IZMO Ltd Q2 FY26: Profit Surges 109% QoQ Despite Revenue Growth Slowdown

The stock has rewarded investors handsomely over the longer term, delivering a staggering 1,085.56% return over three years and 123.06% over the past year, significantly outperforming the Sensex's 9.00% gain during the same period. Trading at ₹861.90 as of November 14, 2025, the stock has gained 4.99% on the day, though it remains 37.54% below its 52-week high of ₹1,380.00.

The September quarter results present a mixed picture of operational improvement marred by challenging year-on-year comparisons. Whilst the company achieved its highest-ever quarterly revenue and operating profit, the 57.99% year-on-year decline in net profit stems from an exceptional ₹31.41 crores other income recorded in Q2 FY25, which inflated the base quarter's profitability artificially.

Financial Performance: Margin Expansion Drives Profitability Recovery

IZMO's Q2 FY26 financial performance demonstrates strong operational improvements despite revenue growth remaining modest. Net sales reached ₹60.11 crores, marking the highest quarterly revenue in the company's history and representing a 6.37% sequential increase from Q1 FY26's ₹56.51 crores. On a year-on-year basis, revenue grew 2.66%, indicating a deceleration from the robust 18.77% growth witnessed in the previous quarter.

The standout feature of the quarter was the dramatic margin expansion across all profitability metrics. Operating profit (excluding other income) surged 39.71% quarter-on-quarter to ₹13.51 crores, whilst operating margin expanded sharply to 22.48% from 17.11% in Q1 FY26. This 537 basis point improvement represents the highest operating margin achieved in the past seven quarters, surpassing even the 23.94% recorded in March 2024.

Employee costs, typically the largest expense for IT services firms, declined 1.39% sequentially to ₹27.77 crores despite revenue growth, demonstrating improved operational leverage. This cost discipline, combined with revenue growth, enabled the company to achieve a net profit margin of 20.90%, up from just 10.62% in the previous quarter. Profit before tax reached ₹13.16 crores, more than doubling from ₹6.00 crores quarter-on-quarter.

The tax rate remained exceptionally low at 4.64% for Q2 FY26, continuing the trend of minimal tax incidence that has characterised recent quarters. This contrasts sharply with the 13.06% tax rate in Q2 FY25, providing a tailwind to net profit growth. However, the sustainability of such low tax rates warrants monitoring, as normalisation could impact future profitability.

The Other Income Question: Quality of Earnings Under Scrutiny

A critical concern emerging from IZMO's quarterly results is the substantial contribution of other income to overall profitability. In Q2 FY26, other income stood at ₹4.45 crores, representing 33.81% of profit before tax. This dependency on non-operating income raises questions about the quality and sustainability of reported earnings, particularly for a company positioned as a software and consulting services provider.

The volatility in other income has been pronounced over recent quarters. Q2 FY25 witnessed an exceptional ₹31.41 crores in other income, which artificially inflated that quarter's profitability to ₹29.90 crores. Excluding this anomaly, the current quarter's operational performance appears more robust, with profit before tax (excluding other income) reaching ₹8.71 crores, the highest in the past seven quarters.

The company's balance sheet reveals a relatively asset-light model with fixed assets of ₹274.19 crores as of March 2025, suggesting limited capital intensity. Current assets stood at ₹152.13 crores, providing reasonable liquidity, whilst debt levels remain minimal at ₹4.42 crores in long-term borrowings. The net debt-to-equity ratio of -0.05 indicates IZMO is effectively a net cash company, with cash holdings exceeding total debt.

Management Efficiency: Low Returns Highlight Capital Deployment Challenges

Despite the operational improvements in Q2 FY26, IZMO's capital efficiency metrics remain a significant concern for long-term investors. The company's average return on equity (ROE) stands at just 9.54%, substantially below the 15% threshold typically expected from quality businesses. The latest ROE of 14.19%, whilst improved, still lags peer averages and indicates suboptimal capital deployment.

Return on capital employed (ROCE) presents an even weaker picture at 5.40% on average, with the latest reading at 6.43%. These returns fall well short of the company's cost of capital, suggesting that incremental investments are not generating adequate returns for shareholders. For a software services company with minimal capital requirements, such low returns are particularly disappointing and point to either pricing pressures, operational inefficiencies, or suboptimal project selection.

The company's sales-to-capital-employed ratio of 0.55x indicates that IZMO generates just 55 paise of revenue for every rupee of capital deployed, reflecting poor asset productivity. This metric, combined with low ROCE, suggests the company may be carrying excess capital or investing in low-return projects. The substantial reserves and surplus of ₹342.96 crores on a shareholder base of ₹359.15 crores indicate capital accumulation without commensurate value creation.

