Sandhar Technologies Q1: Why Did Profits Fall Despite Robust Revenue Growth?

When a company reports a decline in profits despite robust revenue growth, it often sends ripples of concern through the market. Sandhar Technologies, a prominent player in the automotive components sector, found itself in this intriguing position after announcing its Q1 FY26 financial results. While the headline numbers might prompt a cautious reaction, a deeper dive reveals a more nuanced picture, marked by strategic investments and temporary headwinds.

Let’s unpack what’s truly driving Sandhar’s performance and what it means for its future trajectory.

Top-line Resilience: India Business Leads the Charge 🚀

At first glance, Sandhar’s revenue performance is commendable. The consolidated revenue for Q1 FY26 jumped by a healthy 19% year-over-year to ₹1,090 Crores, while its standalone revenue grew by 8% to ₹728 Crores. What’s particularly striking is the 22% surge in the India business (consolidated), which grew from ₹795 Crores in Q1 FY25 to ₹967 Crores in Q1 FY26. This strong domestic performance is a testament to the ongoing capex revival and government push in infrastructure and manufacturing, aligning well with the broader positive sentiment for domestic-growth themes currently dominating the Indian economy.

Here’s a snapshot of the revenue growth:

A look at the geographical breakdown highlights the increased contribution from Indian subsidiaries, underscoring the domestic growth story:

However, not all segments sailed smoothly. The “Cabins & Fabrications” segment faced temporary headwinds due to the transition from BS IV to BS V engine norms, causing a period of degrowth. Similarly, overseas operations experienced “severe degrowth” partly due to unstable geopolitical conditions and slowdown in Europe. This impacted the overall sales composition, with the 2W segment’s share increasing (65.8% from 64%) while PV and OHV saw slight declines in their share. Management also indicated that two major customers faced supply chain issues, leading to an approximate ₹20 Crores loss in business for Sandhar, impacting overall volume growth.

The Profit Puzzle: Unpacking the “One-Offs” and Strategic Dips 🕵️‍♀️

Here’s where the plot thickens. Despite strong revenue growth, consolidated Profit After Tax (PAT) actually declined by 4% year-over-year to ₹28.01 Crores, and consolidated EBITDA margins compressed from 9.9% in Q1 FY25 to 9.3% in Q1 FY26. This divergence often raises a red flag. But is it a fundamental issue, or something more transitory?

Let’s look at the consolidated financial snapshot:

Management was quick to clarify that several one-time and notional expenses, alongside initial losses from new projects, masked the true operational profitability. These included:

• Foreign Currency Translation Loss (Notional): ₹4.50 Crores (primarily affecting overseas operations). This is an accounting loss, not directly impacting cash.
• Commodity Price Impact (due to quarter lag): ₹2.91 Crores (a timing issue, as customer reimbursements are based on earlier quarter averages).
• One-time Power Cost in Mexico: ₹2.03 Crores.
• Business Loss due to lower volumes: ₹6.91 Crores (related to customer supply issues mentioned earlier).

Cumulatively, these “exceptional/one-time expenses” amounted to ₹16.35 Crores.

Adding to this, new projects that are yet to achieve full operational volumes (with a total investment of ₹405.66 Crores) incurred a loss of ₹10.65 Crores. This includes the Sundaram-Clayton acquisition and three other plants commissioned last year, which are still in their stabilization phase. The Sundaram business, contributing around ₹103 Crores in revenue, generated only ₹4 Crores (approx. 4%) EBITDA in Q1 FY26, significantly below the company’s average. Management expects Sundaram to reach 6-6.5% EBITDA by year-end and break even at the PBT level. This is a classic characteristic of companies in a growth phase, where upfront fixed costs for new ventures impact near-term profitability before revenues catch up.

When these factors are normalized, Sandhar’s underlying profit picture improves significantly. The normalized EBT margin stands at a healthier 5.64% (compared to reported 3.33%), indicating that core operations are more efficient than the reported numbers suggest. The management anticipates Q2 FY26 to be “considerably better” as these one-off costs dissipate and new businesses stabilize. For a company that is consistently investing for growth, a temporary dip in earnings due to new project losses and one-off items can be acceptable, provided it is accompanied by strong revenue growth and clear future prospects. Sandhar’s aggressive sales forecasts and strategic investments align with this narrative, positioning it as a Fast Grower currently in a transition phase.

Strategic Thrusts: Building for the Future 🏗️

Sandhar isn’t just navigating challenges; it’s actively re-shaping its future.

