The small-cap capital markets player, with a market capitalisation of ₹10,114 crores, faced multiple headwinds during the quarter. Net sales declined 7.34% sequentially to ₹572.08 crores, whilst also registering an 11.36% year-on-year contraction. More concerningly, operating profit margins excluding other income compressed to 37.22% from 41.27% in the year-ago period, reflecting the challenging operating environment in the capital markets sector.
The quarter's performance was particularly impacted by a sharp reversal in other income, which turned negative at ₹24.67 crores compared to a positive ₹63.03 crores in the previous quarter. This dramatic swing significantly affected overall profitability, with profit before tax falling to ₹119.90 crores from ₹227.54 crores sequentially. The PAT margin contracted sharply to 14.88% from 28.43% in Q1 FY26, marking the lowest profitability level in recent quarters.
| Quarter | Net Sales (₹ Cr) | QoQ Change | Net Profit (₹ Cr) | QoQ Change | PAT Margin |
|---|---|---|---|---|---|
| Sep'25 | 572.08 | -7.34% | 84.41 | -51.86% | 14.88% |
| Jun'25 | 617.37 | +14.94% | 175.34 | +37.04% | 28.43% |
| Mar'25 | 537.14 | -7.80% | 127.95 | -35.10% | 23.84% |
| Dec'24 | 582.59 | -9.73% | 197.14 | -3.86% | 33.85% |
| Sep'24 | 645.37 | +0.85% | 205.06 | +12.55% | 31.82% |
| Jun'24 | 639.92 | -6.78% | 182.19 | +1.29% | 28.48% |
| Mar'24 | 686.43 | — | 179.87 | — | 26.31% |
Financial Performance: Revenue Decline Compounds Margin Pressure
IIFL Capital Services' Q2 FY26 financial performance revealed multiple pressure points across key metrics. Net sales of ₹572.08 crores represented not just a sequential decline of 7.34%, but also an 11.36% year-on-year contraction, signalling weakening business momentum in the capital markets segment. The company's revenue generation has been inconsistent over recent quarters, with the business struggling to maintain the momentum seen in earlier periods.
Operating profit before depreciation, interest, and tax (excluding other income) stood at ₹212.95 crores, yielding a margin of 37.22%. Whilst this remains respectable in absolute terms, it represents a significant deterioration from the 41.27% margin achieved in Q2 FY25 and the 46.81% margin in Q1 FY24. This margin compression suggests rising competitive pressures and potentially higher variable costs in the broking and capital markets business.
Employee costs rose to ₹153.72 crores in Q2 FY26, up from ₹149.27 crores in the year-ago quarter, even as revenues declined. This inverse relationship between costs and revenues points to operational inefficiencies that management needs to address. Interest expenses also remained elevated at ₹53.31 crores, up from ₹47.78 crores year-on-year, reflecting higher borrowing costs despite a relatively modest debt-to-equity ratio of 0.37.
The quality of earnings deteriorated markedly during the quarter. The dramatic swing in other income from a positive ₹63.03 crores in Q1 FY26 to a negative ₹24.67 crores in Q2 FY26 represents a ₹87.70 crores adverse movement that single-handedly explains much of the profit decline. This volatility in non-operating income raises concerns about the sustainability and predictability of the company's earnings profile.
Capital Efficiency Remains Strong Despite Quarterly Setback
Despite the disappointing quarterly results, IIFL Capital Services continues to demonstrate strong capital efficiency metrics that underscore its fundamental business quality. The company's return on equity (ROE) stands at an impressive 28.41% for the latest period, significantly above the industry average and reflecting efficient capital deployment. Over a five-year period, the average ROE of 24.86% positions IIFL Capital amongst the better-performing capital markets players in terms of shareholder value creation.
The company's balance sheet exhibits reasonable health, with shareholder funds standing at ₹2,507.23 crores as of March 2025, up from ₹1,786.42 crores a year earlier. The absence of long-term debt on the books is a positive, though current liabilities of ₹5,567.79 crores warrant monitoring. The net debt-to-equity ratio of 0.37 remains manageable, providing financial flexibility to navigate challenging market conditions.
IIFL Capital's long-term growth trajectory remains intact, with sales growing at a five-year compound annual growth rate (CAGR) of 27.41% and operating profit (EBIT) expanding at 28.71% annually. These robust long-term growth rates demonstrate the company's ability to capitalise on India's growing capital markets ecosystem, even if near-term volatility has impacted recent quarterly performance.
