Inspirisys Solutions Q3 FY26: Tax Credit Windfall Masks Operational Headwinds

The results present a paradox: strong revenue momentum offset by margin compression and an unsustainable tax windfall. Net sales reached an all-time quarterly high of ₹129.80 crores, up 8.43% sequentially and 63.25% year-on-year, signalling robust demand for the company's IT services. Yet operating profit before depreciation, interest, tax, and other income (PBDIT excl OI) declined to ₹8.80 crores from ₹12.21 crores in Q2 FY26, with operating margins contracting sharply to 6.78% from 10.20%—a 342 basis point sequential deterioration. The tax credit, whilst boosting reported profits, obscures underlying operational challenges that warrant investor scrutiny.

Financial Performance: Revenue Strength Overshadowed by Margin Pressure

Inspirisys Solutions delivered its strongest quarterly revenue performance on record in Q3 FY26, with net sales reaching ₹129.80 crores. The 8.43% sequential growth extended the momentum from Q2 FY26's 41.50% surge, demonstrating the company's ability to secure and execute client engagements. Year-on-year revenue growth of 63.25% reflects a substantial acceleration compared to the prior year's subdued performance, when FY25 revenues declined 20.80% to ₹388 crores from ₹490 crores in FY24.

However, the revenue expansion came at a steep cost. Operating profit excluding other income plunged to ₹8.80 crores from ₹12.21 crores in Q2 FY26, with operating margins compressing 342 basis points to 6.78%. This marks the lowest operating margin in the past three quarters, reversing the 10%+ margins achieved in Q2 and Q1 FY26. Employee costs, the largest expense line for IT services firms, rose to ₹31.41 crores from ₹32.71 crores in Q2 FY26, though as a percentage of revenue they declined to 24.20% from 27.33%, suggesting some operating leverage.

The deterioration in operating profitability raises questions about project mix, pricing discipline, and cost management. Gross profit margins fell to 3.85% from 10.71% in Q2 FY26, indicating that the company may be accepting lower-margin contracts to drive top-line growth. This trade-off is concerning for a services business where sustainable profitability depends on maintaining healthy margins alongside revenue expansion.

Other income contributed ₹1.71 crores in Q3 FY26, down from ₹2.14 crores in Q2 FY26. Profit before tax stood at ₹3.60 crores, sharply lower than ₹11.56 crores in the previous quarter, underscoring the operational margin pressure. The reported net profit of ₹18.62 crores was inflated by the extraordinary tax credit, without which the company would have posted a significantly weaker performance.

The Tax Anomaly: Unsustainable Windfall Distorts Profitability Picture

The standout feature of Q3 FY26 results is the negative tax expense of ₹13.06 crores, producing an effective tax rate of -362.78%. This compares to a normalised tax rate of 36.51% in Q2 FY26 and 23.83% in Q1 FY26. The tax credit likely stems from carry-forward losses or adjustments related to prior periods, providing a one-time boost to reported profits.

Stripping out the tax windfall reveals a far more modest operational performance. On a pre-tax basis, the company earned ₹3.60 crores in Q3 FY26, down 68.86% from ₹11.56 crores in Q2 FY26. This highlights the extent to which the headline profit figure masks underlying weakness. Investors should exercise caution in extrapolating Q3's reported net profit margin of 12.84% into future quarters, as normalised tax rates would compress margins significantly.

Operational Efficiency: Strong ROCE Amid Balance Sheet Transformation

Despite near-term margin pressures, Inspirisys Solutions demonstrates impressive capital efficiency. The company's latest return on capital employed (ROCE) stands at 49.51%, significantly above the five-year average of 21.23%. Higher ROCE indicates superior capital efficiency and profitability—the company generates nearly 50 paise of operating profit for every rupee of capital employed, a testament to asset-light business model execution.

Return on equity (ROE) reached 52.15% in the most recent period, compared to a five-year average of 23.51%. This elevated ROE reflects both improved profitability and a lean equity base following years of accumulated losses. Shareholder funds stood at ₹58.53 crores as of March 2025, up dramatically from negative ₹8.37 crores in March 2023, as the company returned to sustained profitability.

The balance sheet has undergone significant deleveraging. Long-term debt increased to ₹79.74 crores in March 2025 from ₹5.84 crores in March 2024, though the company maintains a net cash position with an average net debt-to-equity ratio of -0.09 over five years. Current assets of ₹216.15 crores comfortably exceed current liabilities of ₹125.66 crores, providing adequate liquidity cushion. Cash and cash equivalents stood at ₹25 crores as of March 2025, down from ₹47 crores in March 2024, reflecting increased working capital deployment.

Peer Comparison: Valuation Discount Reflects Execution Concerns

Inspirisys Solutions trades at a significant valuation discount to larger software services peers, though it commands premium multiples within its immediate micro-cap peer group. The stock's price-to-earnings ratio of 11.13x compares favourably to the industry average of 26x, suggesting relative undervaluation. However, the company's price-to-book ratio of 5.80x is substantially higher than peers such as 3i Infotech (0.97x) and Softsol India (1.94x), reflecting investor expectations for sustained profitability improvements.

