The stock has reacted negatively to the weak quarterly performance, trading at ₹254.95 as of November 18, 2025, down 4.99% on the day and 12.25% over the past month. Despite the recent correction, the stock remains up 102.34% over the past year, significantly outperforming the Sensex's 9.48% gain during the same period. However, the sharp quarterly profit decline and margin compression have raised questions about sustainability of this outperformance.
Financial Performance: A Quarter of Deterioration
ABM Knowledgeware's Q2 FY26 results revealed significant operational challenges. Net sales declined 12.07% quarter-on-quarter to ₹22.08 crores from ₹25.11 crores in Q1 FY26, marking the lowest quarterly revenue in the past seven quarters. On a year-on-year basis, sales contracted 1.52% from ₹22.42 crores in Q2 FY25, indicating both sequential and annual revenue pressure.
| Quarter | Sep'25 | Jun'25 | Mar'25 | Dec'24 | Sep'24 | Jun'24 | Mar'24 |
|---|---|---|---|---|---|---|---|
| Net Sales (₹ Cr) | 22.08 | 25.11 | 24.38 | 28.24 | 22.42 | 21.63 | 26.55 |
| QoQ Growth (%) | -12.07% | +2.99% | -13.67% | +25.96% | +3.65% | -18.53% | — |
| Cons. Net Profit (₹ Cr) | 2.02 | 3.73 | 3.71 | 3.51 | 3.80 | 3.37 | 5.33 |
| QoQ Growth (%) | -45.84% | +0.54% | +5.70% | -7.63% | +12.76% | -36.77% | — |
| Operating Margin (Excl OI) % | 14.54% | 22.14% | 14.23% | 29.32% | 20.16% | 16.60% | 28.25% |
| PAT Margin % | 6.34% | 19.51% | 13.25% | 21.64% | 19.67% | 15.49% | 21.58% |
The most alarming aspect of the quarter was the sharp margin compression. Operating profit excluding other income (PBDIT excl OI) plummeted to ₹3.21 crores from ₹5.56 crores in the previous quarter, with operating margins contracting 760 basis points to 14.54% from 22.14%. This marked the lowest operating margin in the trailing seven quarters, signalling significant operational stress. Employee costs rose to ₹14.39 crores from ₹14.05 crores quarter-on-quarter, even as revenues declined, indicating poor cost management and operating leverage.
Profit after tax (PAT) margin collapsed to 6.34% in Q2 FY26 from 19.51% in Q1 FY26, a staggering 1,317 basis point decline. The PAT of ₹2.22 crores fell 60.85% quarter-on-quarter from ₹5.67 crores. A particularly concerning metric was the elevated tax rate of 44.22% in Q2 FY26, significantly higher than the 22.71% in the previous quarter and well above the company's historical average of around 26.18%. This abnormal tax burden further pressured bottom-line profitability.
Critical Insight: Non-Operating Income Dependency
Other income in Q2 FY26 stood at ₹1.24 crores, representing 49.40% of profit before tax (PBT). This heavy reliance on non-operating income to support profitability is a red flag, suggesting that core business operations are struggling to generate adequate returns. When nearly half of pre-tax profits come from other income rather than core operations, it raises serious questions about business sustainability.
Operational Challenges: Margin Erosion and Cost Pressures
The sharp deterioration in operating margins points to fundamental operational challenges. ABM Knowledgeware's operating profit excluding other income fell to its lowest level at ₹3.21 crores in Q2 FY26, down from ₹5.56 crores in Q1 FY26 and ₹4.52 crores in Q2 FY25. The company's inability to control employee costs in a declining revenue environment has severely impacted profitability. Employee expenses as a percentage of sales rose to 65.17% in Q2 FY26 from 55.96% in Q1 FY26, highlighting poor operational efficiency.
From a capital efficiency perspective, ABM Knowledgeware's return on equity (ROE) stands at a weak 6.62% on average, significantly below industry standards for software companies. The latest ROE of 5.45% indicates deteriorating capital efficiency. Whilst the company maintains a healthy return on capital employed (ROCE) of 15.38% on average, the latest ROCE has declined to 12.17%, reflecting the impact of weakening operational performance. For investors, higher ROE and ROCE are critical indicators of management's ability to generate returns on shareholder capital, and the declining trend is concerning.
⚠️ Critical Concern: Negative Financial Trend
The company's short-term financial trend is officially classified as NEGATIVE as of September 2025. Key negative factors include: consolidated PAT falling 45.2% versus the previous four-quarter average, net sales at their lowest level at ₹22.08 crores, operating profit (PBDIT) at its lowest at ₹3.21 crores, and profit before tax less other income at its lowest at ₹1.27 crores. Additionally, earnings per share (EPS) hit its lowest level at ₹1.01 in Q2 FY26.