Key Concern: Earnings Volatility
The sharp quarterly profit decline of 51.86% and the dramatic swing in other income from positive to negative highlight significant earnings volatility. Investors should note that the company's profitability can fluctuate materially based on market conditions and non-operating items. The PAT margin compression from 28.43% to 14.88% in a single quarter underscores the earnings instability that characterises the capital markets business during periods of market stress.
Capital Markets Sector: Navigating Challenging Trading Volumes
The capital markets sector in India has experienced mixed conditions during the first half of FY2026, with elevated volatility and periodic volume declines affecting broking revenues across the industry. IIFL Capital's 11.36% year-on-year revenue decline in Q2 FY26 reflects these broader sectoral headwinds, as retail investor participation moderated following the exuberance of previous years.
The company operates in a highly competitive landscape dominated by both traditional full-service brokers and new-age discount brokers. The latter have been gaining market share through aggressive pricing and technology-driven customer acquisition, putting pressure on traditional players' margins and market positioning. IIFL Capital's margin compression from 41.27% to 37.22% year-on-year partly reflects this competitive intensity.
Looking ahead, the sector's prospects remain tied to retail investor participation, equity market performance, and the pace of new account openings. The company's diversified service offering spanning broking, merchant banking, and wealth management provides some insulation from pure broking volume volatility, though this diversification benefit was not evident in the Q2 FY26 results.
Peer Comparison: Valuation Discount Reflects Concerns
IIFL Capital Services trades at a significant valuation discount to its capital markets peers, reflecting market concerns about its recent performance trajectory and earnings volatility. With a price-to-earnings ratio of 14.81x, the company is valued well below peers such as CAMS Services (40.58x), KFin Technologies (55.41x), and Prudent Corporate (53.26x).
| Company | P/E (TTM) | P/BV | ROE (%) | Div Yield (%) | Debt/Equity |
|---|---|---|---|---|---|
| IIFL Capital | 14.81 | 4.17 | 24.86 | 0.89 | 0.37 |
| CAMS Services | 40.58 | 16.82 | 40.26 | 2.27 | -0.53 |
| KFin Technologies | 55.41 | 13.61 | 22.56 | — | 0.03 |
| UTI AMC | 26.41 | 0.35 | 13.31 | 3.96 | 0.00 |
| Indian Energy Exchange | 26.55 | 10.95 | 38.92 | 2.15 | -1.13 |
| Prudent Corporate | 53.26 | 16.37 | 31.29 | 0.09 | 0.05 |
The valuation discount is partially justified by IIFL Capital's lower ROE of 24.86% compared to peers like CAMS Services (40.26%) and Indian Energy Exchange (38.92%). However, the company's ROE still exceeds that of KFin Technologies (22.56%) and UTI AMC (13.31%), suggesting the discount may be overdone. The price-to-book ratio of 4.17x also sits well below the peer average of approximately 11.6x, indicating the market is pricing in significant execution risks.
IIFL Capital's dividend yield of 0.89% trails most peers, with the company having declared a dividend of ₹3 per share with an ex-dividend date of February 17, 2025. The modest payout reflects management's preference to retain capital for business growth, though the low dividend payout ratio of 13.05% suggests room for increased shareholder returns if profitability stabilises.
Valuation Analysis: Expensive Despite Recent Underperformance
Despite trading at a discount to peers and experiencing significant stock price underperformance, IIFL Capital Services is currently rated as "Expensive" on an absolute valuation basis. The stock trades at ₹336.45, down 19.31% from its 52-week high of ₹416.95 but up 97.91% from its 52-week low of ₹170.00, reflecting the volatility that has characterised the stock's trading pattern.
The company's valuation metrics present a mixed picture. The P/E ratio of 14.81x appears reasonable for a capital markets player, particularly given the sector's inherent cyclicality. However, the price-to-book ratio of 4.17x suggests investors are still paying a meaningful premium to book value despite the recent performance challenges. The EV/EBITDA multiple of 8.03x and EV/Sales ratio of 3.10x also indicate that the stock is not trading at distressed valuations.
The PEG ratio of 1.15 suggests the stock is fairly valued relative to its growth prospects, though this metric should be viewed cautiously given the recent earnings volatility. The company's valuation grade has oscillated between "Fair" and "Expensive" in recent months, most recently moving to "Expensive" from "Fair" on October 14, 2025, as the stock price recovered without corresponding improvement in fundamentals.
"With earnings under pressure and margins compressing, IIFL Capital's 'Expensive' valuation tag appears difficult to justify despite the peer discount."
