Why is Sundrop Brands Ltd falling/rising?

Recent Price Movement and Market Context

The stock has been under pressure for several sessions, with a consecutive two-day fall resulting in a cumulative loss of 9.16%. Today’s intraday low of ₹616.7 underscores the bearish sentiment prevailing among investors. Notably, the weighted average price indicates that a larger volume of shares traded closer to the day’s low, suggesting selling dominance. Sundrop Brands is currently trading below all key moving averages, including the 5-day, 20-day, 50-day, 100-day, and 200-day averages, signalling a sustained downtrend.

The broader sector of Refined Oil and Vanaspati also experienced a decline of 3.53%, indicating that Sundrop’s fall is partly influenced by sector-wide weakness. However, the stock’s underperformance relative to its sector by 1.57% today highlights company-specific factors exacerbating the decline.

Fundamental Performance and Valuation

Despite the recent price weakness, Sundrop Brands has reported encouraging operational results. The company has posted positive results for four consecutive quarters, with net sales for the latest quarter reaching ₹383.30 crores, reflecting a robust growth rate of 40.6% compared to the previous four-quarter average. Profit after tax for the nine-month period stands at ₹31.14 crores, indicating improved profitability. The return on equity (ROE) is a modest 2.6%, and the stock trades at a price-to-book value of 1.6, which is considered fair and below the average historical valuations of its peers.

Moreover, the company’s profits have surged by an extraordinary 1446.1% over the past year, despite the stock delivering a negative return of 30.60% during the same period. This disparity is reflected in a low PEG ratio of 0.1, suggesting that the stock may be undervalued relative to its earnings growth potential. The company also maintains a low average debt-to-equity ratio of 0.04, indicating a conservative capital structure.

Challenges Weighing on the Stock

Despite these positives, Sundrop Brands faces significant headwinds that have contributed to its share price decline. The company’s operating profit has contracted sharply, with an annualised decline of 67.91% over the past five years, signalling poor long-term earnings growth. This structural weakness undermines investor confidence in the stock’s ability to sustain profitability.

Another critical concern is the complete pledging of promoter shares. All promoter holdings are pledged, and this proportion has doubled in the last quarter. In volatile or falling markets, high promoter pledging often exerts additional downward pressure on share prices, as pledged shares may be sold to meet margin calls, intensifying selling pressure.

Furthermore, Sundrop Brands has consistently underperformed the benchmark indices over multiple time horizons. Over the past year, the stock has declined by 30.60%, while the Sensex has gained 6.63%. Over three and five years, the stock’s returns remain deeply negative, contrasting sharply with the strong positive returns of the broader market. This persistent underperformance against the BSE500 and Sensex indices has likely eroded investor appetite.

Investor Activity and Liquidity

Investor participation has increased recently, with delivery volumes rising by nearly 70% on 19 Jan compared to the five-day average. This heightened activity, combined with the stock’s liquidity allowing trades of approximately ₹0.03 crores based on 2% of the five-day average traded value, suggests that the stock remains accessible to traders despite the downtrend. However, the increased volume has coincided with price declines, indicating that selling pressure dominates.

Conclusion

In summary, Sundrop Brands Ltd’s share price decline on 20-Jan is driven by a combination of sector weakness, poor long-term operating profit growth, and significant promoter share pledging. While the company’s recent sales and profit growth are encouraging and its valuation appears reasonable, these positives have been overshadowed by structural challenges and persistent underperformance relative to market benchmarks. The increased investor participation amid falling prices further highlights the prevailing bearish sentiment. Investors should weigh these factors carefully when considering Sundrop Brands as part of their portfolio.

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