The December quarter results presented a concerning picture of operational challenges despite top-line resilience. Net sales for Q3 FY26 stood at ₹3,478.20 crores, representing a marginal 0.16% decline quarter-on-quarter but a respectable 10.27% year-on-year growth. However, the headline profit figure masks significant underlying issues, particularly the sharp contraction in operating margins and an unusually elevated contribution from other income, which accounted for 48.92% of profit before tax—a red flag for earnings quality.
The company's operating profit excluding other income plummeted to ₹377.90 crores in Q3 FY26, marking the lowest level in recent quarters. Operating margin (excluding other income) compressed dramatically to 10.86% from 17.26% in the previous quarter, representing a substantial 636 basis points sequential decline. This deterioration in profitability metrics raises questions about cost management and competitive pressures in the IT services sector.
| Quarter | Revenue (₹ Cr) | QoQ % | Net Profit (₹ Cr) | QoQ % | Operating Margin % |
|---|---|---|---|---|---|
| Dec'25 | 3,478.20 | -0.16% | 291.90 | -21.15% | 10.86% |
| Sep'25 | 3,483.60 | +6.84% | 370.20 | -2.55% | 17.26% |
| Jun'25 | 3,260.70 | +1.65% | 379.90 | +16.11% | 12.40% |
| Mar'25 | 3,207.90 | +1.70% | 327.20 | +2.60% | 16.45% |
| Dec'24 | 3,154.40 | +0.60% | 318.90 | +5.39% | 15.55% |
| Sep'24 | 3,135.70 | +6.82% | 302.60 | +9.92% | 15.66% |
| Jun'24 | 2,935.50 | — | 275.30 | — | 14.69% |
Financial Performance: Margin Erosion Overshadows Revenue Gains
Hexaware Technologies' Q3 FY26 financial performance reveals a troubling divergence between revenue growth and profitability. While the company maintained revenue momentum with net sales of ₹3,478.20 crores—representing 10.27% year-on-year growth—the sequential contraction of 0.16% suggests plateauing demand in the near term. More concerning is the sharp deterioration in operating margins, which fell to their lowest level in recent quarters at 10.86%, down from 17.26% in Q2 FY26.
Employee costs surged to ₹2,040.30 crores in Q3 FY26 from ₹1,983.50 crores in the previous quarter, representing a 2.86% sequential increase that outpaced revenue growth. This resulted in employee costs consuming 58.66% of revenues, up from 56.94% in Q2 FY26, indicating potential wage inflation or suboptimal utilisation. The company's inability to leverage operating costs against revenue growth raises questions about pricing power and competitive intensity in its key service lines.
The profit after tax margin compressed to 8.38% in Q3 FY26 from 10.62% in the previous quarter, though it remained marginally ahead of the 8.47% reported in Q3 FY25 on a year-on-year basis. Notably, the tax rate fell sharply to 10.41% in Q3 FY26 from 25.53% in Q2 FY26, providing some cushion to net profit. However, this unusually low tax rate may not be sustainable, adding uncertainty to future earnings projections.
Operational Challenges: Earnings Quality Under Scrutiny
The most alarming aspect of Hexaware Technologies' Q3 FY26 results is the deterioration in earnings quality, evidenced by the disproportionate contribution of other income to profitability. Other income surged to ₹213.60 crores in Q3 FY26—representing a staggering 48.92% of profit before tax—compared to just ₹10.30 crores in the previous quarter. This dramatic spike in non-operating income raises concerns about the sustainability of reported profits and suggests that core business operations are under significant pressure.
The company's return on equity remains robust at 23.29% on average, demonstrating strong capital efficiency over the longer term. This higher ROE indicates that Hexaware Technologies has historically generated superior returns on shareholder capital compared to many peers, reflecting efficient deployment of equity. However, the recent quarterly performance suggests this strength may be eroding, with operating leverage working against the company in the current environment.
