Why is Permanent Magnets Ltd falling/rising?

Recent Price Movement and Market Context

On 23 January, Permanent Magnets Ltd closed at ₹783.55, down ₹28.05 or 3.46% from the previous session. This decline continues a three-day losing streak, during which the stock has fallen by 7.82%. Intraday trading saw the share price fluctuate between a high of ₹835, marking a 2.88% gain, and a low of ₹780, a 3.89% drop, with heavier trading volume concentrated near the lower price levels. The stock’s performance today notably underperformed the engineering sector, which itself declined by 2.1%, and lagged behind the broader market benchmark, the Sensex, which fell by 2.43% over the past week.

Further technical indicators reveal that Permanent Magnets Ltd is trading below all key moving averages, including the 5-day, 20-day, 50-day, 100-day, and 200-day averages, signalling sustained downward momentum. Additionally, investor participation appears to be waning, with delivery volumes on 22 January dropping by nearly 48% compared to the five-day average, suggesting reduced confidence or interest among shareholders.

Long-Term Performance and Valuation Concerns

Examining the stock’s returns relative to the Sensex over various time frames highlights its underperformance. Over the past year, Permanent Magnets Ltd has delivered a negative return of 13.71%, while the Sensex gained 6.56%. Even over three years, the stock’s 10.62% gain pales in comparison to the Sensex’s 33.80% rise. Although the five-year return of 427.29% is impressive, it is important to note that this growth has slowed considerably in recent years.

Financially, the company’s operating profit growth has been modest, averaging just 3.09% annually over the last five years. More concerning are the recent quarterly results, which revealed a sharp decline in profitability. The profit before tax less other income fell by 69.63% to ₹2.32 crore, while net profit after tax dropped by 66.6% to ₹2.37 crore in the latest reported quarter. The return on capital employed (ROCE) has also deteriorated, with the half-year figure at a low 10.92%, and a trailing ROCE of 9.3, indicating less efficient use of capital compared to peers.

Despite these challenges, the stock trades at a relatively high valuation, with an enterprise value to capital employed ratio of 4.1. This suggests that investors are paying a premium for the company’s capital base, which may not be justified given the subdued profit growth and declining returns. The stock’s valuation is discounted compared to historical averages of its peers, yet this has not translated into positive price momentum.

Investor Sentiment and Market Position

Investor confidence appears limited, as evidenced by the absence of domestic mutual fund holdings in Permanent Magnets Ltd. Given that mutual funds typically conduct thorough research and hold stakes in companies with promising fundamentals, their lack of participation may reflect concerns about the company’s business prospects or valuation at current levels.

The stock’s underperformance extends beyond short-term fluctuations. It has lagged behind the BSE500 index over the last three years, one year, and three months, signalling persistent challenges in delivering shareholder value. This trend, combined with weak recent earnings and technical indicators, has contributed to the ongoing decline in the share price.

Conclusion

In summary, Permanent Magnets Ltd’s recent share price decline is driven by a combination of weak quarterly earnings, lacklustre long-term profit growth, and technical indicators signalling bearish momentum. The stock’s underperformance relative to the Sensex and its sector, coupled with falling investor participation and an expensive valuation relative to returns, has weighed heavily on sentiment. Without a clear catalyst for improvement, the stock faces continued pressure in the near term.

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