Shareholding Pattern: Institutional Confidence Waning
The shareholding pattern for IIFL Capital Services reveals a gradual erosion of institutional confidence, with foreign institutional investors (FIIs) reducing their stake from 19.00% in September 2024 to 16.93% in September 2025. The most recent quarter saw FII holdings decline by 0.31% sequentially, continuing a trend of foreign investor exits that has persisted over multiple quarters.
| Quarter | Promoter | FII | Mutual Fund | Insurance | Other DII | Public |
|---|---|---|---|---|---|---|
| Sep'25 | 30.98% | 16.93% | 1.24% | 0.00% | 3.80% | 47.06% |
| Jun'25 | 31.02% | 17.24% | 1.19% | 0.00% | 3.73% | 46.83% |
| Mar'25 | 30.70% | 18.98% | 0.95% | 0.00% | 3.36% | 46.01% |
| Dec'24 | 30.71% | 19.12% | 1.18% | 0.00% | 2.81% | 46.17% |
| Sep'24 | 30.79% | 19.00% | 0.50% | 0.00% | 3.19% | 46.51% |
Promoter holding has remained relatively stable around 31%, declining marginally from 31.02% in June 2025 to 30.98% in September 2025. The absence of promoter pledging is a positive, indicating confidence in the business and no immediate financial stress at the promoter level. Key promoters include Nirmal Bhanwarlal Jain (15.13%), Madhu N Jain (3.89%), and Venkataraman Rajamani (3.60%).
Mutual fund participation remains disappointingly low at just 1.24%, though this represents a marginal increase from 1.19% in the previous quarter. With only seven mutual funds holding stakes in the company, institutional interest from domestic asset managers remains muted. The absence of any insurance company holdings further underscores the limited institutional appetite for the stock.
The high public shareholding of 47.06% suggests significant retail investor participation, which has increased marginally over recent quarters. This retail-heavy shareholder base can contribute to stock price volatility, particularly during periods of weak results or broader market corrections.
Stock Performance: Significant Underperformance Despite Long-Term Gains
IIFL Capital Services' stock performance presents a tale of two timeframes. Over the past year, the stock has declined 14.31%, significantly underperforming the Sensex's 4.62% gain and generating a negative alpha of 18.93%. This underperformance is even more pronounced when compared to the broader capital markets sector, which delivered a 19.74% return over the same period, resulting in a 34.05% underperformance gap.
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | -1.42% | -0.86% | -0.56% |
| 1 Month | +9.77% | +1.57% | +8.20% |
| 3 Months | +11.19% | +3.22% | +7.97% |
| 6 Months | +45.49% | +3.06% | +42.43% |
| YTD | +2.95% | +6.50% | -3.55% |
| 1 Year | -14.31% | +4.62% | -18.93% |
| 2 Years | +200.67% | +28.14% | +172.53% |
| 3 Years | +376.56% | +36.01% | +340.55% |
| 5 Years | +769.38% | +98.64% | +670.74% |
However, the longer-term picture remains impressive. Over two years, the stock has delivered a stellar 200.67% return, vastly outperforming the Sensex's 28.14% gain with a positive alpha of 172.53%. The three-year and five-year returns of 376.56% and 769.38% respectively demonstrate the company's ability to create substantial shareholder wealth over extended periods, despite near-term volatility.
The stock's six-month performance of 45.49% suggests some recovery momentum, though this has been partially reversed in recent weeks. The stock trades below most of its key moving averages, including the 5-day (₹337.10), 20-day (₹338.82), 50-day (₹312.44), 100-day (₹320.05), and 200-day (₹282.46) averages, indicating weak technical momentum.
With a beta of 1.35, IIFL Capital is classified as a high-beta stock, exhibiting greater volatility than the broader market. The stock's volatility of 53.41% over the past year is more than four times the Sensex's volatility of 12.35%, resulting in a negative risk-adjusted return of -0.27. This high-risk, low-return profile makes the stock unsuitable for conservative investors seeking stability.
Investment Thesis: Quality Undermined by Negative Momentum
IIFL Capital Services presents a conflicted investment proposition, with strong long-term fundamentals overshadowed by deteriorating near-term financial trends. The company's average quality rating reflects this dichotomy—solid underlying business characteristics marred by recent execution challenges and earnings volatility.
The investment case rests on several pillars. The company's strong ROE of 24.86% demonstrates efficient capital allocation and profitability generation when market conditions are favourable. The five-year sales CAGR of 27.41% and EBIT growth of 28.71% underscore the company's ability to capitalise on India's expanding capital markets ecosystem. Institutional holdings of 21.96%, whilst declining, still indicate a meaningful level of sophisticated investor participation.
However, these positives are currently overwhelmed by negative near-term drivers. The company's financial trend turned negative in September 2025, with quarterly profit at ₹84.41 crores representing a 52.1% decline versus the previous four-quarter average. Key metrics including profit before tax (excluding other income) and earnings per share have hit multi-quarter lows, raising concerns about the sustainability of the business model in the current environment.