On the balance sheet front, Hexaware Technologies maintains a debt-free position with net cash, as evidenced by the negative net debt to equity ratio of -0.23. The company's shareholder funds stood at ₹5,356.90 crores as of December 2024, up from ₹4,635.20 crores in the previous year, reflecting retained earnings accumulation. Fixed assets increased substantially to ₹3,199.90 crores from ₹2,077.40 crores, suggesting ongoing capital investments, though the immediate return on these investments remains unclear given the margin compression.
Critical Concern: Unsustainable Earnings Composition
Other income accounted for 48.92% of profit before tax in Q3 FY26, an unsustainably high proportion that masks underlying operational weakness. Core operating profit (excluding other income) fell to its lowest level at ₹377.90 crores, down 37.16% quarter-on-quarter, indicating significant pressure on the company's primary business activities. Investors should exercise caution as normalisation of other income in future quarters could lead to further profit disappointments.
Industry Context: Navigating Demand Headwinds in IT Services
The IT services sector has faced challenging demand conditions through 2025, with discretionary spending remaining constrained across key geographies, particularly North America and Europe. Hexaware Technologies' marginal sequential revenue decline of 0.16% in Q3 FY26 reflects these broader industry headwinds, though the company's 10.27% year-on-year growth suggests it is maintaining market share better than some competitors.
The sharp margin compression observed in Q3 FY26 aligns with industry-wide pressures including wage inflation in India, pricing pressure from clients seeking cost optimisation, and the need for increased investments in digital capabilities and automation. Many mid-tier IT services providers have struggled to maintain operating leverage as growth moderates, and Hexaware Technologies appears to be facing similar challenges.
The company's elevated employee costs as a percentage of revenue—reaching 58.66% in Q3 FY26—suggest potential issues with utilisation rates or the need to retain talent through higher compensation in a competitive labour market. The ability to improve these metrics will be critical to margin recovery in subsequent quarters.
Peer Comparison: Valuation Premium Difficult to Justify
Hexaware Technologies trades at a price-to-earnings ratio of 35.89x based on trailing twelve-month earnings, representing a premium to the industry average P/E of 20x. This elevated valuation multiple appears increasingly difficult to justify given the recent deterioration in operating performance and margin compression. The company's price-to-book value of 7.27x is broadly in line with peers such as LTI Mindtree (7.23x) and Coforge (7.86x), though it trades at a discount to Persistent Systems (13.21x).
| Company | P/E (TTM) | P/BV | ROE % | Div Yield % | Debt/Equity |
|---|---|---|---|---|---|
| Hexaware Tech. | 35.89 | 7.27 | 23.29 | 1.66 | -0.23 |
| LTI Mindtree | 32.61 | 7.23 | 26.97 | 1.17 | -0.42 |
| Tech Mahindra | 33.39 | 5.86 | 16.46 | 2.73 | -0.19 |
| Persistent Systems | 52.42 | 13.21 | 21.92 | 0.62 | -0.20 |
| Coforge | 42.08 | 7.86 | 19.88 | 0.98 | 0.06 |
| Mphasis | 28.07 | 5.33 | 20.32 | 2.12 | -0.07 |
Hexaware Technologies' return on equity of 23.29% positions it favourably within the peer group, ahead of Tech Mahindra (16.46%), Coforge (19.88%), and Mphasis (20.32%), though trailing LTI Mindtree's sector-leading 26.97%. This superior capital efficiency has historically supported the company's valuation premium. However, the recent quarterly performance raises questions about whether this ROE advantage can be sustained if operating margins remain under pressure.
The company's debt-free status (net debt to equity of -0.23) provides financial flexibility and distinguishes it from leveraged peers, though this advantage is shared by most companies in the peer group. The dividend yield of 1.66% is modest, falling in the middle of the range compared to peers, with Tech Mahindra offering a more attractive 2.73% yield and Mphasis at 2.12%.