The company's balance sheet remains relatively healthy with zero debt and shareholder funds of ₹234.58 crores as of March 2025. Current assets stood at ₹187.61 crores, providing adequate liquidity. However, the company's investments have increased to ₹31.31 crores from ₹22.61 crores in the previous year, suggesting capital is being deployed in non-core areas rather than driving organic growth in the core software business.
Industry Context: Outperforming a Struggling Sector
ABM Knowledgeware operates in the software products sector, which has faced significant headwinds over the past year. The broader software products industry delivered a negative return of 15.55% over the past twelve months, whilst ABM Knowledgeware's stock surged 102.34%, resulting in a remarkable outperformance of 117.89 percentage points versus the sector. This divergence suggests that investors had priced in significant optimism about the company's prospects, making the recent quarterly disappointment all the more impactful.
The software products sector in India has been grappling with slower enterprise spending, elongated sales cycles, and margin pressures from wage inflation. ABM Knowledgeware's Q2 FY26 results reflect many of these broader sectoral challenges, particularly the margin compression and revenue volatility. The company's five-year sales growth of just 3.76% and a negative five-year EBIT growth of 8.99% indicate that ABM Knowledgeware has struggled to capitalise on India's broader technology growth story.
Peer Comparison: Valuation Premium Despite Weaker Fundamentals
When compared to peers in the software products space, ABM Knowledgeware's fundamental metrics reveal a mixed picture. The company's ROE of 6.62% lags significantly behind sector peers, with companies like Blue Cloud Softech delivering an impressive 34.00% ROE, Unicommerce at 13.07%, and IRIS Business at 14.22%. ABM Knowledgeware's capital efficiency metrics place it at the lower end of the peer group, raising questions about its competitive positioning.
| Company | P/E (TTM) | P/BV | ROE (%) | Div Yield (%) | Debt/Equity |
|---|---|---|---|---|---|
| ABM Knowledgeware | 41.38 | 2.26 | 6.62 | 0.47 | -0.43 |
| Quick Heal Technologies | NA (Loss Making) | 3.86 | 6.79 | — | -0.44 |
| Unicommerce | 56.29 | 7.36 | 13.07 | — | -0.12 |
| Blue Cloud Softech | 22.09 | 7.32 | 34.00 | — | 0.54 |
| Subex | NA (Loss Making) | 2.28 | 1.65 | — | -0.30 |
| IRIS Business | 30.64 | 3.68 | 14.22 | — | -0.46 |
From a valuation perspective, ABM Knowledgeware trades at a P/E ratio of 41.38x, which is elevated compared to peers like Blue Cloud Softech (22.09x) and IRIS Business (30.64x), though lower than Unicommerce (56.29x). The company's price-to-book ratio of 2.26x is the lowest among profitable peers, reflecting its weaker ROE profile. All peer companies maintain net cash positions (negative debt-to-equity ratios), indicating the software products sector's generally healthy balance sheet characteristics.
The key concern is that ABM Knowledgeware commands a premium P/E multiple of 41.38x despite delivering significantly weaker ROE (6.62%) compared to peers averaging around 14% ROE. This valuation-quality mismatch suggests the stock may be overvalued relative to its fundamental performance, particularly given the recent sharp deterioration in quarterly results.
Valuation Analysis: Premium Pricing for Deteriorating Fundamentals
ABM Knowledgeware's current valuation metrics paint a concerning picture. The stock trades at a P/E ratio of 41.38x compared to the software products industry average of 28x, representing a significant premium of approximately 48% to sector peers. Given the company's weak ROE of 6.62% and negative five-year EBIT growth of 8.99%, this premium appears unjustified.
The company's valuation grade has been classified as "VERY EXPENSIVE" since mid-September 2025, with frequent oscillations between "Very Expensive" and "Expensive" throughout September. The price-to-book ratio of 2.26x, whilst lower than peers, still represents a substantial premium to the book value of ₹114.53 per share. The enterprise value multiples tell a similar story: EV/EBITDA of 21.19x and EV/Sales of 4.36x are elevated for a company experiencing margin compression and revenue volatility.
Fair Value Assessment
Based on peer comparison and fundamental analysis, a more appropriate P/E multiple for ABM Knowledgeware would be in the range of 25-30x, given its weak ROE profile and negative growth trends. This would imply a fair value range of ₹180-215 per share, suggesting the current price of ₹254.95 embeds approximately 18-42% downside risk. The stock's recent correction from its 52-week high of ₹325.00 has only partially addressed this overvaluation.
