CG-VAK Software Q3 FY26: Margin Expansion Drives Profitability Despite Revenue Headwinds

With a market capitalisation of ₹109.00 crores, the micro-cap software firm demonstrated its ability to enhance profitability through improved operational efficiency, even as top-line growth remained elusive. However, the sequential decline in net profit by 6.36% from Q2 FY26 and the stock's 31.07% underperformance over the past year continue to raise questions about the sustainability of this margin-led recovery.

The December 2025 quarter results present a tale of two narratives for CG-VAK Software. On one hand, the company achieved its highest operating profit margin in nearly two years, demonstrating effective cost management in a challenging revenue environment. On the other, the year-on-year revenue decline of 5.52% to ₹18.65 crores marks the third consecutive quarter of negative top-line growth, raising concerns about demand conditions in the company's key markets.

Financial Performance: Margin Expansion Offsets Revenue Weakness

CG-VAK Software's Q3 FY26 financial performance reveals a company successfully navigating revenue headwinds through operational efficiency. Net sales declined 5.52% year-on-year to ₹18.65 crores, whilst sequential growth of 2.02% from Q2 FY26 offered a glimmer of stabilisation. The nine-month performance for FY26 shows revenue of ₹55.38 crores, down 3.69% compared to ₹57.50 crores in the corresponding period last year.

The standout achievement lies in margin expansion. Operating profit (excluding other income) surged to ₹4.45 crores, marking a seven-quarter high, with operating margin reaching 23.86%—a remarkable 481 basis points improvement year-on-year. This margin trajectory represents the company's best performance since March 2023, when it recorded a 22.40% operating margin on significantly higher revenues.

Employee costs, the largest expense component for this labour-intensive services business, declined to ₹12.50 crores in Q3 FY26 from ₹14.32 crores in Q3 FY25, reflecting a 12.71% reduction. This cost optimisation, achieved without compromising service delivery, has been instrumental in driving profitability. Net profit for the quarter stood at ₹3.24 crores, translating to a PAT margin of 17.37%—378 basis points higher than the 13.58% recorded in the year-ago period.

However, the sequential decline in net profit from ₹3.46 crores in Q2 FY26 to ₹3.24 crores in Q3 FY26 (down 6.36%) warrants attention. This decline occurred despite a modest 2.02% sequential revenue growth, primarily due to higher tax provisioning at 27.19% compared to 25.75% in the previous quarter. The effective tax rate has fluctuated between 24.45% and 28.02% over the past seven quarters, adding volatility to bottom-line performance.

Operational Efficiency: The Double-Edged Sword of Cost Cutting

CG-VAK Software's operational strategy in recent quarters has centred on aggressive cost management, particularly in employee expenses. The company's employee cost declined from ₹14.32 crores in Q3 FY25 to ₹12.50 crores in Q3 FY26, representing a 12.71% reduction. Over the nine-month period of FY26, employee costs totalled ₹37.22 crores, down from ₹43.45 crores in the corresponding period of FY25—a reduction of 14.34%.

This cost discipline has translated into impressive profitability metrics. The company's return on equity (ROE) stands at 17.95% on average, demonstrating efficient capital utilisation, whilst the latest ROE of 14.48% reflects the impact of accumulated reserves. More impressively, the average return on capital employed (ROCE) of 34.05% positions CG-VAK Software as a highly efficient operator in the capital-light IT services sector.

The company's balance sheet reflects financial prudence. With zero long-term debt as of March 2025 and a net cash position (indicated by negative net debt-to-equity of -0.19), CG-VAK Software maintains financial flexibility. Shareholder funds increased to ₹71.56 crores in FY25 from ₹62.49 crores in FY24, driven by retained earnings. Current assets of ₹28.63 crores comfortably exceed current liabilities of ₹5.89 crores, providing adequate working capital cushion.

However, the company's capital allocation decisions raise questions. Fixed assets increased from ₹23.12 crores in March 2024 to ₹31.29 crores in March 2025, whilst investments nearly doubled from ₹8.27 crores to ₹16.42 crores. This capital deployment, totalling approximately ₹16.00 crores in cash outflows for investing activities during FY25, has yet to translate into revenue growth—a concerning disconnect that merits management explanation.

Industry Context: Navigating a Challenging IT Services Landscape

CG-VAK Software operates in the highly competitive Computers - Software & Consulting sector, where demand volatility and pricing pressures have intensified. The company's 5-year sales compound annual growth rate (CAGR) of 12.32% and EBIT CAGR of 12.47% reflect moderate historical growth, significantly below the sector's high-growth leaders but consistent with smaller, niche-focused IT services providers.

The broader IT services industry has faced headwinds from reduced discretionary spending by global clients, particularly in North America and Europe, as enterprises navigate macroeconomic uncertainty. For smaller players like CG-VAK Software, the challenge is compounded by limited scale, making it difficult to compete for large transformation deals or weather demand fluctuations.

The company's revenue decline of 5.52% year-on-year in Q3 FY26, following declines of 5.87% in Q2 FY26 and modest growth of 1.21% in Q1 FY26, suggests structural challenges rather than temporary softness. The full-year FY25 revenue of ₹77.00 crores represented a 1.30% decline from FY24's ₹78.00 crores, breaking a multi-year growth streak that had seen revenues expand from ₹39.00 crores in FY20 to ₹78.00 crores in FY24.

Peer Comparison: Valuation Discount Reflects Growth Concerns

A comparative analysis of CG-VAK Software against its peer group reveals a company trading at a significant valuation discount, justified by its modest growth profile and operational scale. The company's price-to-earnings ratio of 10.11x stands well below the peer average of approximately 39x, whilst its price-to-book value of 1.46x compares favourably against the peer average of 4.80x.