Valuation Analysis: Premium Valuation Increasingly Unjustified
At the current market price of ₹627.65, Hexaware Technologies trades at 35.89 times trailing twelve-month earnings, representing a significant 79.45% premium to the industry average P/E of 20x. This valuation appears increasingly stretched given the company's recent operational challenges, margin compression, and deteriorating earnings quality. The stock has declined 30.27% from its 52-week high of ₹900.15, reflecting growing investor scepticism about near-term prospects.
The company's enterprise value to EBITDA multiple of 22.34x and EV to EBIT of 26.35x are elevated by historical standards, particularly considering the sharp contraction in operating margins. The EV to sales ratio of 3.41x suggests the market is pricing in expectations of margin recovery and sustained growth, assumptions that appear questionable based on recent quarterly trends.
Hexaware Technologies' price-to-book value of 7.27x, while in line with several peers, implies the market expects the company to generate returns significantly above its cost of capital. With the recent erosion in operating profitability and questions about earnings sustainability, this valuation multiple appears optimistic. The stock's valuation grade has been assessed as "Fair" by proprietary metrics, though this may not fully capture the deterioration evident in the latest quarterly results.
Shareholding Pattern: Promoter Stake Marginally Lower, Mutual Fund Accumulation
The shareholding pattern for Hexaware Technologies shows modest shifts in Q3 FY26, with promoter holding declining marginally to 74.30% from 74.55% in the previous quarter. This 0.25 percentage point reduction is relatively minor and does not signal any significant concern about promoter commitment. The promoter stake has been gradually declining over recent quarters, falling from 74.71% in March 2025, though it remains comfortably above the 74% level.
| Investor Category | Dec'25 | Sep'25 | Jun'25 | QoQ Change |
|---|---|---|---|---|
| Promoters | 74.30% | 74.55% | 74.57% | -0.25% |
| FII | 8.15% | 8.31% | 9.76% | -0.16% |
| Mutual Funds | 10.81% | 10.44% | 9.21% | +0.37% |
| Insurance | 0.35% | 0.62% | 0.43% | -0.27% |
| Other DII | 0.15% | 0.07% | 0.23% | +0.08% |
| Non-Institutional | 6.24% | 6.01% | 5.80% | +0.23% |
Foreign institutional investors (FII) reduced their stake marginally to 8.15% in Q3 FY26 from 8.31% in the previous quarter, continuing a trend of gradual disinvestment. FII holding has declined from 10.59% in March 2025, suggesting foreign investors have been reducing exposure to the stock, possibly in response to valuation concerns or operational challenges. This 2.44 percentage point decline over three quarters represents a meaningful reduction in foreign institutional confidence.
In contrast, mutual funds increased their stake to 10.81% in Q3 FY26 from 10.44% in Q2 FY26, marking the third consecutive quarter of accumulation. Mutual fund holding has risen from 8.71% in March 2025, indicating domestic institutional investors view the recent weakness as a buying opportunity or maintain conviction in the company's longer-term prospects. This divergence between FII selling and mutual fund buying is noteworthy and suggests differing perspectives on the stock's risk-reward profile.
Stock Performance: Severe Underperformance Across All Timeframes
Hexaware Technologies has delivered disappointing returns across all meaningful timeframes, significantly underperforming the broader market. The stock plunged 9.08% on February 5, 2026, following the Q3 FY26 results announcement, compared to a modest 0.48% decline in the Sensex, resulting in negative alpha of 8.60 percentage points. This sharp single-day decline reflects investor disappointment with the margin compression and earnings quality concerns evident in the quarterly results.
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Day | -9.08% | -0.48% | -8.60% |
| 1 Week | -9.81% | +1.02% | -10.83% |
| 1 Month | -14.94% | -2.37% | -12.57% |
| 3 Months | -9.70% | -0.06% | -9.64% |
| 6 Months | -13.94% | +3.35% | -17.29% |
| YTD (FY26) | -17.91% | -2.12% | -15.79% |
| 5 Years | +33.33% | +64.42% | -31.09% |
| 10 Years | +155.19% | +238.84% | -83.65% |
The medium-term performance is particularly concerning, with the stock declining 14.94% over the past month and 13.94% over six months, while the Sensex declined just 2.37% and gained 3.35% respectively over these periods. The negative alpha of 12.57 percentage points over one month and 17.29 percentage points over six months highlights the stock-specific challenges facing Hexaware Technologies, independent of broader market movements.
