Adroit Infotech Q2 FY26: Profitability Returns but Valuation Concerns Persist

Whilst the quarter-on-quarter recovery is notable, with net profit swinging from a loss of ₹0.79 crores in Q1 FY26 to a profit of ₹0.84 crores in Q2 FY26, the year-on-year comparison reveals a more modest 71.43% growth from ₹0.49 crores in Q2 FY25. The company's revenue performance showed a sequential decline of 5.48%, falling from ₹10.40 crores in Q1 FY26 to ₹9.83 crores in Q2 FY26, though it registered a healthy 49.85% year-on-year growth.

The company's operational performance in Q2 FY26 marks a significant improvement over the previous quarter's anomalous loss, which was primarily driven by exceptional items and one-time adjustments. The return to profitability, coupled with improved margins, suggests that the underlying business operations are stabilising, albeit with considerable volatility quarter-to-quarter. Trading at ₹11.31 as of November 6, 2025, the stock has declined 0.53% in the latest trading session, continuing its downward trajectory that has seen it underperform the broader market significantly over the past year.

Financial Performance: Recovery Amid Volatility

Adroit Infotech's Q2 FY26 financial performance demonstrates a return to normalised operations after the previous quarter's loss. Net sales in Q2 FY26 stood at ₹9.83 crores, representing a sequential decline of 5.48% from Q1 FY26's ₹10.40 crores, but a robust year-on-year growth of 49.85% from Q2 FY25's ₹6.56 crores. This YoY growth trajectory reflects the company's expanding client base and improved project execution, though the QoQ decline raises questions about revenue sustainability and pipeline visibility.

The operating profit margin (excluding other income) improved significantly to 13.63% in Q2 FY26, compared to 9.60% in Q2 FY25, indicating better cost management and operational efficiency. The company's employee costs, which constitute the bulk of expenses in the software consulting business, stood at ₹6.14 crores in Q2 FY26, down from ₹6.85 crores in Q1 FY26. This reduction in employee costs, coupled with the revenue decline, suggests potential workforce optimisation or project completion cycles impacting the quarter's performance.

Net profit for Q2 FY26 reached ₹0.84 crores, a dramatic recovery from the loss of ₹0.79 crores in Q1 FY26. The PAT margin of 8.55% in Q2 FY26 represents an improvement from 7.47% in Q2 FY25, though it remains substantially below the 23.74% margin achieved in Q4 FY24. The tax rate in Q2 FY26 stood at 27.59%, normalising after the previous quarter's anomalous -618.18% rate, which was distorted by losses and deferred tax adjustments.

Other income contributed ₹0.64 crores in Q2 FY26, down from ₹1.05 crores in Q1 FY26 but up from ₹0.36 crores in Q2 FY25. The variability in other income, which includes interest income and miscellaneous receipts, adds to the earnings volatility. Interest expenses remained manageable at ₹0.36 crores in Q2 FY26, reflecting the company's low debt burden, with long-term debt standing at just ₹0.42 crores as of March 2025.

Operational Challenges: Weak Return Ratios and Growth Concerns

Despite the quarterly profit recovery, Adroit Infotech faces significant operational challenges that are reflected in its weak return on equity (ROE) and return on capital employed (ROCE) metrics. The average ROE over recent periods stands at 9.02%, whilst the latest ROE is negative at -4.04%, indicating poor capital efficiency and shareholder value creation. For a software consulting business with minimal capital intensity, these returns are substantially below industry benchmarks and suggest fundamental issues with profitability scalability.

The company's five-year earnings before interest and tax (EBIT) growth stands at a concerning -222.64%, highlighting a dramatic deterioration in operating profitability over the long term. Whilst sales have grown at a five-year compound annual growth rate (CAGR) of 34.02%, the inability to translate this top-line expansion into sustainable bottom-line growth points to structural cost issues, pricing pressures, or project execution challenges. The average ROCE of 9.92%, with the latest figure at -3.87%, further underscores the company's struggle to generate adequate returns on deployed capital.

The balance sheet reveals a company that has undergone significant capital restructuring. Share capital increased from ₹29.79 crores in March 2024 to ₹54.18 crores in March 2025, indicating substantial equity dilution. Reserves and surplus improved from ₹3.62 crores to ₹19.43 crores during the same period, but this improvement came at the cost of shareholder dilution. Current assets expanded dramatically from ₹16.23 crores to ₹67.37 crores, suggesting either improved working capital management or capital infusion, though the productive deployment of these assets remains questionable given the weak return metrics.

