The quarter's standout feature was the unprecedented revenue jump from ₹7,167.00 crores in Q1 FY26, marking the highest quarterly sales figure in the company's history. However, this growth came at a steep cost: operating margins excluding other income compressed to 1.76%, whilst the company's dependence on non-operating income reached alarming levels at 272.87% of profit before tax. The results underscore the fundamental challenge facing Eternal—scaling operations whilst maintaining profitability in a fiercely competitive market.
The company's trajectory over recent quarters reveals a business in rapid transformation. From a loss-making entity just two years ago, Eternal has achieved consistent quarterly profitability since Q2 FY24, though the magnitude of profits has proven volatile. The current quarter's sequential profit jump of 160% from ₹25.00 crores in Q1 FY26 offers some encouragement, yet the year-on-year comparison tells a sobering story—profits have plummeted from ₹176.00 crores in Q2 FY25, representing a decline that far outpaces revenue growth.
| Quarter | Net Sales (₹ cr) | QoQ Growth | Net Profit (₹ cr) | YoY Growth | PAT Margin |
|---|---|---|---|---|---|
| Sep'25 | 13,590.00 | +89.62% | 65.00 | -63.07% | 0.48% |
| Jun'25 | 7,167.00 | +22.87% | 25.00 | -90.12% | 0.35% |
| Mar'25 | 5,833.00 | +7.92% | 39.00 | -77.71% | 0.67% |
| Dec'24 | 5,405.00 | +12.63% | 59.00 | -57.25% | 1.09% |
| Sep'24 | 4,799.00 | +14.10% | 176.00 | +388.89% | 3.67% |
| Jun'24 | 4,206.00 | +18.08% | 253.00 | +12550.00% | 6.02% |
| Mar'24 | 3,562.00 | +8.33% | 175.00 | — | 4.91% |
| Dec'23 | 3,288.00 | +15.45% | 138.00 | — | 4.20% |
Financial Performance: Growth at the Expense of Margins
Eternal's Q2 FY26 financial performance presents a study in contrasts. Whilst net sales surged to ₹13,590.00 crores—an 89.62% sequential jump and 183.18% year-on-year increase—the company's ability to convert this revenue into sustainable profits remains questionable. Operating profit before depreciation, interest, and tax (excluding other income) stood at ₹239.00 crores, translating to a wafer-thin margin of 1.76%. This represents only a marginal 16 basis point improvement from the previous quarter's 1.60%, suggesting the business model continues to operate on razor-thin economics.
The cost structure reveals concerning trends. Employee costs climbed to ₹865.00 crores in Q2 FY26, up 4.22% quarter-on-quarter, reflecting ongoing investments in talent acquisition and retention. However, the real pressure point emerges in the depreciation line, which surged 19.75% sequentially to ₹376.00 crores, indicating aggressive capital deployment that has yet to translate into proportionate profitability gains. Interest expenses also jumped 28.36% to ₹86.00 crores, suggesting increased debt servicing costs despite the company's net cash position.
The tax rate dynamics add another layer of complexity. At 49.61% for Q2 FY26, the effective tax rate remains elevated compared to the standard corporate rate, though it has normalised from the anomalous 71.59% recorded in Q1 FY26. This normalisation contributed to the sequential profit recovery, though the year-on-year comparison remains deeply unfavourable. The company generated profit after tax of ₹65.00 crores on profit before tax of ₹129.00 crores, highlighting the substantial tax burden that erodes shareholder returns.
Operational Challenges: The Non-Operating Income Dependency
Perhaps the most concerning aspect of Eternal's Q2 FY26 results lies in the company's heavy reliance on non-operating income to sustain profitability. Other income contributed ₹352.00 crores to the quarter's performance, representing a staggering 272.87% of profit before tax. This means that without income from investments, interest on deposits, and other non-core activities, the company would have reported a substantial operating loss. Such dependency raises fundamental questions about the sustainability of the core business model.
The company's return on equity of 1.74% for the latest quarter ranks amongst the lowest in the IT services sector, reflecting poor capital efficiency. For context, this metric indicates that for every ₹100 of shareholder capital deployed, the company generates merely ₹1.74 in annual returns—a figure that fails to compensate investors adequately for the risk undertaken. The five-year average ROE of 1.15% offers little comfort, suggesting this is not a temporary aberration but rather a structural characteristic of the business.
