Megri Soft Q2 FY26: Profit Holds Ground as Revenue Declines Persist

The stock, currently trading at ₹99.00, has declined 0.92% from its previous close, reflecting the market's cautious stance on the company's prolonged revenue contraction. The Chandigarh-based firm, which provides comprehensive IT solutions ranging from mobile app development to cloud applications and digital marketing services, faces mounting pressure to reverse its top-line decline whilst maintaining the modest profitability gains achieved through cost management.

Financial Performance: Profitability Amid Revenue Erosion

In Q2 FY26, Megri Soft posted net sales of ₹0.67 crores, marking a 6.94% sequential decline from Q1 FY26's ₹0.72 crores and a concerning 33.00% year-on-year contraction from ₹1.00 crores in Q2 FY25. This represents the seventh consecutive quarter of year-on-year revenue decline, with the company's quarterly sales now running at less than half the levels achieved in March 2024 (₹1.38 crores).

Despite the revenue challenges, the company demonstrated improved operational efficiency. Operating profit (PBDIT excluding other income) stood at ₹0.22 crores in Q2 FY26, translating to an operating margin of 32.84%—a notable 228 basis points improvement from Q1 FY26's 30.56% and substantially higher than the 21.00% recorded in Q2 FY25. This margin expansion was primarily driven by aggressive cost control, particularly in employee costs, which declined to ₹0.15 crores from ₹0.25 crores in the previous quarter.

The net profit of ₹0.15 crores in Q2 FY26 matched the year-ago level, though it remained significantly below the ₹0.28 crores achieved in March 2024. The PAT margin expanded to 22.39% from 19.44% in the previous quarter, reflecting the company's ability to protect bottom-line performance through stringent cost management despite the revenue pressures. However, the sustainability of this margin improvement remains questionable if revenue contraction persists.

Operational Challenges: Weak Returns Signal Structural Issues

The company's operational metrics paint a concerning picture of capital efficiency and return generation. Megri Soft's return on equity (ROE) stands at a meagre 2.46%, significantly below acceptable thresholds for value creation and indicating that the company generates minimal returns on shareholder capital. The five-year average ROE of 2.58% confirms this is a persistent structural weakness rather than a temporary aberration.

Similarly, the return on capital employed (ROCE) of 3.19% reflects poor utilisation of total capital deployed in the business. With such anaemic returns, the company struggles to create meaningful shareholder value, particularly when compared to risk-free alternatives. The five-year average ROCE of 2.92% underscores the chronic nature of this inefficiency.

From a balance sheet perspective, Megri Soft maintains a debt-free status with shareholder funds of ₹22.37 crores as of March 2025, representing a net cash position. Fixed assets stood at ₹7.94 crores, whilst investments amounted to ₹6.01 crores. Current assets of ₹2.82 crores provide adequate liquidity against current liabilities of ₹0.43 crores. However, the quality of asset deployment remains questionable given the poor returns generated.

Industry Context: Struggling in a Competitive Landscape

The IT services sector, particularly the web and mobile application development segment, has witnessed significant commoditisation and pricing pressure. Larger players with scale advantages and established client relationships dominate the market, whilst smaller providers like Megri Soft face intense competition for project wins. The company's revenue decline suggests it is losing market share or facing client attrition in an otherwise growing digital services market.

The five-year sales growth of 7.96% appears modest on the surface but masks the recent sharp deterioration. The company's inability to capitalise on the digital transformation wave that has benefited larger IT services providers highlights potential gaps in service offerings, client acquisition capabilities, or execution quality.

Peer Comparison: Premium Valuation Despite Weak Fundamentals

Megri Soft trades at a significant premium to its peer group despite demonstrably weaker fundamentals. At a P/E ratio of 55.99x, the stock commands nearly four times the multiple of Walchand People (14.23x) and over eight times that of Artefact Projects (6.56x). More concerningly, this premium exists despite Megri Soft's ROE of 2.58% being less than one-third of Artefact Projects' 8.26% and approximately one-quarter of Walchand People's 9.98%.

The price-to-book ratio of 1.38x also appears elevated given the company's inability to generate adequate returns on book value. Peers with superior ROE profiles trade at significantly lower P/BV multiples, suggesting Megri Soft's valuation lacks fundamental justification and may be driven by illiquidity or speculative interest rather than intrinsic value.

Valuation Analysis: Expensive Entry Point Unjustified

At the current price of ₹99.00, Megri Soft trades at a P/E ratio of 56x trailing earnings—a valuation typically reserved for high-growth companies with strong competitive moats and robust return profiles. The company possesses neither characteristic. The price-to-book value of 1.38x implies the market is willing to pay a 38% premium over net asset value for a business generating sub-3% returns on equity.

The enterprise value to EBITDA multiple of 29.71x further confirms the expensive valuation, particularly when juxtaposed against the company's flat-to-negative growth trajectory. The EV/Sales ratio of 9.65x appears excessive for a business experiencing 33% year-on-year revenue contraction. These metrics collectively point to a valuation that has become disconnected from underlying business fundamentals.

The stock's 52-week range of ₹86.05 to ₹299.85 reveals significant volatility, with the current price 66.98% below the high achieved earlier in the year. This dramatic decline suggests earlier valuations were even more disconnected from fundamentals, and the current level, whilst lower, still fails to offer adequate margin of safety given the deteriorating business trajectory.

Shareholding Pattern: Stable Promoter Base, Zero Institutional Interest

The shareholding pattern reveals a stable promoter holding of 74.99% with no pledging—a positive sign of promoter confidence. However, the complete absence of institutional investors (FIIs, mutual funds, insurance companies, and other DIIs) is telling. Professional investors have shown zero interest in the stock, likely due to the company's weak fundamentals, poor return profile, and limited liquidity.

The non-institutional shareholding of 25.01% has remained static, suggesting minimal trading activity and poor market liquidity. This lack of institutional participation and retail interest further underscores the challenges facing the company in attracting investor capital.

Stock Performance: Severe Underperformance Across Timeframes

Megri Soft's stock performance has been dismal across most relevant timeframes. The year-to-date decline of 47.65% significantly underperforms the Sensex's 6.56% gain, resulting in negative alpha of 54.21 percentage points. Over the past year, the stock has lost 28.21% whilst the broader market gained 4.74%, reflecting investor exodus as fundamentals deteriorated.

The three-year performance is equally concerning, with the stock declining 7.86% against the Sensex's robust 34.74% gain. The stock's beta of 1.50 indicates high volatility, amplifying losses during market downturns whilst failing to capture proportionate gains during rallies. The current bearish technical trend, which began on November 10, 2025, adds further pressure.

Investment Thesis: Multiple Red Flags Outweigh Limited Positives

The investment case for Megri Soft is fundamentally challenged across all critical parameters. The company's below-average quality rating stems from weak return ratios, persistent revenue decline, and structural inefficiencies. The very expensive valuation grade reflects pricing that bears no relation to underlying business performance or growth prospects.

The flat financial trend indicates stagnation at best, whilst the bearish technical trend suggests continued selling pressure. The proprietary Mojo score of 21 out of 100 places the stock firmly in "Strong Sell" territory, reflecting the confluence of negative factors across valuation, quality, fundamentals, and technicals.

Key Strengths & Risk Factors

Outlook: Critical Monitoring Points

The path forward for Megri Soft requires urgent strategic intervention to arrest revenue decline and improve capital efficiency. Without demonstrable progress on these fronts, the current valuation premium will likely continue to compress, potentially leading to further downside. Investors should monitor quarterly revenue trends closely, as sustained contraction would signal deeper structural issues requiring more drastic remedial action.