Industry Context: Software Services Sector Challenges

IZMO operates in the highly competitive computers software and consulting sector, which has faced headwinds from macroeconomic uncertainty, client budget constraints, and pricing pressures. The company positions itself as a customer relationship management (CRM) solutions provider with partnerships with global technology leaders including SAP, Oracle, and others. Its focus on automotive e-retailing solutions and interactive marketing represents a niche positioning within the broader IT services landscape.

The Indian IT services sector has witnessed margin compression across the board as wage inflation, attrition costs, and competitive pricing have squeezed profitability. IZMO's ability to expand operating margins to 22.48% in Q2 FY26 stands in contrast to broader sector trends, suggesting either improved project mix, better resource utilisation, or one-off cost benefits that may not sustain.

The company's modest revenue growth of 2.66% year-on-year in Q2 FY26 significantly underperforms the broader software services sector, which has generally maintained mid-to-high single-digit growth despite challenges. This growth deceleration from the previous quarter's 18.77% raises questions about demand momentum, client pipeline, and competitive positioning. The company's micro-cap status with a market capitalisation of just ₹1,284 crores limits its ability to compete for large enterprise deals against better-capitalised peers.

IZMO's peer comparison reveals a mixed competitive positioning. The company trades at a P/E ratio of 25.20x, above the peer average of approximately 21x, despite delivering the weakest ROE in the comparison set at 9.54%. Expleo Solutions and Dynacons Systems, for instance, command lower valuations whilst generating superior returns on equity of 19.05% and 27.77% respectively. This valuation premium appears unjustified based on fundamental metrics, suggesting the stock's recent price appreciation may have outpaced operational improvements.

Valuation Analysis: Premium Pricing Despite Operational Concerns

IZMO's current valuation presents a challenging picture for prospective investors. Trading at ₹861.90 as of November 14, 2025, the stock commands a trailing twelve-month P/E ratio of 25.20x, representing a premium to several better-performing peers. The price-to-book value ratio of 3.57x appears reasonable given the asset-light nature of the business, though it exceeds the sector median of approximately 3.3x.

The company's enterprise value multiples paint a concerning picture of valuation sustainability. EV/EBITDA stands at an elevated 32.69x, whilst EV/EBIT reaches a stretched 57.70x. These multiples significantly exceed historical sector averages and suggest limited margin of safety at current prices. The EV/sales ratio of 5.42x appears particularly demanding for a company growing revenue at just 2.66% year-on-year and struggling with capital efficiency.

The stock's PEG ratio of 0.32 might appear attractive at first glance, suggesting the stock is undervalued relative to growth. However, this metric must be interpreted cautiously given the volatility in earnings caused by exceptional other income items and the recent deceleration in revenue growth. The five-year sales CAGR of 17.39% and EBIT CAGR of 34.66% reflect historical performance that may not extrapolate into the future given current growth trends.

The stock's valuation grade has oscillated between "Fair" and "Expensive" over recent months, currently settling at "Fair" as of October 17, 2025. This assessment appears generous given the operational challenges and premium multiples. A fair value estimate based on peer multiples and normalised earnings (excluding exceptional other income) would suggest a range of ₹650-750, implying 20-25% downside risk from current levels.

Shareholding: Stable Promoter Base, Limited Institutional Interest

IZMO's shareholding pattern reveals a stable promoter base but notably limited institutional participation, which constrains liquidity and market depth. Promoter holding stood at 34.95% as of September 2025, unchanged from the previous quarter and down marginally from 35.05% a year ago. The promoter group, led by Kiran Soni (16.17%), Shashi Soni (15.08%), and Sanjay Soni (3.70%), has maintained consistent ownership without pledging any shares, indicating confidence in the business.

Foreign institutional investor (FII) holding declined to 3.31% in Q2 FY26 from 4.18% in the previous quarter, representing an 87 basis point reduction. This marks a continuation of the gradual FII exit witnessed over the past year, with holdings down from 4.34% in December 2024. The presence of just one FII investor limits diversification and suggests limited conviction amongst international investors.

The complete absence of mutual fund and insurance company holdings is particularly noteworthy and concerning. Institutional investors typically conduct rigorous due diligence, and their absence signals potential concerns about corporate governance, growth visibility, or valuation. Other domestic institutional investors (DIIs) increased their stake to 0.81% from 0.28% quarter-on-quarter, though this remains minimal in absolute terms.