Year-to-date in FY26, the stock has fallen 17.91% compared to a 2.12% decline in the Sensex, resulting in underperformance of 15.79 percentage points. This substantial underperformance reflects growing concerns about the company's ability to maintain profitability and margin expansion in a challenging demand environment. The stock is currently trading below all key moving averages—5-day (₹702.16), 20-day (₹715.71), 50-day (₹738.23), 100-day (₹724.89), and 200-day (₹753.71)—indicating a firmly established bearish technical trend.
Investment Thesis: Quality Company Facing Cyclical Headwinds
Hexaware Technologies presents a mixed investment proposition, combining long-term quality attributes with near-term operational challenges that have significantly impacted profitability. The company's overall quality grade of "Excellent" reflects its strong historical financial performance, including 27.60% five-year sales growth, robust average return on equity of 23.29%, and a debt-free balance sheet with net cash position. These fundamental strengths have been built over years and represent genuine competitive advantages in capital efficiency and financial stability.
However, the recent quarterly performance reveals significant operational stress. The financial trend has been assessed as "Flat" for Q3 FY26, with operating margins hitting their lowest level at 10.86% and other income accounting for an unsustainable 48.92% of profit before tax. These metrics suggest the core business is facing meaningful headwinds that could persist for several quarters. The technical trend has turned decisively "Bearish" as of February 4, 2026, with the stock breaking below key support levels and trading significantly below all moving averages.
The valuation picture is complex. At 35.89 times trailing earnings, Hexaware Technologies trades at a substantial premium to the industry average of 20x, a multiple that appears difficult to justify given the recent margin compression and earnings quality concerns. While the company's debt-free status, strong ROE, and established market position provide a foundation for long-term value creation, the near-term outlook appears challenging, with limited visibility on margin recovery and demand stabilisation.
Key Strengths & Risk Factors
KEY STRENGTHS
- Strong Capital Efficiency: Return on equity of 23.29% demonstrates superior capital deployment and profitability compared to many peers, reflecting efficient business operations.
- Debt-Free Balance Sheet: Net cash position with net debt to equity of -0.23 provides financial flexibility and reduces balance sheet risk during challenging periods.
- Consistent Revenue Growth: Five-year sales CAGR of 27.60% demonstrates the company's ability to gain market share and expand its client base over the long term.
- Excellent Quality Rating: Long-term financial performance has earned an "Excellent" quality grade, reflecting consistent profitability and strong fundamentals.
- Zero Promoter Pledging: No pledged shares indicates promoter confidence and eliminates concerns about forced selling or financial distress.
- Domestic Institutional Support: Mutual funds increased stake to 10.81% in Q3 FY26, demonstrating growing domestic institutional confidence despite near-term challenges.
- Strong Interest Coverage: Average EBIT to interest ratio of 100x indicates minimal financial risk and strong debt servicing capability.
KEY CONCERNS
- Severe Margin Compression: Operating margin (excluding other income) plunged to 10.86% in Q3 FY26 from 17.26% in Q2 FY26, representing a 636 basis point sequential decline.
- Deteriorating Earnings Quality: Other income accounted for 48.92% of profit before tax in Q3 FY26, an unsustainably high proportion that masks core business weakness.
- Rising Employee Costs: Employee expenses reached 58.66% of revenue in Q3 FY26, up from 56.94% in Q2 FY26, indicating pressure on utilisation or wage inflation.
- Sequential Profit Decline: Consolidated net profit fell 21.15% quarter-on-quarter to ₹291.90 crores despite marginal revenue growth, highlighting operational stress.
