trailing ROCE of just 3.9%. Such returns are insufficient to justify the current valuation, especially given the enterprise value to capital employed ratio of 2.1 times, which suggests the stock is expensive relative to the returns it generates.

Profitability has also plummeted, with profits falling by 92.6% over the past year, a stark contrast to the broader market’s positive returns. This disconnect between earnings performance and valuation has likely contributed to investor caution and selling pressure.

Promoter Shareholding and Market Sentiment

Adding to the negative sentiment is the high level of promoter share pledging, which currently stands at 56.93%. This is a significant risk factor, as pledged shares can exacerbate price declines during market downturns due to forced selling. The proportion of pledged shares has increased by 2.81% over the last quarter, intensifying concerns among investors about potential liquidity risks and governance issues.

HFCL’s underperformance is evident not only in the short term but also over longer horizons. The stock has delivered a negative return of 43.69% over the past year, while the Sensex has gained 7.31%. Over three years, HFCL’s returns lag the benchmark by a wide margin, further underscoring its struggles to keep pace with the broader market and its sector peers.

Debt Servicing and Liquidity

On a more positive note, HFCL maintains a relatively strong ability to service its debt, with a low Debt to EBITDA ratio of 1.36 times. This suggests that despite operational challenges, the company is managing its leverage prudently. Additionally, the stock’s liquidity remains adequate, with a trade size capacity of approximately ₹1.18 crore based on recent average traded values, allowing investors to enter or exit positions without significant market impact.

Nevertheless, these positives have not been sufficient to offset the broader concerns weighing on the stock, as reflected in its continued price weakness and underperformance relative to benchmarks.

Conclusion

In summary, HFCL’s share price decline as of 24-Nov is primarily driven by disappointing financial results, including shrinking sales, rising interest costs, and sharply reduced profitability. The stock’s valuation appears stretched given its low returns on capital and deteriorating earnings. High promoter share pledging further compounds investor apprehension, especially in a falling market environment. While the company’s debt servicing capacity and liquidity provide some cushion, these factors have not been enough to reverse the negative trend. Investors should remain cautious and closely monitor upcoming financial disclosures and market developments before considering exposure to HFCL.

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