The technical picture offers little comfort, with the stock in a "Mildly Bullish" trend that recently downgraded from "Bullish" on November 3, 2025. Most technical indicators show mixed-to-bearish signals, with MACD mildly bearish on monthly charts, KST mildly bearish on both weekly and monthly timeframes, and OBV showing mildly bearish momentum on weekly charts. The stock's trading below key moving averages reinforces the weak technical setup.
Key Strengths & Risk Factors
KEY STRENGTHS
- Strong Capital Efficiency: ROE of 28.41% demonstrates excellent returns on shareholder capital, significantly above industry averages
- Robust Long-Term Growth: Five-year sales CAGR of 27.41% and EBIT growth of 28.71% reflect strong business expansion
- Healthy Balance Sheet: Net debt-to-equity of 0.37 with no long-term debt provides financial flexibility
- Diversified Service Platform: Full-service broking, merchant banking, and wealth management reduce dependence on single revenue stream
- Established Market Position: One of India's largest independent full-service broking houses with strong brand recognition
- No Promoter Pledging: Clean promoter holding structure with 30.98% stake and zero pledging indicates confidence
- Impressive Long-Term Returns: Five-year stock return of 769.38% demonstrates wealth creation capability
KEY CONCERNS
- Sharp Earnings Decline: Q2 FY26 profit down 51.86% QoQ and 58.84% YoY signals significant business stress
- Margin Compression: Operating margins declined from 41.27% to 37.22% YoY, reflecting competitive and cost pressures
- Volatile Other Income: Swing from +₹63.03 crores to -₹24.67 crores in a single quarter raises earnings quality concerns
- Revenue Decline: Net sales down 11.36% YoY indicates weakening business momentum
- Weak Institutional Support: FII stake declining, mutual fund participation at just 1.24%, zero insurance holdings
- High Volatility: Beta of 1.35 and 53.41% volatility make stock unsuitable for risk-averse investors
- Sector Underperformance: One-year return of -14.31% vs capital markets sector gain of 19.74% (34% underperformance)
Outlook: What Lies Ahead
The outlook for IIFL Capital Services hinges critically on the company's ability to stabilise earnings and restore margin momentum. The immediate quarters will be crucial in determining whether Q2 FY26 represents a temporary setback or the beginning of a more sustained downturn. Management's commentary on business pipelines, market share trends, and cost optimisation initiatives will be key factors for investors to monitor.
The broader capital markets environment will play a significant role in the company's recovery trajectory. Improved retail investor participation, rising equity market volumes, and increased corporate activity in primary markets would provide tailwinds for revenue growth. Conversely, sustained market volatility or regulatory changes affecting broking economics could further pressure profitability.
POSITIVE CATALYSTS
- Recovery in capital markets volumes and retail participation
- Stabilisation of operating margins through cost optimisation
- Normalisation of other income contributing to earnings stability
- Market share gains in wealth management and merchant banking
- Increased institutional investor participation and FII inflows
RED FLAGS TO MONITOR
- Further sequential decline in quarterly revenues and profits
- Continued margin compression below 35% threshold
- Additional FII stake reduction indicating loss of confidence
- Rising employee costs without corresponding revenue growth
- Sustained negative other income impacting overall profitability
The Verdict: Challenging Period Warrants Caution
Score: 44/100
For Fresh Investors: Avoid initiating positions at current levels. The sharp earnings decline, margin compression, and negative financial trend make the risk-reward unattractive. Wait for clear signs of earnings stabilisation and margin recovery before considering entry. The "Expensive" valuation tag despite recent underperformance offers no margin of safety.
For Existing Holders: Consider reducing positions or exiting on any near-term rallies. The deteriorating fundamentals, weak institutional support, and high volatility (53.41%) create an unfavourable holding environment. Long-term investors with high risk tolerance may hold with strict stop-losses, but the negative momentum suggests patience is warranted before re-evaluating.
Fair Value Estimate: ₹280-300 (17% downside from current levels), based on normalised earnings and peer valuations
Despite strong long-term credentials including a 24.86% average ROE and impressive five-year growth rates, IIFL Capital Services faces significant near-term headwinds that justify a cautious stance. The 51.86% quarterly profit decline, margin compression, and volatile other income create earnings uncertainty that the current valuation does not adequately reflect. Until the company demonstrates sustained improvement in quarterly performance and margin stability, investors are better served waiting on the sidelines.
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. The author and publisher are not responsible for any investment decisions made based on the information provided in this article.