Balance sheet quality presents a more encouraging picture. Eternal maintains a net cash position of ₹5,886 crores, with zero long-term debt and substantial investments of ₹10,920.00 crores as of March 2025. Shareholder funds have grown impressively to ₹30,317.00 crores, up from ₹20,413.00 crores a year earlier, reflecting capital infusions and retained earnings. Current assets of ₹9,429.00 crores comfortably exceed current liabilities of ₹3,326.00 crores, providing adequate liquidity cushion for operational requirements.
Critical Warning Signal
Non-operating income dependency: Other income represents 272.87% of profit before tax in Q2 FY26, indicating the core operations would be loss-making without investment income. This raises serious questions about business model sustainability and the quality of reported earnings. Investors should monitor whether operational profitability improves in coming quarters or if this dependency persists.
Industry Context: Navigating Competitive Intensity
Eternal operates in the intensely competitive IT services sector, though its business model differs significantly from traditional software services companies. The company's 73.31% five-year sales compound annual growth rate vastly outpaces the broader IT sector, reflecting the rapid expansion of its platform-based business model. However, this growth has come at considerable cost, with the company burning cash in earlier years before achieving profitability in recent quarters.
The competitive landscape remains challenging. Whilst Eternal has established market leadership in certain segments, sustaining this position requires continuous investment in technology, marketing, and customer acquisition. The company's operating margins of 1.76% pale in comparison to traditional IT services firms that typically generate EBITDA margins in the 15-25% range, highlighting the fundamentally different economics of platform businesses versus services businesses.
Market dynamics suggest the competitive intensity will persist. The company faces pressure from both established players and well-funded startups, necessitating ongoing investments in growth initiatives that may continue to constrain near-term profitability. The question for investors becomes whether the company can achieve operating leverage as it scales, or if the current low-margin profile represents the steady-state economics of the business.
| Company | P/E (TTM) | P/BV Ratio | ROE % | Debt to Equity | Div Yield % |
|---|---|---|---|---|---|
| Eternal Ltd | 1,145.09 | 11.29 | 1.74% | -0.13 | 0.00% |
| Swiggy | NA (Loss Making) | 10.80 | -30.38% | -0.29 | 0.00% |
| Info Edge (India) | 85.68 | 2.49 | 2.71% | -0.03 | 0.45% |
| FSN E-Commerce | 938.81 | 57.54 | 5.08% | 0.85 | 0.00% |
| Brainbees Solutions | NA (Loss Making) | 4.02 | -2.99% | -0.03 | 0.00% |
Valuation Analysis: Premium Pricing for Uncertain Prospects
Eternal's valuation metrics suggest the market continues to price in substantial future growth expectations despite current profitability challenges. Trading at a price-to-earnings ratio of 1,145.09 times trailing twelve-month earnings, the stock commands one of the highest valuation multiples in the entire Indian equity market. This stratospheric P/E reflects the minimal absolute profit base rather than investor enthusiasm, making the metric largely meaningless for valuation purposes.
More relevant is the price-to-book ratio of 11.29 times, which values the company at more than eleven times its net asset value. Whilst this premium appears justified by the company's intangible assets and market position, it leaves little room for execution missteps. The enterprise value to sales ratio of 14.33 times indicates investors are paying ₹14.33 for every rupee of annual revenue, a multiple that assumes significant margin expansion in future years.
The stock has delivered exceptional returns to long-term shareholders, surging 462.84% over three years and 212.47% over two years, vastly outperforming the Sensex. However, recent momentum has moderated, with the stock trading 5.43% below its 52-week high of ₹368.40. The current price of ₹348.40 reflects a market capitalisation of ₹347,000 crores, positioning Eternal as the fourth-largest company in the IT software sector by market value.
Shareholding: Institutional Confidence Waning
The shareholding pattern reveals a notable shift in institutional sentiment towards Eternal. Foreign institutional investors have reduced their stake from 50.23% in November 2024 to 39.04% in September 2025, representing a substantial 11.19 percentage point decline over four quarters. This steady divestment by sophisticated foreign investors raises questions about their confidence in the company's near-term prospects and valuation sustainability.
Conversely, domestic mutual funds have increased their holdings from 15.52% in December 2024 to 24.68% in September 2025, adding 9.16 percentage points to their stake. This divergence between foreign and domestic institutional behaviour suggests differing views on the company's growth trajectory and valuation. The most recent quarter saw mutual funds add 3.09 percentage points whilst FIIs reduced exposure by 3.30 percentage points, continuing the established trend.
