Affle 3i Q2 FY26: Strong Growth Momentum Continues Amid Premium Valuation Concerns

The company's shares closed at ₹1,926.55 on October 31, 2025, down 0.36% from the previous close, as investors digested the quarterly performance against the backdrop of elevated valuations. With promoter holding steady at 54.97% and institutional investors increasing their stake to 33.69%, the stock reflects a delicate balance between fundamental strength and valuation concerns.

The September quarter results underscore Affle's ability to maintain growth momentum in a competitive software consulting landscape. Net sales reached ₹646.72 crores in Q2 FY26, representing a 4.19% sequential uptick and 19.13% year-on-year expansion, demonstrating the company's capacity to scale operations whilst preserving profitability. The consistency in revenue generation, with six consecutive quarters of sequential growth, positions Affle as a reliable performer in the technology services sector.

Financial Performance: Margin Expansion Drives Profitability

Affle's Q2 FY26 financial performance reflects a company firing on multiple cylinders. Revenue growth of 19.13% year-on-year to ₹646.72 crores demonstrates robust demand for the company's mobile advertising and consumer intelligence solutions. More impressively, operating profit before depreciation, interest, tax and other income (PBDIT excluding OI) expanded to ₹146.12 crores, yielding an operating margin of 22.59%, a substantial 171 basis points improvement over the corresponding quarter last year.

The margin expansion story is particularly compelling when examined through the lens of operational efficiency. Operating margins have demonstrated consistent improvement from 19.36% in March 2024 to the current 22.59%, reflecting the company's ability to leverage scale advantages and optimise cost structures. Employee costs, whilst rising in absolute terms to ₹63.15 crores, have remained well-controlled as a percentage of revenue, indicating judicious talent management in a competitive hiring environment.

Profit after tax margin stood at 17.09% for Q2 FY26, demonstrating the quality of earnings generation. The company's ability to convert top-line growth into bottom-line expansion is evident in the net profit growth outpacing revenue growth—a positive indicator of operating leverage. Tax expenses for the quarter totalled ₹24.82 crores at an effective rate of 18.34%, marginally lower than the previous quarter, contributing to improved net profitability.

On a half-yearly basis for H1 FY26, Affle posted consolidated revenues of ₹1,267.46 crores with net profit of ₹216.01 crores, representing strong momentum in the first half of the fiscal year. This performance builds upon the company's impressive full-year FY25 results, where revenues reached ₹2,266 crores with a net profit of ₹381 crores, establishing a solid foundation for continued growth.

Operational Excellence: High Capital Efficiency Drives Value Creation

Affle's operational metrics paint a picture of a well-managed enterprise with strong capital efficiency. The company's return on equity (ROE) of 19.46% places it amongst the better performers in the software consulting space, demonstrating effective utilisation of shareholder capital to generate profits. This high ROE, sustained over multiple years, reflects management's ability to deploy capital productively and create value for investors.

Return on capital employed (ROCE) stands at an impressive 23.23% on average, with the latest reading at 23.61%, indicating that the company generates strong returns on all capital deployed in the business. This metric is particularly significant for a technology services company, as it demonstrates the ability to earn attractive returns without requiring excessive capital intensity. The company's net debt-to-equity ratio of -0.44 reveals it is a net cash company, providing substantial financial flexibility for growth initiatives or shareholder returns.

The balance sheet strength is further evidenced by the company's shareholder funds growing to ₹2,946.46 crores in FY25 from ₹2,498.04 crores in FY24, a healthy 17.95% expansion. Fixed assets have increased to ₹1,216.12 crores, reflecting ongoing investments in infrastructure and technology capabilities to support future growth. Current assets of ₹2,176.12 crores provide ample liquidity, with the company maintaining a comfortable current ratio.

Interest coverage, measured by EBIT to interest ratio, stands at a robust 25.63x on average, indicating the company's strong ability to service any debt obligations comfortably. This metric has consistently remained in double digits, providing confidence in the company's financial stability even in challenging market conditions. The minimal interest expense of ₹1.17 crores in Q2 FY26 reflects the company's conservative approach to leverage.

Industry Context: Navigating the Software Consulting Landscape

The software consulting and mobile advertising industry has witnessed significant transformation over the past few years, with companies adapting to changing client demands, technological evolution, and competitive dynamics. Affle operates in a space characterised by rapid innovation, where the ability to deliver measurable results and demonstrate return on advertising spend becomes crucial for client retention and growth.

Affle's consistent growth trajectory stands out in an industry where many peers have experienced volatility. The company's 5-year sales compound annual growth rate (CAGR) of 46.66% and EBIT CAGR of 40.25% significantly outpace industry averages, demonstrating the company's ability to gain market share and expand its service offerings. This growth has been achieved whilst maintaining healthy margins, a feat that requires both operational excellence and strategic positioning.

