Saksoft Q3 FY26: Margin Expansion Drives Strong Profit Growth Despite Technical Weakness

The quarter showcased the company's operational excellence with operating margins expanding to 19.58% from 17.08% a year ago, whilst revenue climbed 20.07% year-on-year to ₹258.49 crores. Despite these strong fundamentals, the stock has entered bearish technical territory, creating a stark disconnect between operational performance and market sentiment that warrants careful investor scrutiny.

The September quarter results underscore Saksoft's ability to scale operations profitably, with PAT margins improving to 13.92% from 12.15% in the corresponding period last year. This margin expansion comes despite elevated employee costs, which rose to ₹128.81 crores, reflecting strategic investments in talent acquisition to support the company's growth trajectory. The sequential profit growth of 11.19% quarter-on-quarter demonstrates consistent momentum beyond mere year-on-year comparisons.

Financial Performance: Margin Excellence Amidst Revenue Momentum

Saksoft's Q3 FY26 financial performance reveals a company firing on multiple cylinders. Revenue of ₹258.49 crores represents the seventh consecutive quarter of sequential growth, with the 20.07% year-on-year expansion significantly outpacing the company's five-year sales CAGR of 21.28%. More impressively, the quarter-on-quarter revenue growth of 3.78% demonstrates sustained momentum despite a challenging global IT services environment.

The standout feature of the quarter was the remarkable operating margin expansion. Operating profit (excluding other income) surged to ₹50.62 crores, yielding a margin of 19.58%—a substantial 250 basis points improvement over the 17.08% recorded in Q3 FY24. This margin expansion is particularly noteworthy given that employee costs increased 28.14% year-on-year to ₹128.81 crores, suggesting that the company has successfully leveraged its workforce investments through improved productivity and higher-value project execution.

The profit trajectory has been equally impressive. Net profit of ₹35.97 crores marks a 37.50% year-on-year surge and an 11.19% sequential improvement, reflecting both operational leverage and effective cost management. The PAT margin of 13.92% represents a 177 basis points improvement over the prior year quarter, demonstrating the company's ability to translate top-line growth into bottom-line expansion. Other income contributed ₹6.26 crores in the quarter, though the core operational profitability remains robust even excluding this element.

On a half-yearly basis for H1 FY26 (April-September 2025), the company has posted consolidated revenue of ₹507.56 crores and net profit of ₹68.32 crores, representing year-on-year growth rates of 21.94% and 31.68% respectively. This sustained performance across multiple quarters reinforces the structural strength of the company's business model rather than one-off gains.

Operational Excellence: Capital Efficiency Drives Superior Returns

Beneath the headline numbers lies a story of exceptional capital efficiency that distinguishes Saksoft from many peers in the mid-cap IT services segment. The company's average Return on Equity (ROE) of 19.08% places it firmly in the "good" category for profitability, whilst the average Return on Capital Employed (ROCE) of 32.33% demonstrates truly exceptional efficiency in deploying capital. These metrics are particularly impressive considering the company operates with minimal leverage, boasting an average net debt-to-equity ratio of -0.19, effectively making it a net cash company.

The balance sheet strength provides Saksoft with strategic flexibility. Shareholder funds stood at ₹619.10 crores as of March 2025, up from ₹505.43 crores a year earlier, reflecting healthy retained earnings accumulation. Long-term debt of ₹32.61 crores as of March 2025 represents a modest increase from ₹7.27 crores in the previous year, likely deployed for strategic investments, yet remains well within manageable limits with a debt-to-EBITDA ratio averaging just 0.27.

The company's five-year EBIT growth CAGR of 24.39% exceeds even its impressive sales growth CAGR of 21.28%, indicating improving operational leverage as the business scales. The sales-to-capital-employed ratio of 1.41 demonstrates reasonable asset turnover, though there remains scope for further improvement as the company optimises its capital base.

From an operational standpoint, the recent quarter's performance suggests that Saksoft is successfully navigating the dual challenges of wage inflation and competitive pricing pressures. The ability to expand margins whilst investing in talent acquisition points to either favourable contract mix shifts toward higher-value services, improved utilisation rates, or successful offshore leverage—likely a combination of all three factors.

Industry Context: Navigating IT Services Headwinds

Saksoft operates in the highly competitive Computers - Software & Consulting sector, where companies face ongoing challenges from pricing pressures, talent costs, and evolving client demands. The broader Indian IT services sector has experienced mixed fortunes over the past year, with large-cap players reporting cautious client spending in discretionary areas whilst demand for digital transformation and cloud services remains robust.