The absence of promoter holding—a characteristic of the company's ownership structure—means institutional investors effectively control the company's direction. Total institutional holdings stand at 71.08%, with the number of FII holders increasing to 1,482 from 1,379, suggesting broader distribution of foreign ownership even as aggregate FII stake declines. The remaining 30.83% is held by non-institutional investors, including retail shareholders.
| Investor Category | Sep'25 | Jun'25 | Mar'25 | QoQ Change |
|---|---|---|---|---|
| Promoter Holding | 0.00% | 0.00% | 0.00% | — |
| FII Holding | 39.04% | 42.34% | 44.36% | -3.30% |
| Mutual Fund | 24.68% | 21.59% | 19.37% | +3.09% |
| Insurance | 3.03% | 2.80% | 2.15% | +0.23% |
| Other DII | 2.42% | 2.21% | 2.04% | +0.21% |
| Non-Institutional | 30.83% | 31.07% | 32.08% | -0.24% |
Stock Performance: Momentum Moderating After Stellar Run
Eternal's stock has delivered extraordinary returns over longer time horizons, though recent performance suggests momentum is waning. The three-year return of 462.84% and two-year return of 212.47% place the stock amongst the top performers in the Indian equity market, vastly outpacing the Sensex's 44.11% and 26.15% returns over the same periods. This outperformance reflects the market's recognition of the company's transformation from loss-making startup to profitable platform business.
However, shorter-term metrics paint a more nuanced picture. The one-year return of 27.06% significantly lags the stellar multi-year performance, suggesting the rate of appreciation has decelerated markedly. The six-month return of 56.90% and three-month return of 32.83% indicate renewed momentum in recent months, though this follows a period of consolidation. The stock currently trades above all major moving averages, with the price of ₹348.40 sitting 33.12% above the 200-day moving average of ₹261.72.
Technical indicators present a bullish picture in the near term. The stock's trend changed to bullish on 6 October 2025 at ₹335.10, and has since gained 3.97%. MACD and Bollinger Bands flash bullish signals on both weekly and monthly timeframes, whilst Dow Theory confirms the bullish trend. However, the on-balance volume indicator shows only mildly bullish readings, suggesting accumulation is not as aggressive as price momentum might indicate. The stock's beta of 0.59 classifies it as a low-beta security, typically rising and falling by a smaller proportion than the broader market.
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | 0.88% | 1.58% | -0.70% |
| 1 Month | 6.45% | 1.32% | +5.13% |
| 3 Months | 32.83% | 1.01% | +31.82% |
| 6 Months | 56.90% | 8.34% | +48.56% |
| Year-to-Date | 25.32% | 6.82% | +18.50% |
| 1 Year | 27.06% | 2.41% | +24.65% |
| 2 Years | 212.47% | 26.15% | +186.32% |
| 3 Years | 462.84% | 44.11% | +418.73% |
Investment Thesis: Growth Story Intact, Profitability Questionable
Eternal's investment case rests on the company's ability to sustain rapid revenue growth whilst gradually improving operational profitability. The 73.31% five-year sales compound annual growth rate demonstrates the company's success in capturing market share and expanding its addressable market. The platform business model offers inherent scalability advantages, with incremental revenues requiring proportionally less incremental investment once critical mass is achieved. The question is whether Eternal has reached that inflection point.
The company's financial trend assessment currently stands at "flat," having deteriorated from "outstanding" in earlier quarters. This downgrade reflects the market's recognition that whilst revenues continue growing impressively, profitability has failed to keep pace. The Mojo score of 54 out of 100 places the stock in "hold" territory, suggesting the current valuation adequately reflects both the growth potential and execution risks.
Key strengths supporting the investment thesis include the company's debt-free balance sheet, substantial cash reserves, and high institutional ownership of 71.08%. The absence of promoter pledging eliminates a common corporate governance concern. However, the extremely low return on equity of 1.74%, heavy dependence on non-operating income, and compressed operating margins of 1.76% raise fundamental questions about whether the business model can generate adequate returns on invested capital.