Working capital management shows mixed signals. The cash flow from operations was negative at ₹1.00 crore for FY25, driven by a ₹6.00 crore increase in working capital requirements. This negative operating cash flow, despite reported profitability in the annual accounts, raises concerns about the quality of earnings and the timing of revenue recognition versus cash collection. The company's cash flow from financing activities of ₹37.00 crores in FY25 indicates substantial capital raising, likely through the equity dilution observed in the balance sheet.

Industry Context: Struggling in a Thriving Sector

The broader Indian software consulting industry has demonstrated resilience and growth, with many peers delivering strong returns and expanding margins. However, Adroit Infotech's performance stands in stark contrast to this sector-wide strength. Over the past year, the stock has declined 49.42%, whilst the Computers - Software & Consulting sector has delivered a positive return of 10.98%, resulting in a massive 60.40 percentage point underperformance versus the sector.

This significant underperformance reflects market scepticism about the company's competitive positioning, execution capabilities, and growth sustainability. The software consulting business is characterised by low barriers to entry but high competitive intensity, requiring consistent delivery, client retention, and the ability to scale operations efficiently. Adroit Infotech's volatile quarterly performance, declining margins over time, and inability to maintain profitability consistency suggest challenges in all these critical areas.

The company's micro-cap status, with a market capitalisation of just ₹59.00 crores, limits its ability to compete for large enterprise contracts and attract top talent. The absence of institutional holdings—with zero foreign institutional investor (FII) and mutual fund (MF) participation—further underscores the lack of confidence from sophisticated investors. This institutional apathy is particularly telling in a sector where quality companies typically attract significant institutional interest.

Valuation Analysis: Risky Despite Low Multiples

Adroit Infotech trades at a price-to-book value (P/BV) ratio of 0.82x, below its book value of ₹13.59 per share. Whilst this might appear attractive on the surface, the below-book valuation is justified given the company's loss-making status on a trailing twelve-month (TTM) basis and its consistently weak return on equity. The P/E ratio is not applicable due to negative earnings over the TTM period, reflecting the Q1 FY26 loss that has distorted the annual profitability metrics.

The company's valuation grade has been classified as "Risky" since May 2025, having deteriorated from "Very Attractive" in late 2024. This downgrade reflects the market's reassessment of the company's earnings quality, growth sustainability, and operational consistency. The enterprise value-to-EBITDA (EV/EBITDA) ratio of -75.59x and EV/EBIT of -26.71x are negative due to the company's negative net debt position (more cash than debt) and volatile EBITDA, making traditional valuation multiples less meaningful.

The stock's 52-week performance paints a concerning picture. Trading at ₹11.31, it sits just 18.80% above its 52-week low of ₹9.52 but 62.43% below its 52-week high of ₹30.10. This dramatic decline from peak levels reflects the market's loss of confidence in the company's growth narrative and profitability outlook. The stock trades below all key moving averages—5-day, 20-day, 50-day, 100-day, and 200-day—indicating sustained selling pressure and lack of buying interest.

Fair value estimation for Adroit Infotech is challenging given the earnings volatility and lack of consistent profitability. Using a conservative price-to-book approach and factoring in the below-average ROE, a fair value estimate would be around ₹10.00-₹11.00 per share, suggesting the stock is fairly valued to slightly overvalued at current levels of ₹11.31. Any upside would require demonstrable improvement in profitability consistency, margin expansion, and return ratio enhancement over multiple quarters.

Shareholding Pattern: Stable Promoter Base but Zero Institutional Interest

The shareholding pattern reveals a relatively stable promoter holding of 37.47% as of September 2025, with marginal quarter-on-quarter changes. Promoter holding has fluctuated between 36.92% and 39.06% over the past five quarters, with the most recent quarter showing a modest 0.13% increase from 37.34% in June 2025. The key promoters include Softpoint Technologies Private Limited (20.23%), Sudhakiran Reddy Sunkerneni (14.39%), and Kanthi Reddy Sunkerneni (2.85%), indicating concentrated control within a small group.

Positively, there is no promoter pledging, which eliminates concerns about financial distress or forced selling at the promoter level. However, the complete absence of institutional investors—with zero holdings from FIIs, mutual funds, insurance companies, and other domestic institutional investors (DIIs)—is a significant red flag. This institutional vacuum suggests that sophisticated investors have not found the company's fundamentals, governance, or growth prospects compelling enough to warrant investment.