The dividend yield of 0.47% is negligible and provides minimal income support to investors. With a dividend payout ratio of just 17.68%, the company retains most of its earnings, yet has failed to deploy this capital effectively as evidenced by the negative five-year EBIT growth. The latest dividend of ₹1.25 per share (ex-date August 22, 2025) represents minimal shareholder returns.
Shareholding Pattern: Stable Promoter Base, Minimal Institutional Interest
ABM Knowledgeware's shareholding pattern has remained remarkably stable over the past five quarters, with promoter holding consistently at 66.92% from September 2024 through September 2025. The promoter group, led by Prakash Baburao Rane (47.71%) and Supriya Prakash Rane (12.27%), demonstrates strong commitment with zero pledging of shares—a positive signal for corporate governance.
| Shareholder Category | Sep'25 | Jun'25 | Mar'25 | Dec'24 | Sep'24 |
|---|---|---|---|---|---|
| Promoter | 66.92% | 66.92% | 66.92% | 66.92% | 66.92% |
| FII | 0.00% | 0.00% | 0.00% | 0.34% | 0.34% |
| Mutual Funds | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| Other DII | 0.00% | 0.06% | 0.06% | 0.00% | 0.00% |
| Non-Institutional | 33.08% | 33.01% | 33.01% | 32.73% | 32.73% |
However, the complete absence of institutional investor interest is a significant red flag. Foreign institutional investors (FIIs) exited completely in March 2025, reducing their stake from 0.34% to zero. Mutual funds hold no stake in the company, and insurance companies are absent as well. Other domestic institutional investors (DIIs) held a minuscule 0.06% stake in June 2025 but have since exited. The total institutional holding stands at effectively 0%, indicating that sophisticated investors have shown no confidence in the company's prospects.
The non-institutional shareholding has marginally increased from 32.73% in September 2024 to 33.08% in September 2025, suggesting some retail investor interest. However, the absence of any meaningful institutional participation raises concerns about the stock's liquidity and the quality of the shareholder base. Institutional investors typically conduct rigorous due diligence, and their complete absence suggests they have identified fundamental concerns that outweigh any potential upside.
Stock Performance: Impressive Rally Faces Reality Check
ABM Knowledgeware's stock has delivered exceptional returns over various timeframes, though recent performance has turned sharply negative. Over the past year, the stock surged 102.34%, vastly outperforming the Sensex's 9.48% gain, resulting in an alpha of 92.86 percentage points. The two-year return of 142.46% and three-year return of 128.35% demonstrate sustained outperformance, with alpha of 113.77 and 91.04 percentage points respectively.
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Day | -4.99% | -0.33% | -4.66% |
| 1 Week | -5.52% | +0.96% | -6.48% |
| 1 Month | -12.25% | +0.86% | -13.11% |
| 3 Month | +52.94% | +4.18% | +48.76% |
| 6 Month | +51.85% | +2.85% | +49.00% |
| YTD | +42.63% | +8.36% | +34.27% |
| 1 Year | +102.34% | +9.48% | +92.86% |
| 2 Years | +142.46% | +28.69% | +113.77% |
| 3 Years | +128.35% | +37.31% | +91.04% |
However, the recent trend has reversed sharply. The stock has declined 4.99% in the past day, 5.52% over the past week, and 12.25% over the past month, significantly underperforming the Sensex during these periods. This abrupt reversal coincides with the disappointing Q2 FY26 results and suggests that the market is reassessing the stock's lofty valuation in light of deteriorating fundamentals.
The stock's technical indicators show a bullish overall trend that began on September 19, 2025 at ₹184.55, though this was established before the recent quarterly results. The stock currently trades at ₹254.95, approximately 21.55% below its 52-week high of ₹325.00 and 107.95% above its 52-week low of ₹122.60. With a beta of 1.50, the stock exhibits high volatility and is significantly more volatile than the broader market, as evidenced by its 63.84% volatility compared to the Sensex's 12.26%.
"When a stock trades at 41x earnings with declining margins, negative EBIT growth, and zero institutional interest, the burden of proof shifts heavily to management to demonstrate a credible turnaround plan."
Investment Thesis: Quality Concerns Outweigh Technical Momentum
ABM Knowledgeware's investment case presents a stark contradiction between recent stock price momentum and underlying fundamental deterioration. The company's overall quality grade is classified as "AVERAGE," reflecting adequate but unimpressive long-term financial performance. The key quality metrics reveal several concerns: five-year sales growth of just 3.76%, negative five-year EBIT growth of 8.99%, and a weak average ROE of 6.62%.