Key Strengths & Risk Factors
KEY STRENGTHS
- Explosive Revenue Growth: 183.18% YoY sales growth in Q2 FY26, with five-year CAGR of 73.31% demonstrating strong market position and customer acquisition capabilities
- Debt-Free Balance Sheet: Net cash position of ₹5,886 crores eliminates financial risk and provides flexibility for growth investments
- Strong Institutional Support: 71.08% institutional holdings with 45 mutual funds and 1,482 FIIs demonstrating confidence in long-term prospects
- Market Leadership: ₹347,000 crore market capitalisation positions company as fourth-largest in IT software sector
- Sequential Profit Recovery: Net profit jumped 160% QoQ from ₹25.00 crores to ₹65.00 crores, suggesting operational improvements
- Robust Cash Generation: Substantial investments of ₹10,920 crores and healthy current ratio provide financial stability
- Zero Promoter Pledging: Clean corporate governance with no encumbered shares
KEY CONCERNS
- Profitability Collapse: Net profit declined 63.07% YoY despite 183% revenue growth, indicating severe margin pressure and unsustainable cost structure
- Non-Operating Income Dependency: Other income represents 272.87% of PBT, meaning core operations would be loss-making without investment income
- Anaemic Operating Margins: 1.76% operating margin (excluding OI) far below industry standards, questioning business model viability
- Extremely Low ROE: Return on equity of 1.74% indicates poor capital efficiency and inadequate shareholder returns
- FII Divestment: Foreign institutional holdings declined from 50.23% to 39.04% over four quarters, signalling weakening confidence
- Elevated Tax Rate: 49.61% effective tax rate significantly erodes profitability and shareholder returns
- Valuation Concerns: P/E of 1,145x and P/BV of 11.29x leave no margin for execution missteps
Outlook: Critical Inflection Point Ahead
Eternal stands at a critical juncture. The company has successfully scaled revenues to impressive levels, achieving ₹13,590 crores in quarterly sales—a figure that would have seemed implausible just three years ago. However, this growth has come at the expense of profitability, with operating margins remaining stubbornly low and the company heavily dependent on non-operating income to report positive earnings. The coming quarters will determine whether management can unlock operating leverage and improve unit economics, or if the current low-margin profile represents the structural reality of the business.
Several factors will influence the investment outcome. First, the company must demonstrate margin expansion as it scales, converting incremental revenues into proportionally higher profits. Second, the core business must achieve self-sustaining profitability without relying on investment income. Third, competitive dynamics must stabilise sufficiently to allow for pricing power and reduced customer acquisition costs. The absence of progress on these fronts would call into question the sustainability of the current valuation.
POSITIVE CATALYSTS
- Operating Leverage Materialisation: Sequential margin improvement from 1.60% to 1.76% suggests potential for further expansion as scale benefits accrue
- Market Share Gains: 183% YoY revenue growth indicates successful market penetration and customer acquisition
- Cash Deployment Opportunities: ₹5,886 crore net cash enables strategic investments, acquisitions, or shareholder returns
- Domestic Institutional Support: Mutual fund holdings increased 9.16 percentage points over three quarters, providing price support
- Technical Momentum: Bullish trend since 6 October 2025 with price above all major moving averages
RED FLAGS
- Persistent Margin Compression: Operating margins of 1.76% remain inadequate despite scale, questioning whether model can achieve acceptable profitability
- FII Exodus Continues: Foreign institutions reduced stake by 11.19 percentage points over four quarters—a clear vote of no confidence
- Quality of Earnings Concerns: Core operations would be loss-making without other income of ₹352 crores
- Valuation Vulnerability: P/E of 1,145x and P/BV of 11.29x offer no downside protection if execution falters
- ROE Below Cost of Capital: 1.74% return fails to compensate shareholders adequately for risk undertaken
"Eternal's explosive revenue growth tells only half the story—the company's inability to convert top-line expansion into sustainable bottom-line profits raises fundamental questions about business model viability at current valuations."
The Verdict: Hold for Existing Investors, Avoid Fresh Entry
Score: 54/100
For Fresh Investors: Avoid initiating positions at current levels. The stock's valuation of 11.29 times book value and 1,145 times trailing earnings leaves no margin of safety. Whilst revenue growth remains impressive, the company's inability to generate adequate operating profits and its heavy reliance on non-operating income raise serious concerns about earnings quality. Wait for either substantial margin improvement or a meaningful valuation correction before considering entry.
For Existing Holders: Maintain positions but monitor quarterly results closely for signs of margin expansion. The company's debt-free balance sheet, substantial cash reserves, and market leadership provide downside protection, justifying a hold stance despite profitability concerns. However, set strict exit criteria: sustained margin compression below 1.5% or continued YoY profit declines for two consecutive quarters should trigger portfolio reallocation. The bullish technical trend offers tactical support, but fundamental improvement is essential for long-term wealth creation.
Fair Value Estimate: ₹280-300 (15-20% downside from current levels of ₹348.40)
⚠️ 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.
