What's behind 7% surge in Eternal share price despite 90% drop in Q1 profit?

Despite reporting a steep 90% year-on-year decline in net profit for the first quarter of FY26, Eternal Limited surprised market watchers as its stock surged nearly 7% intraday on Monday, defying the gravity of its poor financial results. This paradoxical rally has piqued investor interest, prompting a closer look at what’s really driving market sentiment.

Q1 Results: A Bleak Bottom Line

Eternal Ltd posted a net profit of ₹4.2 crore for Q1 FY26, down a staggering 90.2% from ₹42.9 crore in Q1 FY25. Revenue from operations also dipped marginally by 5.3% YoY to ₹311 crore, down from ₹328 crore in the same quarter last year. The company attributed the drastic fall in profits to rising input costs, lower export demand, and inventory write-downs in its specialty chemicals division.

Operational Highlights:

• EBITDA slipped to ₹24.7 crore from ₹69.5 crore YoY.

• EBITDA margin contracted sharply to 7.9% from 21.1%.

• Raw material costs surged by over 18% YoY.

• Exports contributed only 22% to the revenue vs 30% YoY.

Despite these weak numbers, the company indicated that corrective steps are underway, including strategic price hikes and portfolio restructuring to focus on high-margin segments.

Market Reaction: Decoding the Rally

Eternal shares rallied by 6.9% to hit an intraday high of ₹527 on the NSE, before closing at ₹522. This surge came against the backdrop of broader market consolidation, making the move even more intriguing.

Analysts attribute the upmove to several possible triggers:

1. Management Commentary and Forward Guidance

In its investor call, Eternal’s management struck a cautiously optimistic tone, projecting margin recovery from Q2 onwards, backed by:

• Softer crude-linked raw material prices

• Inventory normalization

• Strong order book in the paints & coatings vertical

“Despite the current setback, we see a rebound in profitability by the second half of the fiscal, supported by a stronger product mix and cost optimization,” said CEO Pratik Desai during the post-earnings call.

2. Bottom Fishing and Valuation Comfort

With the stock correcting nearly 40% from its 52-week high, value investors are seeing an opportunity.

“Much of the negative sentiment was already priced in. A sharp earnings drop often leads to overreaction, and bargain hunters tend to enter when pessimism peaks,” noted Richa Naik, Senior Research Analyst at Nuvama Wealth.

3. Technical Support and Short Covering

The stock found strong support at its 200-day moving average, prompting short covering and speculative buying.

“From a technical perspective, Eternal was in an oversold zone. The bounce looks more like a relief rally with key resistance near ₹540. Traders should remain cautious until we see a decisive trend reversal,” added Amit Trivedi, Technical Analyst at Axis Securities.

4. Sectoral Tailwinds

The specialty chemicals sector is poised for a demand rebound in H2FY26 due to revival in Chinese and European demand, regulatory tailwinds, and improved domestic capex from downstream users. Eternal’s core segments—coatings, agro-intermediates, and polymer additives—are expected to benefit.

Investor Outlook: Patience Over Panic

While the Q1 numbers are undeniably weak, the stock price movement signals optimism for medium- to long-term recovery. Investors appear to be factoring in a bottoming out of operational stress, and some have even welcomed the company’s aggressive pivot towards cost control and high-value products.

What Should Investors Watch For?

• Margin expansion in Q2 and Q3 FY26

• Volume growth in domestic and export markets

• Raw material price trends, especially benzene and toluene derivatives

• Execution of announced capex of ₹180 crore over next 12 months

The Eternal stock rally amid collapsing profits reflects a classic case of “bad news already priced in” combined with speculative buying on future recovery hopes. While fundamentals remain under strain, management’s proactive approach and sectoral tailwinds have lent a temporary reprieve. However, for sustained upward movement, delivery on promised operational improvements will be crucial.

As investors tread cautiously, Eternal’s Q2 results may very well be the litmus test of whether this optimism is justified or premature.