On the positive side, the company maintains zero debt, has no promoter pledging, and generates adequate cash flows. The average ROCE of 15.38% indicates reasonable capital efficiency, though this has declined to 12.17% in the latest period. The company's net cash position and low debt-to-EBITDA ratio provide financial flexibility, but this has not translated into growth or improved returns.
The current Mojo Score of 58 out of 100 places the stock in "HOLD" territory, with the recommendation stating "Not recommended for fresh buy. You can continue to hold." This score reflects mixed signals across key parameters: bullish technical indicators offset by negative financial trends, average quality metrics, and very expensive valuation. The score improved from 51 in mid-September 2025, but this was before the disappointing Q2 FY26 results.
Key Strengths & Risk Factors
✓ Key Strengths
Zero Debt Company: Maintains a completely debt-free balance sheet with net cash position, providing financial flexibility and reducing solvency risk.
No Promoter Pledging: Promoters have pledged zero shares, indicating confidence and strong corporate governance standards.
Stable Promoter Holding: Consistent 66.92% promoter stake over past five quarters demonstrates long-term commitment to the business.
Strong Historical Returns: Delivered 102.34% return over past year, significantly outperforming both Sensex and sector peers.
Adequate Capital Efficiency: Average ROCE of 15.38% indicates reasonable returns on capital employed, though declining.
Positive Cash Generation: Generated ₹23.00 crores in operating cash flow in FY25, demonstrating ability to convert profits to cash.
⚠ Key Concerns
Severe Profit Decline: Consolidated net profit collapsed 45.84% QoQ and 46.84% YoY in Q2 FY26, indicating serious operational challenges.
Margin Compression: Operating margins contracted 760 bps QoQ to 14.54%, the lowest in seven quarters, reflecting poor cost management.
Negative Financial Trend: Short-term financial trend classified as NEGATIVE with multiple metrics at multi-quarter lows.
Weak ROE Profile: Average ROE of 6.62% significantly trails peer average of ~14%, indicating poor capital efficiency.
Zero Institutional Interest: Complete absence of FII, mutual fund, and insurance holdings signals lack of sophisticated investor confidence.
Expensive Valuation: P/E of 41.38x represents 48% premium to sector despite weaker fundamentals, classified as "VERY EXPENSIVE."
Negative Long-Term Growth: Five-year EBIT growth of -8.99% indicates deteriorating operational performance over time.
Outlook: What to Watch
Positive Catalysts
Margin Recovery: Any signs of operating margin stabilisation or improvement above 20% levels would be positive.
Revenue Acceleration: Consistent QoQ revenue growth returning to ₹25+ crore quarterly run rate.
Cost Optimisation: Employee cost as percentage of sales declining below 60% would indicate improved efficiency.
Institutional Entry: Any meaningful institutional investor participation would validate investment thesis.
Red Flags
Further Margin Decline: Operating margins falling below 14% would signal deepening operational crisis.
Sustained Revenue Decline: Consecutive quarters of revenue contraction would confirm negative growth trajectory.
Rising Other Income Dependency: Other income exceeding 50% of PBT indicates unsustainable profit structure.
Promoter Stake Reduction: Any decline in promoter holding would signal loss of confidence.
The Verdict: Avoid Fresh Purchases, Existing Holders Monitor Closely
Score: 45/100
For Fresh Investors: Avoid initiating positions. The combination of deteriorating quarterly performance, severe margin compression, negative financial trend, weak ROE profile, and expensive valuation (41x P/E) creates an unfavourable risk-reward equation. The complete absence of institutional investor interest is particularly concerning and suggests sophisticated investors have identified fundamental issues.
For Existing Holders: Consider reducing exposure or exiting positions, particularly if holding at substantial gains. The 102% one-year return provides an opportunity to book profits before further fundamental deterioration. If choosing to hold, closely monitor Q3 FY26 results for signs of margin stabilisation and revenue recovery. Set a mental stop-loss at ₹220 (approximately 14% below current levels) to protect capital.
Fair Value Estimate: ₹195 per share (23.5% downside from current price), based on a more appropriate 28-30x P/E multiple aligned with peer valuations and adjusted for weak ROE and negative growth profile.
Note- ROCE= (EBIT - Other income)/(Capital Employed - Cash - Current Investments)
⚠️ Investment Disclaimer
This article is for educational and informational purposes only and should not be construed as financial advice. Investors should conduct their own due diligence, consider their risk tolerance and investment objectives, and consult with a qualified financial advisor before making any investment decisions.