- Premium Valuation: P/E ratio of 35.89x represents a 79% premium to industry average of 20x, appearing increasingly unjustified given recent performance.
- FII Disinvestment: Foreign institutional investors reduced stake from 10.59% in March 2025 to 8.15% in December 2025, signalling waning international confidence.
- Bearish Technical Trend: Stock trading below all key moving averages with firmly established bearish momentum following Q3 results disappointment.
Outlook: What to Watch in Coming Quarters
POSITIVE CATALYSTS
- Margin Recovery: Any improvement in operating margins back towards the 15-16% range would signal successful cost optimisation and improved operational execution.
- Normalised Other Income: Stabilisation of other income at sustainable levels (below 10% of PBT) would improve earnings quality and investor confidence.
- Revenue Acceleration: Sequential revenue growth returning to 3-5% levels would indicate stabilising demand and market share gains.
- Deal Pipeline Visibility: Large deal wins or improved total contract value (TCV) metrics would provide confidence in medium-term growth trajectory.
- Utilisation Improvement: Better employee utilisation rates leading to lower employee costs as percentage of revenue would drive margin expansion.
RED FLAGS TO MONITOR
- Further Margin Erosion: Operating margins falling below 10% would indicate severe competitive or execution challenges requiring management intervention.
- Continued Sequential Revenue Decline: Another quarter of flat or negative QoQ revenue growth would raise concerns about demand environment and competitive positioning.
- Elevated Employee Costs: Employee expenses rising above 60% of revenue would significantly constrain profitability and limit margin recovery potential.
- Sustained FII Selling: Continued reduction in foreign institutional holding below 7% would signal deepening concerns about growth prospects or governance.
- Client Concentration Issues: Loss of major clients or reduced spending from top accounts would threaten revenue stability and growth trajectory.
The outlook for Hexaware Technologies remains clouded by significant near-term uncertainties. The company must demonstrate its ability to stabilise and then improve operating margins while maintaining revenue momentum in a challenging demand environment. The elevated contribution of other income to profitability in Q3 FY26 is unsustainable, and normalisation of this metric in future quarters could lead to further profit disappointments if core operating performance does not improve meaningfully.
Management's ability to control employee costs, improve utilisation rates, and maintain pricing discipline will be critical to margin recovery. The IT services sector faces ongoing headwinds from cautious client spending, particularly in discretionary areas, and Hexaware Technologies will need to demonstrate differentiation through digital capabilities, automation, and value-added services to protect margins and win market share.
From a technical perspective, the stock's bearish trend and position below all major moving averages suggests further downside risk in the near term. The immediate support level lies at the 52-week low of ₹592.95, with meaningful resistance at the 20-day moving average of ₹715.71. Any sustained move above this level would be required to signal a technical reversal, though fundamental improvement would need to accompany such a move for it to be sustainable.
The Verdict: Hold with Caution—Wait for Operational Stabilisation
Score: 75/100
For Fresh Investors: Avoid initiating positions at current levels given the sharp margin compression, deteriorating earnings quality, and bearish technical trend. The premium valuation of 35.89x earnings is not justified by recent operational performance. Wait for at least two consecutive quarters of margin stabilisation and improved earnings quality before considering entry. A more attractive entry point would be closer to ₹550-570, representing a 12-15% downside from current levels.
For Existing Holders: Hold positions but closely monitor the next two quarters for signs of margin recovery and normalisation of other income contribution. If operating margins remain below 12% or other income continues to exceed 20% of PBT in Q4 FY26, consider reducing exposure. The company's strong long-term fundamentals, debt-free balance sheet, and robust ROE provide some comfort, but near-term execution challenges warrant caution. Set a stop-loss at ₹580 to protect against further deterioration.
Fair Value Estimate: ₹680-700 (8-11% upside from current levels), contingent on margin recovery to 14-15% levels and normalisation of earnings quality over the next two quarters.
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. Past performance is not indicative of future results, and all investments carry risk of loss.