• Verticalization: The company is consolidating its businesses into four distinct verticals: Aluminum Die Casting, Sheet Metal, Automotive Proprietary (Locks/Mirrors), and Construction Equipment. This move aims to enhance focus, achieve economies of scale, and improve overall operational efficiency. The internal plan for the Aluminum business is to double its revenue from last year, indicating an aggressive growth trajectory. Capacity utilization in the sheet metal segment has already improved from 60-65% to 70-72%.
• EV Foray: A significant strategic pivot is the foray into E-Mobility. Sandhar has commenced commercial production of Battery Chargers, Motor Controllers, and DC-DC Converters, marking its first commercial sale in July 2024. While EV revenue in Q1 FY26 was modest (just under ₹2 Crores), the company has invested approximately ₹21 Crores in this segment and is developing integrated solutions like 3-in-1 Motor Controllers. This long-term bet positions Sandhar to capitalize on India’s burgeoning EV market, aligning with the domestic-growth investment theme.
• Smart Locks: The smart locks business is in its pilot phase, with volumes expected to pick up significantly in the second half of FY26. This adds another layer of proprietary, value-added products to its portfolio.
• Joint Ventures (JVs): Sandhar has streamlined its JV portfolio by selling stakes in two non-core JVs. The remaining five are all profitable and contribute positively, with the company’s share of revenue from these JVs at ₹37 Crores and a healthy 10.72% EBITDA margin in Q1 FY26.
• Overseas Performance: Despite the current losses in overseas operations (EUR 1.06 Million in Q1 FY26, including FX loss, and overall lower volumes due to global slowdown), the company is implementing cost reduction and efficiency measures, aiming for profitability by FY25-26. This is a critical area to monitor, as global factors like Fed policy and crude oil volatility continue to be watchpoints for the broader Indian market.

Capital Allocation & Financial Health: Fuelling Ambition 💰

Sandhar’s growth ambitions are backed by significant capital expenditure and strategic financing plans.

• CapEx: In Q1 FY26, the company spent ₹101 Crores on CapEx, which included the balance payment for the Sundaram acquisition. It plans an additional ₹200 Crores for the rest of the year, bringing the total growth and maintenance CapEx to around ₹250 Crores. New capacities are expected to be operational by year-end, with revenue contribution kicking in from FY27 onwards due to typical gestation periods in manufacturing. This substantial investment indicates management’s conviction in future growth and its ability to deliver on aggressive sales forecasts for coming years.
• Financing & Debt: Consolidated gross debt increased to ₹862 Crores as of June 2025 (from ₹821 Crores in FY25). This increase was primarily attributed to foreign currency translation (₹28 Crs) and the conversion of a bill discounting facility into a loan (₹20 Crs) in overseas subsidiaries. While the Debt-to-Equity ratio has slightly risen to 0.74, and Debt-to-EBITDA to 2.12, these ratios are manageable for a company in growth mode. The company aims to keep gross debt within ₹850-900 Crores. The “adjusted capital employed” calculation indicates a normalized ROCE of 17.60% (consolidated), which is healthy.
• QIP for Growth: Perhaps the most significant financing move is the proposed Qualified Institutional Placement (QIP) of ₹500 Crores. The proceeds are earmarked primarily for future inorganic acquisitions. Management has a clear filter for these acquisitions: they must offer high margins, profitability, stability, and a Return on Capital Employed (ROCE) above 18% post-tax within 2-3 years. This disciplined approach to M&A suggests a focus on value creation and aligns with the investment insight of preferring strong domestic-growth themes, specifically identifying opportunities that can deliver superior returns within the auto components sector.

Key Takeaways for Investors 🎯

Sandhar Technologies’ Q1 FY26 results present a classic case of looking beyond the immediate headlines.

1. Strong Underlying Growth: The robust revenue growth, especially from the India business, affirms its position within the favorable domestic-growth theme. This is driven by strong domestic demand, a key macro indicator for the Indian economy.
2. Profitability Under Pressure, but Temporarily: The dip in PAT and margins is largely attributable to one-off expenses and initial losses from new projects and acquisitions that are yet to achieve full scale. The normalized profitability figures offer a more optimistic view of its operational efficiency. Investors should closely monitor how these “one-off” impacts diminish and how new projects, particularly the Sundaram acquisition, scale up in subsequent quarters and begin contributing positively to margins.
3. Strategic Vision: The company’s aggressive investments in CapEx, the nascent but promising EV segment, smart locks, and its verticalization strategy signal a clear intent to capture future growth opportunities. The proposed QIP for high-ROCE acquisitions further underscores this ambitious outlook, focusing on quality inorganic growth.
4. Operational Efficiencies: Improving capacity utilization in segments like sheet metal from 60-65% to 70-72% is a positive sign of better asset utilization and cost control.
5. Management Outlook: Despite the Q1 challenges, management maintains its target of a 0.5% EBITDA margin expansion for FY26 and expects Q2 to be “considerably better.” This reflects confidence in their strategic execution.

In essence, Sandhar Technologies appears to be a Fast Grower currently navigating a period of significant strategic investment and temporary challenges. The management’s proactive communication and clear strategic roadmap suggest confidence in its ability to deliver on its full-year EBITDA margin expansion target and continue its growth trajectory. The coming quarters will be critical in demonstrating the tangible benefits of these bold moves, particularly the ramp-up of new projects and the performance of overseas operations.

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