The company's performance must be viewed against this backdrop. Whilst Saksoft's 20.07% year-on-year revenue growth in Q3 FY26 appears strong in absolute terms, it represents a moderation from the exceptional growth rates witnessed in earlier periods. The five-year sales CAGR of 21.28% positions the company as a consistent growth performer, though sustaining such rates becomes progressively challenging as the revenue base expands.

One concerning aspect is the stock's recent underperformance relative to its sector. Over the past year, Saksoft has declined 19.03% whilst the broader Computers - Software & Consulting sector fell 13.57%, resulting in a 5.46 percentage point underperformance. This sector-relative weakness suggests that market participants harbour concerns specific to Saksoft beyond general IT services headwinds, possibly related to client concentration, geographic exposure, or competitive positioning.

Peer Comparison: Valuation Discount Reflects Size Constraints

Saksoft's positioning within its peer group reveals both relative strengths and the challenges inherent in its market position. The company's P/E ratio of 18.34 times trailing earnings represents a substantial discount to the sector average P/E of 27 times, suggesting that the market assigns a lower valuation multiple to Saksoft's earnings stream compared to the broader industry.

However, this valuation discount appears unjustified when examining fundamental quality metrics. Saksoft's ROE of 19.08% significantly exceeds the peer group average of approximately 13%, demonstrating superior profitability and capital efficiency. Only Network People Services, trading at an astronomical 88.72 times earnings, reports a higher ROE of 44.26%, though that valuation multiple appears unsustainable.

The company's Price-to-Book ratio of 3.27 times sits slightly above the peer average, reflecting the market's recognition of the company's asset-light business model and strong return profile. Saksoft's net cash position (debt-to-equity of -0.19) compares favourably to most peers, providing financial flexibility that isn't fully reflected in the valuation multiple.

One area where Saksoft lags peers is dividend yield. At 0.49%, the dividend yield trails the sector, with Protean eGov offering 1.64%. The company's dividend payout ratio of just 8.38% suggests significant scope for increased shareholder returns, though management appears to be prioritising capital retention for growth investments—a strategy that may prove prudent given the company's strong ROCE.

Valuation Analysis: Attractive Entry Point Amidst Technical Weakness

Saksoft's current valuation presents a compelling case of fundamental value disconnected from technical price action. At ₹166.60 per share, the stock trades at a P/E ratio of 18.34 times trailing twelve-month earnings, representing a 32% discount to the sector average P/E of 27 times. This valuation gap appears particularly stark given the company's superior ROE of 19.08% and robust five-year earnings CAGR.

The stock's 34.45% decline from its 52-week high of ₹254.15 has pushed valuation metrics to historically attractive levels. The company's proprietary valuation grade recently shifted to "Attractive" from "Fair" on October 1, 2025, reflecting the improved risk-reward proposition at current prices. The EV/EBITDA multiple of 12.70 times and EV/EBIT of 13.75 times appear reasonable for a company delivering consistent double-digit growth with improving margins.

The PEG ratio of 0.64 suggests that Saksoft offers growth at a reasonable price, with the P/E multiple not demanding excessive premium relative to the company's earnings growth trajectory. Conventional wisdom suggests PEG ratios below 1.0 indicate potentially undervalued growth stocks, though this metric should be interpreted alongside other fundamental and technical factors.

The Price-to-Book ratio of 3.27 times may appear elevated on an absolute basis, but it's justified by the company's ROE of 19.08%, which substantially exceeds the cost of equity for most investors. A simple valuation framework suggests that companies earning ROEs above 15% can justify P/BV multiples in the 3-4 times range, placing Saksoft within reasonable bounds.

Shareholding Pattern: Stable Promoter Base, Limited Institutional Interest

Saksoft's shareholding pattern reveals a company with strong promoter commitment but limited institutional participation—a characteristic common among small-cap IT services firms. Promoter holding has remained rock-solid at 66.68% over the past three quarters (June 2025 through December 2025), with a marginal increase of 0.04 percentage points in March 2025 demonstrating continued confidence in the company's prospects.

The key promoters—Sak Industries Pvt Ltd (45.72%) and Aditya Krishna (20.96%)—maintain substantial stakes with zero pledging, eliminating concerns about forced selling or governance issues that sometimes plague promoter-heavy companies. This clean shareholding structure provides stability and aligns promoter interests with minority shareholders.