CG-VAK Software's ROE of 17.95% positions it favourably within the peer group, significantly outperforming most comparable companies. However, this profitability advantage has not translated into valuation premiums, as investors remain focused on the company's stagnant revenue trajectory. The industry P/E ratio of 26x suggests the sector commands a premium for growth, which CG-VAK Software currently lacks.

The company's dividend yield of 0.44%, based on a ₹1.00 per share dividend (ex-date September 19, 2025), reflects a conservative payout ratio of 5.45%. This low payout suggests management's preference for capital retention, though the deployment of this capital—as evidenced by increased fixed assets and investments—has yet to yield revenue growth.

Valuation Analysis: Attractive Entry Point or Value Trap?

CG-VAK Software's current valuation presents a paradox. At a P/E ratio of 10.11x, significantly below the industry average of 26x, the stock appears statistically cheap. The price-to-book value of 1.46x, whilst above the accounting value, remains reasonable given the company's ROE profile. The EV/EBITDA multiple of 6.42x and EV/EBIT of 7.07x further underscore the valuation discount.

The proprietary Mojo Score assigns CG-VAK Software a "Very Attractive" valuation grade, reflecting these compressed multiples. However, this valuation attractiveness must be weighed against the company's growth challenges. The PEG ratio of 0.22x, calculated using the 5-year EBIT growth rate of 12.47%, suggests the stock is trading at a significant discount to its historical growth rate.

Yet, the stock's performance tells a different story. Trading at ₹228.00 on February 11, 2026, the shares have declined 31.07% over the past year, underperforming the Sensex by 41.48 percentage points. The stock trades 35.36% below its 52-week high of ₹352.75, reached in August 2025, and just 19.97% above its 52-week low of ₹190.05. This price action suggests investors are discounting the company's ability to return to growth, viewing the valuation discount as justified rather than opportunistic.

Shareholding Pattern: Stable Promoter Base, Zero Institutional Interest

CG-VAK Software's shareholding structure has remained remarkably stable over the past five quarters, with promoter holding consistently at 53.87% and non-institutional investors holding the remaining 46.13%. This stability reflects the absence of any meaningful equity dilution or secondary market transactions by promoters.

The complete absence of foreign institutional investor (FII), mutual fund, and insurance company holdings is striking and concerning. Zero institutional participation in a publicly listed company typically signals limited liquidity, inadequate corporate governance standards, or insufficient growth visibility to attract professional investors. For CG-VAK Software, the lack of institutional interest likely reflects all three factors—micro-cap status limiting liquidity, modest growth profile failing to attract growth-oriented funds, and limited analyst coverage reducing visibility.

Key promoters include S Ladha (23.14%), G Suresh (18.85%), Ganapathy C (8.05%), and Ganapathy Saraswathi (3.82%). Positively, there is no promoter pledging, indicating financial stability at the promoter level and reducing concerns about forced selling or governance issues related to pledged shares.

Stock Performance: Severe Underperformance Across All Timeframes

CG-VAK Software's stock performance over the past year has been dismal, with the shares declining 31.07% compared to the Sensex's 10.41% gain—a negative alpha of 41.48 percentage points. This underperformance extends across multiple timeframes, reflecting sustained investor pessimism about the company's prospects.

The recent one-week surge of 14.43% and one-month gain of 3.21% reflect short-term technical bounce from oversold levels rather than fundamental improvement. The stock's beta of 1.50 indicates high volatility, with movements amplified relative to the broader market. This high-beta characteristic, combined with negative returns, places CG-VAK Software in the "high risk, low return" category—an unattractive risk-reward profile for most investors.

Technical indicators paint a uniformly bearish picture. The stock trades below all key moving averages—5-day (₹203.13), 20-day (₹204.42), 50-day (₹221.73), 100-day (₹243.66), and 200-day (₹251.86)—indicating sustained downtrend. MACD, RSI, Bollinger Bands, KST, and Dow Theory indicators all signal bearish or mildly bearish trends across weekly and monthly timeframes. The stock entered bearish territory on November 3, 2025, at ₹258.45, and has failed to reclaim any meaningful technical support since then.

Investment Thesis: Quality Concerns Overshadow Valuation Appeal

The investment case for CG-VAK Software rests on four pillars: valuation, quality, financial trend, and technical trend. The company's Mojo Score of 48 out of 100, translating to a "SELL" recommendation, reflects the interplay of these factors.

Valuation (Very Attractive): At a P/E of 10.11x and P/BV of 1.46x, the stock trades at significant discounts to both peers and historical averages. This valuation grade represents the strongest pillar of the investment thesis.

Quality (Average): The company's quality assessment has deteriorated from "Good" prior to May 2024 to "Average" currently. Whilst the 34.05% average ROCE and zero-debt balance sheet remain positives, the 5-year sales CAGR of 12.32% and EBIT CAGR of 12.47% are deemed insufficient for a growth-oriented IT services company. The absence of institutional holdings (0%) further undermines the quality perception.

Financial Trend (Positive): The short-term financial trend turned positive in Q3 FY26, driven by highest quarterly operating profit of ₹4.45 crores, peak operating margin of 23.86%, and nine-month PAT growth of 31.89%. However, this positive trend is built on margin expansion rather than revenue growth, raising sustainability concerns.

Technical Trend (Bearish): All technical indicators signal bearish trends, with the stock trading below all major moving averages and showing no signs of trend reversal. The bearish technical setup negates any short-term trading appeal.

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