Non-institutional shareholders dominate the register at 60.93%, indicating a predominantly retail investor base. This composition contributes to higher volatility and limited liquidity, as evidenced by the stock's beta of 1.50 and daily trading volumes averaging just 3,439 shares. The lack of institutional sponsorship also limits research coverage and market awareness, potentially constraining valuation multiples.

Stock Performance: Spectacular Long-Term Returns Mask Recent Weakness

IZMO's stock price performance presents a tale of two timeframes. Over the longer term, the stock has delivered exceptional returns that significantly outperform broader market indices. The three-year return of 1,085.56% represents an extraordinary wealth creation opportunity for early investors, with the stock multiplying nearly twelve-fold. The five-year return of 2,135.80% and ten-year return of 1,283.54% place IZMO amongst the top performers in the Indian equity market over these periods.

However, recent performance reveals concerning momentum loss. The one-month return of -13.16% significantly underperforms the Sensex's 3.09% gain, resulting in negative alpha of -16.25%. This weakness follows a spectacular three-month surge of 124.25% and six-month gain of 168.17%, suggesting profit-booking after a sharp rally. The stock currently trades 37.54% below its 52-week high of ₹1,380.00, indicating substantial retracement from peak levels.

Technical indicators present a mixed picture. The stock's current trend is classified as "Mildly Bullish" as of October 23, 2025, downgraded from "Bullish" previously. Weekly MACD shows a "Mildly Bearish" signal, whilst monthly MACD remains "Bullish", reflecting short-term weakness within a longer-term uptrend. The stock trades below its 5-day, 20-day, and 50-day moving averages, indicating near-term technical weakness, though it remains above the 100-day and 200-day moving averages at ₹689.45 and ₹503.01 respectively.

The stock's high beta of 1.50 indicates significantly higher volatility than the broader market, with annualised volatility of 66.47% compared to the Sensex's 12.26%. This volatility profile, combined with limited liquidity (average daily volume of just 3,439 shares), makes IZMO suitable only for risk-tolerant investors with longer investment horizons. The risk-adjusted return of 1.85 over one year suggests the exceptional returns have compensated investors for the elevated volatility, though sustainability remains questionable.

Investment Thesis: Quality Concerns Overshadow Recent Improvements

IZMO's investment thesis rests on four key parameters that collectively paint a cautious picture. The company's Mojo Score of 52/100 places it firmly in "HOLD" territory, with the recommendation stating it is "not recommended for fresh buy" though existing investors "can continue to hold". This assessment reflects the balance between operational improvements and structural concerns.

The company's quality grade of "Average" reflects its long-term financial performance characterised by healthy sales growth (17.39% CAGR over five years) but hampered by weak capital efficiency. The average ROE of 9.54% and ROCE of 5.40% fall well short of quality benchmarks, indicating management's struggle to generate adequate returns on deployed capital. Whilst the company maintains a clean balance sheet with negligible debt and zero promoter pledging, these positives are insufficient to offset the poor returns profile.

The financial trend classification of "Flat" for Q2 FY26 captures the mixed nature of recent performance. Whilst net sales and operating profit reached quarterly highs, the company flagged concerns including the 51.17% decline in profit over the latest six months (H1 FY26) and the high contribution of non-operating income to profitability. These factors prevent a more positive trend classification despite the quarter-on-quarter improvements.

Outlook: What to Watch in Coming Quarters

IZMO's near-term trajectory will depend on its ability to sustain the operational improvements witnessed in Q2 FY26 whilst addressing fundamental concerns about capital efficiency and earnings quality. The company faces the challenge of demonstrating that margin expansion can persist without reliance on exceptional other income, and that revenue growth can reaccelerate from the current modest pace.

The company's management will need to articulate a clear strategy for improving capital returns and reducing dependency on other income. Investors should closely monitor the composition of other income in coming quarters, the sustainability of the improved employee cost-to-revenue ratio, and any commentary on deal pipeline and client additions. The absence of institutional investors suggests concerns that retail investors should heed, particularly given the premium valuation and operational challenges.

For the stock to justify its current valuation and rerate higher, IZMO must demonstrate consistent double-digit revenue growth, sustained margin expansion, and most critically, significant improvement in ROE and ROCE metrics. The company's micro-cap status and limited liquidity add execution risk, whilst the competitive intensity in IT services creates headwinds for margin sustainability. The technical downgrade from "Bullish" to "Mildly Bullish" and the recent 13.16% one-month decline suggest near-term momentum has waned.