The company's institutional holding of 33.69% reflects growing confidence amongst sophisticated investors in Affle's business model and growth prospects. Foreign institutional investors (FIIs) have increased their stake to 19.01% in Q2 FY26 from 15.55% a year ago, a significant vote of confidence. Mutual fund holdings stand at 11.81%, with 29 different funds holding positions, indicating broad-based institutional interest.

Peer Comparison: Premium Valuation Relative to Industry

When benchmarked against peers in the software consulting sector, Affle presents a mixed picture of relative strengths and valuation concerns. The company's price-to-earnings ratio of 67.62x significantly exceeds the industry average of approximately 15x and trades at a premium to most direct peers. This valuation gap reflects market expectations of sustained high growth but also introduces vulnerability to any execution missteps or growth deceleration.

Affle's ROE of 19.46%, whilst respectable, trails several peers including Tata Elxsi (31.37%), Inventurus Knowledge (29.58%), and Hexaware Technologies (23.29%). This suggests that despite Affle's strong absolute profitability metrics, some competitors demonstrate even higher capital efficiency. The company's price-to-book ratio of 9.20x falls in the mid-range amongst peers, lower than Inventurus Knowledge (15.79x) and Tata Elxsi (11.89x) but higher than Hexaware (7.82x) and Tata Technologies (7.84x).

A notable distinction is Affle's zero dividend policy, unlike most peers who return cash to shareholders through dividends. Hexaware Technologies offers a 1.67% yield, Tata Technologies 1.69%, and Tata Elxsi 1.37%. This suggests Affle's management prioritises reinvesting cash flows into growth opportunities rather than distributing to shareholders, a strategy that may be appropriate given the company's high growth trajectory but limits near-term income for investors.

The valuation premium commanded by Affle appears partially justified by its superior growth metrics—the 5-year sales CAGR of 46.66% significantly outpaces most peers. However, the PEG ratio of 2.63 indicates the stock may be pricing in more growth than can be reasonably delivered, introducing execution risk. Investors are essentially paying ₹2.63 for every unit of expected earnings growth, which is elevated by historical standards.

Valuation Analysis: Stretched Multiples Limit Upside Potential

Affle's current valuation presents the most significant challenge for prospective investors. Trading at 67.62x trailing twelve-month earnings, the stock commands one of the highest multiples in the software consulting sector. This valuation implies market expectations of sustained high growth, continued margin expansion, and flawless execution—a demanding set of requirements that leaves little room for disappointment.

The price-to-book ratio of 9.20x indicates investors are paying more than nine times the company's book value per share of ₹211.01. Whilst premium valuations are not uncommon for high-growth technology companies, this multiple suggests significant growth and profitability improvements are already embedded in the current price. The enterprise value to EBITDA multiple of 49.76x and EV to sales of 10.89x further confirm the stock's expensive positioning.

The stock's 52-week range of ₹1,221.05 to ₹2,186.80 illustrates significant volatility, with the current price of ₹1,926.55 sitting 11.90% below the peak and 57.78% above the low. This volatility, combined with a high beta of 1.35, indicates the stock experiences amplified movements relative to the broader market—a characteristic that suits aggressive investors but may concern those seeking stability.

Historical valuation trends show the stock has traded in the "Very Expensive" category since June 2020, suggesting the market has consistently assigned premium multiples to Affle's growth story. However, the persistence of elevated valuations increases the risk of mean reversion, particularly if growth rates moderate or competitive pressures intensify. The current Mojo score of 64/100 with a "HOLD" rating reflects this valuation challenge, despite positive fundamental trends.

Shareholding Pattern: Institutional Confidence Building

The shareholding pattern reveals a stable promoter base with gradually increasing institutional participation. Promoter holding has remained largely steady at 54.97% in Q2 FY26, declining marginally by 0.03% sequentially and 0.12% over the past year. This stability provides confidence that promoters remain committed to the company's long-term vision, with no significant dilution or exit plans evident.

Foreign institutional investors have demonstrated growing conviction, increasing their stake from 15.55% in September 2024 to 19.01% in September 2025, a substantial 346 basis points increase. The sequential addition of 60 basis points in Q2 FY26 suggests continued buying interest from sophisticated global investors. With 183 FIIs holding positions, the ownership is well-diversified, reducing concentration risk.

Mutual fund holdings of 11.81% across 29 funds indicate domestic institutional interest, though the sequential increase of 62 basis points in Q2 FY26 followed a 162 basis points decline in the previous quarter, suggesting some rotation amongst fund managers. Insurance company holdings have gradually increased to 2.44%, reflecting long-term institutional confidence in the company's prospects.