Non-institutional holdings, comprising primarily retail investors, account for 62.53% of the shareholding. This retail-heavy shareholder base contributes to the stock's volatility and limited liquidity, with average daily volumes of just 2,010 shares in the latest trading session. The lack of institutional participation also means reduced analyst coverage, limited market visibility, and potentially weaker corporate governance oversight compared to institutionally-backed companies.

Stock Performance: Severe Underperformance Across All Timeframes

Adroit Infotech's stock performance has been dismal across virtually all meaningful timeframes, significantly underperforming both the benchmark Sensex and its sector peers. Over the past year, the stock has declined 49.42%, compared to a 3.65% gain in the Sensex, resulting in a negative alpha of 53.07 percentage points. This massive underperformance reflects fundamental concerns about the company's business model, execution capabilities, and long-term viability.

Year-to-date (YTD) performance shows an even more dramatic picture, with the stock down 42.56% whilst the Sensex has gained 6.62%, translating to a negative alpha of 49.18 percentage points. The three-year performance shows a decline of 3.57% versus a 36.69% gain in the Sensex, indicating that the company's challenges are not merely cyclical but structural in nature. Even the five-year return of 110.19%, whilst positive, has barely outpaced the Sensex's 98.87% gain, delivering just 11.32 percentage points of alpha over this extended period.

The stock's beta of 1.50 indicates it is 50% more volatile than the broader market, classified as a high-beta stock. With a volatility of 49.73% over the past year, compared to the Sensex's 12.45%, the stock presents significantly higher risk without commensurate returns. The risk-adjusted return of -0.99 and negative Sharpe ratio place it firmly in the "HIGH RISK LOW RETURN" category—the worst possible combination for investors.

Technical analysis reveals a "Mildly Bearish" trend, with the stock trading below all key moving averages. The Moving Average Convergence Divergence (MACD) shows mixed signals (mildly bullish on weekly, bearish on monthly), whilst the Relative Strength Index (RSI) provides no clear directional signal. The immediate support lies at the 52-week low of ₹9.52, whilst resistance is encountered at the 20-day moving average of ₹11.36, suggesting limited near-term upside potential.

Investment Thesis: Multiple Red Flags Outweigh Cyclical Recovery

The investment case for Adroit Infotech is severely compromised by multiple structural challenges that overshadow the recent quarterly profit recovery. The company's proprietary Mojo score of 23 out of 100, with a "STRONG SELL" rating, reflects the confluence of negative factors: weak long-term fundamental strength with a -222.64% CAGR in operating profits over five years, bearish technical trend, risky valuation despite low multiples, and severe market underperformance.

The company's quality grade of "Below Average" is based on weak return ratios (average ROE of 9.02%, average ROCE of 9.92%), inconsistent profitability, and the absence of institutional investor confidence. Whilst the five-year sales CAGR of 34.02% appears impressive, the inability to convert this revenue growth into sustainable profits raises serious questions about business model viability, competitive positioning, and management execution capabilities.

The short-term financial trend is classified as "Positive" based on the Q2 FY26 recovery, with the latest six-month PAT of ₹1.61 crores being higher than comparable prior periods. However, this positive short-term trend is insufficient to override the concerning long-term trajectory. The company's negative operating cash flow of ₹1.00 crore in FY25, despite reported annual profits, suggests earnings quality issues and potential working capital management challenges that could constrain future growth.

Outlook: What Lies Ahead

The outlook for Adroit Infotech remains challenging despite the recent quarterly recovery. For the company to regain investor confidence and justify a re-rating, it must demonstrate sustained profitability over multiple quarters, improve return ratios significantly, and attract institutional investor interest. The absence of institutional holdings is particularly concerning, as it suggests sophisticated investors have found the risk-reward profile unattractive even at current depressed valuations.

Key monitoring points for existing shareholders and potential investors include the sustainability of revenue growth, the ability to maintain positive operating cash flows, and progress towards achieving double-digit return on equity consistently. The company's management must also address the earnings quality concerns highlighted by the disconnect between reported profits and operating cash flows, and provide greater transparency on project pipelines, client concentration, and competitive positioning.

The software consulting industry's growth trajectory remains robust, driven by digital transformation initiatives across sectors. However, Adroit Infotech's ability to capitalise on this industry tailwind is questionable given its track record of inconsistent execution, volatile profitability, and inability to scale efficiently. The company's micro-cap status and lack of institutional backing further limit its competitive positioning against better-capitalised and more established peers.