Rajapalayam Mills FY26: A Loom Twice Repaired Still Waiting for Thread

General information and entertainment, not investment advice. The author is not a SEBI-registered adviser or research analyst. No recommendation, no promised returns. Markets carry risk including loss of capital. Figures may not be current. Consult a registered adviser before acting.

1. At a Glance

Rajapalayam Mills posted a consolidated net profit of ₹114.36 Cr for FY26 against a ₹17.05 Cr profit in FY25—a sixfold jump driven almost entirely by a ₹109.71 Cr net gain from shares held in group associates. Strip that out and the core business returned a ₹1.51 Cr loss on ₹942 Cr in sales.

Revenue grew 4.8% to ₹942.04 Cr, yet operating profitability sagged: the P&L showed a ₹27.88 Cr loss before tax. Interest costs eat ₹92.09 Cr annually against an operating profit of just ₹122 Cr—a coverage ratio of 1.3x, which the credit rating agencies flag as strained.

The market prices it at 6.7x annualised earnings, a 73% discount to the peer median of 24.2x. That gap exists because the company is losing money on operations while borrowing heavily to fund a loom expansion that hasn’t yet ramped.

Three items warrant attention: a ₹31.57 Cr GST demand from FY24, a ₹13.80 Cr GST demand from FY23, and a new ₹40 Cr corporate guarantee given to a group textile entity. The balance sheet carries ₹2,200 Cr in listed equity investments and ₹1,146 Cr in debt—a 0.52x gearing that would be benign if the operations weren’t red.

2. Introduction

Rajapalayam Mills was founded in 1936 and is the flagship of the Ramco group, a six-decade-old family textile conglomerate. The company makes fine cotton yarn (counts 4s to 300s) and value-added products—mercerized, gassed, slub, mélange—plus a newly ramped fabric division. Three of its peers are group associates: Ramco Cements, Ramco Industries, and Ramco Systems, all of which post far healthier returns.

For 88 years the group has carried zero defaults. That backing is textbook insurance; it’s also textbook reason to ask: if group support is that strong, why is Rajapalayam not running break-even?

In FY25, the board launched a ₹334 Cr loom expansion—tripling capacity from 154 to 328 looms—and a ₹150 Cr fabric finishing plant. By FY26, the fabric unit was operational but underutilized. Concurrently, raw cotton prices collapsed (a global tailwind that hit the P&L anyway), and the company burned through cash on capex debt and working capital.

In March 2026, the board approved a ₹40 Cr corporate guarantee for another Ramco group textile mill. The previous month, GST authorities slapped it with a ₹45.37 Cr cumulative demand (FY23 + FY24). The company believes these will be overturned on appeal.

3. Business Model: WTF Do They Even Do?

Rajapalayam spins and weaves. Its yarn business (76% of FY26 sales) runs at a tight 12–14% margin; it competes on scale, quality, and cost. The capex binge was meant to fix margin: a fabric division (20% of FY26 sales) promises 18–22% margins if fed the right yarn mix and utilization.

The arithmetic suggests ambition. Fabric was 35% of H1 FY26 sales (versus 26% in FY25). If capacity utilization hits 70%—still below the company’s historical 95%—the fabric unit alone could contribute ₹180 Cr in annual revenue. The risk: it’s capital-light only in dreams. Mercerization, gassing, and dyeing plants cost cash to build, run hot, and are sensitive to offtake timing.

The wind power play—35.15 MW of windmills plus a group captive solar scheme for 17 MW—cuts power costs by roughly 40%. In FY26, the windmill segment posted ₹2,960.98 Cr in operating profit before finance cost, a ₹2,196.29 Cr gain from FY25. Wait: those numbers are in lakhs. Let me recalculate: that’s ₹29.61 Cr and ₹21.96 Cr respectively. The windmill business is the company’s profit cushion.

Revenue is 30–40% exported; 60–80% of raw cotton is imported. Both expose the company to currency risk. Management hedges 80% of forex exposure through forwards, which is credible and also means 20% is naked.

The production footprint sits in Rajapalayam, Tamil Nadu: four mills, 151,808 spindles, 328 looms as of March 2026. Capacity utilization on spinning ran 95% historically; in FY26 it was lower due to muted demand. Fabric capacity utilization improved to 70% in H1 FY26 and is trending upward.

The business is high-volume, low-margin, and cyclical. Cotton textile is a commodity. Pricing power is nil. Survival depends on cost discipline and volume. Rajapalayam has both in history; the jury is out on whether the new loom assets deliver return.

4. Financials Overview

Figures are consolidated, in ₹ crore.

The headline profit number is misleading. The company’s core textile and windmill operations returned an operating profit of ₹122 Cr, a 12.9% margin—solid in a cyclical commodity business. But finance cost of ₹92.09 Cr and depreciation of ₹75.39 Cr compressed it to a ₹27.88 Cr loss before tax. Deferred tax benefits of ₹5.15 Cr narrowed the standalone PAT loss to ₹15.12 Cr.

The consolidated profit of ₹114.36 Cr includes a ₹109.71 Cr share of profit from associates—mostly Ramco Cements (which made ₹13,627 Cr in profit in FY26) and Ramco Industries. Without the associates, Rajapalayam’s profit would be deeply negative.

In H1 FY26, the company posted an operating margin of 15.2%, vs. 9.6% in H1 FY25. The fabric division ramp and improved product mix lifted it. However, the company also incurred a net loss of ₹4 Cr before associate income in the half-year, thanks to high interest cost.

5. Valuation Discussion: Fair Value Range (Educational Only)

What follows is a walkthrough of how three valuation