However, the institutional participation paints a less encouraging picture. Foreign Institutional Investor (FII) holding has gradually declined from 2.86% in December 2024 to 2.23% in December 2025, with a notable 0.50 percentage point drop in the September 2025 quarter alone. This exodus of foreign capital coincides with the stock's technical breakdown and suggests that sophisticated institutional investors have been reducing exposure.

Mutual fund participation remains virtually non-existent at 0.00% as of December 2025, having briefly touched 0.05% in March 2025 before exiting completely. The absence of domestic institutional investors—insurance companies hold 0.00% and other DIIs just 0.14%—limits the stock's liquidity and potentially contributes to higher volatility. The non-institutional holding of 30.96% represents largely retail investors who may exhibit different behavioural patterns during market stress.

Stock Performance: Severe Technical Correction Overshadows Fundamentals

Saksoft's stock price performance presents a tale of two narratives: exceptional long-term wealth creation marred by severe recent underperformance. Over a five-year horizon, the stock has delivered staggering returns of 501.70%, vastly outpacing the Sensex return of 64.00% and generating alpha of 437.70 percentage points. This long-term outperformance reflects the company's consistent operational execution and earnings compounding.

However, the recent performance paints a starkly different picture. The stock has declined 19.03% over the past year whilst the Sensex gained 5.37%, resulting in negative alpha of 24.40 percentage points. This underperformance has accelerated in recent months, with the stock falling 19.09% over six months, 14.89% over three months, and 16.07% over the past month alone. The single-day decline of 4.77% on February 2, 2026, whilst the Sensex rose 1.17%, underscores the selling pressure.

From a technical perspective, the stock has decisively broken down. Trading at ₹166.60, shares currently sit 34.45% below the 52-week high of ₹254.15, though still 39.36% above the 52-week low of ₹119.55. The stock trades below all key moving averages—5-day (₹173.53), 20-day (₹182.11), 50-day (₹192.74), 100-day (₹196.64), and 200-day (₹197.82)—a configuration that typically signals sustained downward momentum.

The technical trend officially turned "Bearish" on January 22, 2026, at ₹171.90, deteriorating from "Mildly Bearish" in the prior period. Multiple technical indicators flash warning signals: MACD shows bearish readings on both weekly and monthly timeframes, Bollinger Bands indicate mildly bearish conditions, and the KST oscillator confirms the bearish trend. With a beta of 1.50, Saksoft exhibits 50% higher volatility than the broader market, amplifying both gains and losses.

Investment Thesis: Quality Company at Crossroads

Saksoft's investment case rests on four key pillars, each pulling in different directions to create a complex risk-reward proposition. The company's valuation appears attractive at current levels, with the stock trading at significant discounts to both historical multiples and sector peers. The quality of the underlying business remains average but acceptable, supported by consistent profitability, minimal leverage, and strong return ratios. However, the financial trend has flattened in recent quarters despite headline growth, whilst technical indicators flash unambiguous warning signals.

The company's overall Mojo Score of 48 out of 100 places it firmly in "SELL" territory, downgraded from "HOLD" on October 7, 2025. This score reflects the proprietary algorithm's assessment that despite attractive valuation, the combination of flattening financial momentum and bearish technical setup outweighs the fundamental value proposition at current junctures.

For existing shareholders, the decision framework revolves around conviction in the company's ability to reaccelerate growth and restore technical momentum versus the opportunity cost of capital deployed in a declining stock. The 37.50% year-on-year profit growth in Q3 FY26 provides some reassurance that the underlying business remains healthy, but the market's refusal to reward this performance suggests deeper scepticism about sustainability or concerns about factors not yet visible in reported numbers.

Key Strengths and Risk Factors

Outlook: What to Monitor

The coming quarters will prove critical in determining whether Saksoft's current stock price represents a value opportunity or a value trap. Several key factors warrant close monitoring to assess whether the company can reverse its technical decline and restore investor confidence.

Investors should pay particular attention to the December 2025 quarter results (Q3 FY26 results are for September 2025 quarter), which will provide insights into whether the strong September quarter performance can be sustained through the typically seasonally strong period. Management commentary on order book, client additions, and pipeline visibility will prove crucial in assessing whether the current financial trend classification of "Flat" represents temporary consolidation or the beginning of a more concerning deceleration.

The technical setup suggests that any recovery attempt will face significant overhead resistance at the 20-day moving average (₹182.11), 50-day moving average (₹192.74), and particularly the 200-day moving average (₹197.82). A decisive reclaim of the 200-day moving average on sustained volumes would represent an important technical milestone, though such a move appears unlikely in the near term given current momentum indicators.