Inspirisys Solutions' ROE of 23.51% substantially exceeds the peer group average of approximately 6%, justifying some valuation premium. However, the company's micro-cap status, limited liquidity (average daily volume of 7,124 shares), and absence of institutional investors create significant execution risk. The 69.95% promoter holding provides stability, though zero participation from foreign institutional investors (FIIs), mutual funds, and insurance companies limits market confidence.

Valuation Analysis: Attractive Entry Point With Execution Caveats

At ₹99.25 per share, Inspirisys Solutions trades at what appears to be an attractive valuation relative to its historical performance and growth trajectory. The P/E ratio of 11.13x is well below the broader software services sector average of 26x, whilst the PEG ratio of 0.07x suggests the stock is undervalued relative to its five-year EBIT growth rate of 100.05%. The enterprise value-to-EBITDA multiple of 10.51x is reasonable for a company transitioning from loss-making to sustained profitability.

The stock's price-to-book ratio of 5.80x reflects expectations for continued return on equity improvement. With book value per share at ₹14.77, the current price represents a 572% premium to book value—high in absolute terms but justified by the 52.15% ROE. The company's "Very Attractive" valuation grade from proprietary scoring models acknowledges this discount to intrinsic value based on normalised earnings power.

However, valuation attractiveness must be weighed against execution risks. The stock trades 17.46% below its 52-week high of ₹120.25, reflecting market scepticism about margin sustainability. With the stock above all key moving averages (5-day, 20-day, 50-day, 100-day, and 200-day), technical momentum appears constructive, though the "mildly bearish" overall technical trend classification suggests caution.

Shareholding Pattern: Stable Promoter Base, Zero Institutional Interest

Inspirisys Solutions' shareholding structure has remained remarkably stable over the past five quarters, with promoter holding steady at 69.95% and non-institutional investors holding the remaining 30.05%. The complete absence of foreign institutional investors, mutual funds, insurance companies, and other domestic institutional investors is notable and concerning.

The lack of institutional participation reflects the stock's micro-cap status, limited liquidity, and perhaps concerns about governance or business sustainability. Cac Holdings Corporation holds the entire 69.95% promoter stake, with no pledging reported—a positive signal for governance. However, attracting institutional investors would require sustained profitability, improved disclosure standards, and greater liquidity.

Stock Performance: Recent Momentum Masks Long-Term Underperformance

Inspirisys Solutions shares have delivered mixed returns across different time horizons, with recent momentum contrasting sharply with longer-term underperformance. The stock surged 7.12% on February 06, 2026, following the Q3 results announcement, and has gained 15.68% over the past week, significantly outperforming the Sensex's 1.59% weekly gain. Over one month, the stock has rallied 15.22% against the Sensex's 1.74% decline, generating 16.96% alpha.

However, medium-term performance reveals significant weakness. The stock has declined 7.80% over six months, underperforming the Sensex by 11.57%. One-year returns of just 0.80% lag the Sensex's 7.07% gain, whilst two-year returns show a painful 20.38% loss against the Sensex's 15.78% gain. The stock's beta of 1.42 indicates high volatility—it tends to move 42% more than the market, amplifying both gains and losses.

Long-term investors have been rewarded, with three-year returns of 99.50% and five-year returns of 191.06% substantially outpacing the Sensex. This reflects the company's successful turnaround from loss-making to profitability over the past three years. However, the stock's classification as "High Risk Low Return" over one year, combined with 54.90% volatility, underscores the speculative nature of the investment.

Investment Thesis: Turnaround Story With Execution Risk

Inspirisys Solutions presents a classic small-cap turnaround narrative: a company emerging from years of losses with improving fundamentals, strong capital efficiency metrics, and attractive valuation multiples. The proprietary Mojo score of 57/100 places the stock in "HOLD" territory, reflecting balanced positives and negatives. The valuation grade of "Very Attractive" and quality grade of "Average" suggest potential upside if execution improves, whilst the "Positive" financial trend and "Mildly Bearish" technical trend create mixed signals.

Key investment positives include exceptional ROCE of 49.51%, strong ROE of 52.15%, robust five-year EBIT growth of 100.05%, and a reasonable P/E multiple of 11.13x. The company operates with minimal debt, maintains zero promoter pledging, and has demonstrated ability to scale revenues rapidly when market conditions are favourable.

However, significant concerns temper enthusiasm. The Q3 FY26 profit surge stems from unsustainable tax credits rather than operational improvements. Operating margins contracted sharply to 6.78%, raising questions about pricing power and cost management. The complete absence of institutional investors, limited liquidity, and high volatility (beta of 1.42) create execution and liquidity risks. The stock's underperformance over one and two years relative to the Sensex suggests market scepticism about sustainability.

Outlook: What Lies Ahead

The forward outlook for Inspirisys Solutions hinges on management's ability to sustain revenue growth whilst reversing margin deterioration. Investors should monitor several key catalysts and warning signs in coming quarters.