Notably, zero promoter pledging provides additional comfort regarding the financial health of the controlling shareholders. This clean shareholding structure, combined with increasing institutional participation, creates a stable ownership base that should support the stock during market volatility.

Stock Performance: Outperformance Driven by Fundamental Strength

Affle's stock has delivered impressive returns across most timeframes, significantly outperforming the Sensex benchmark. Over the past year, the stock generated returns of 25.93% compared to the Sensex's 5.73%, producing an alpha of 20.20 percentage points. This outperformance reflects the market's recognition of the company's consistent execution and growth delivery.

The longer-term performance is even more striking, with 5-year returns of 261.98% dwarfing the Sensex's 111.89%, generating an exceptional alpha of 150.09 percentage points. This multi-year outperformance validates the company's business model and execution capabilities, rewarding patient investors handsomely. The 2-year return of 83.49% and 3-year return of 66.93% demonstrate consistent wealth creation.

However, recent performance has been more subdued, with the stock down 1.96% over the past month whilst the Sensex gained 3.65%, resulting in negative alpha of 5.61 percentage points. The 3-month performance of -0.13% against the Sensex's +3.39% suggests some profit-taking or rotation out of expensive technology stocks. These shorter-term underperformance periods are not uncommon for high-beta stocks and may present accumulation opportunities for long-term investors.

The stock's volatility of 34.97% significantly exceeds the Sensex volatility of 12.50%, resulting in a beta of 1.35. This high beta classification indicates the stock amplifies market movements—rising more during bull markets but potentially falling more sharply during corrections. The risk-adjusted return of 0.74 over one year compares favourably to the Sensex's 0.46, suggesting the additional volatility has been compensated with higher returns.

Against its sector, Affle has substantially outperformed, with 1-year returns of 25.93% compared to the software consulting sector's 4.69%, generating sector outperformance of 21.24 percentage points. This relative strength indicates Affle's specific growth drivers are resonating with investors beyond general sector trends.

Investment Thesis: Quality Company at Expensive Valuation

Affle presents a nuanced investment case that balances strong fundamental quality against demanding valuation multiples. The company's Mojo score of 64/100 with a "HOLD" rating encapsulates this dichotomy—positive financial trends and good quality metrics offset by very expensive valuation that limits near-term upside potential.

The quality assessment of "Good" reflects several positive attributes: zero debt, consistent profitability, strong ROCE of 23.23%, healthy 5-year growth rates, and zero promoter pledging. The company's average ROE of 19.46% demonstrates effective capital allocation, whilst the 5-year sales CAGR of 46.66% and EBIT CAGR of 40.25% validate the high-growth narrative. Operating cash flow reaching an all-time high of ₹425.99 crores in FY25 provides confidence in earnings quality.

The financial trend classification of "Positive" is supported by multiple all-time high metrics in Q2 FY26: net sales of ₹646.72 crores, operating profit of ₹146.12 crores, operating margin of 22.59%, and net profit of ₹110.51 crores. The sequential improvement across quarters demonstrates operational momentum that should continue barring significant market disruptions.

However, the "Very Expensive" valuation grade cannot be ignored. At 67.62x earnings and a PEG ratio of 2.63, the stock prices in substantial future growth that may take years to justify current multiples. Any disappointment in growth rates, margin compression, or competitive pressures could trigger significant multiple contraction. The stock's position 11.90% below its 52-week high suggests some of this valuation concern is already reflected in recent price action.

Key Strengths & Risk Factors

Outlook: What Lies Ahead for Affle

The forward outlook for Affle hinges on the company's ability to sustain high growth rates whilst expanding margins further and managing the valuation expectations embedded in the current stock price. The positive financial trend suggests operational momentum remains intact, with the company well-positioned to benefit from continued digitisation of advertising and increasing mobile internet penetration in key markets.

The technical trend classification of "Mildly Bullish" suggests the stock is in a consolidation phase after recent gains, with immediate support at the 52-week low of ₹1,221.05 and resistance near the 100-day moving average of ₹1,954.07. A decisive breakout above ₹2,000 could signal resumption of the uptrend, whilst a breakdown below ₹1,900 might indicate further consolidation or correction.

Investors should monitor quarterly results closely for any signs of growth deceleration or margin pressure. The company's ability to maintain 15-20% YoY revenue growth whilst expanding margins will be critical to justifying current valuations. Additionally, any changes in shareholding patterns—particularly significant promoter selling or institutional exits—would warrant reassessment of the investment thesis.