Shradha AI Technologies Q2 FY26: Profit Momentum Stalls Amid Revenue Contraction

The September quarter results expose a troubling disconnect between top-line performance and profitability. While the company managed to maintain elevated profit margins through increased other income, the sharp 26.53% sequential decline in net sales from ₹6.03 crores to ₹4.43 crores signals potential challenges in the core business. This marks a reversal from the exceptional 96.42% quarter-on-quarter growth witnessed in Q1 FY26, suggesting the prior quarter may have been an anomaly rather than a sustainable trend.

Shradha AI Technologies operates in the highly competitive software and consulting sector, where consistent execution and client acquisition are paramount. The company's volatile quarterly performance pattern—swinging from near 100% growth to 26% contraction within a single quarter—raises concerns about business visibility and revenue predictability.

Financial Performance: Margin Resilience Masks Revenue Weakness

In Q2 FY26, Shradha AI Technologies reported net sales of ₹4.43 crores, declining 26.53% from ₹6.03 crores in the previous quarter but growing 25.14% year-on-year from ₹3.54 crores. The sequential contraction is particularly concerning given the strong 96.42% quarter-on-quarter growth witnessed in Q1 FY26, suggesting significant revenue lumpiness in the business model.

Operating profit excluding other income stood at ₹2.33 crores in Q2 FY26, down 42.75% from ₹4.07 crores in Q1 FY26, with operating margins compressing sharply to 52.60% from 67.50%. This 1,490 basis point margin decline indicates that the revenue contraction was accompanied by deteriorating operational efficiency, likely due to fixed cost absorption challenges on a smaller revenue base.

On a half-yearly basis (H1 FY26), the company reported net sales of ₹10.46 crores, representing 59.69% growth compared to the corresponding period last year. Consolidated net profit for H1 FY26 stood at ₹5.99 crores, up 40.28% year-on-year. While these half-yearly numbers appear encouraging, the sharp sequential decline in Q2 raises questions about the sustainability of this growth momentum.

The company's heavy reliance on other income is a notable red flag. In Q2 FY26, other income of ₹1.31 crores constituted 36.69% of profit before tax, an unhealthy proportion that suggests core operating profitability may be weaker than headline numbers indicate. This dependency on non-operating income has been a persistent feature across recent quarters, with other income ranging between 20-37% of PBT.

Operational Challenges: Weak Returns on Capital

The company's return on equity (ROE) stands at 11.29% on an average basis and 13.26% for the latest period, significantly below industry benchmarks for quality software companies which typically generate ROEs above 20%. This indicates that Shradha AI Technologies is generating relatively weak returns on shareholder capital despite maintaining elevated profit margins.

Return on capital employed (ROCE) paints a similar picture at 9.43% on average and 13.01% for the latest period. For a capital-light software business, these returns are concerning and suggest either inefficient capital deployment or inherent business model limitations that prevent the company from scaling profitably.

The company maintains a debt-free balance sheet with net cash of ₹48.68 crores in investments as of March 2025, representing a significant portion of its ₹87.08 crores in shareholder funds. Whilst zero debt is positive from a financial risk perspective, the low capital efficiency metrics suggest this cash is not being productively deployed to generate adequate returns for shareholders.

Profitability Deep Dive: Margin Dynamics Under Pressure

The company's gross profit margin in Q2 FY26 stood at 81.94%, up from 77.78% in Q1 FY26, indicating strong pricing power or favourable project mix. However, the PAT margin of 59.14%, whilst elevated, benefited significantly from the ₹1.31 crores in other income. Excluding this non-operating income, the underlying business profitability would be considerably lower.

Employee costs rose to ₹1.34 crores in Q2 FY26 from ₹0.95 crores in Q1 FY26, a 41.05% sequential increase that outpaced the 26.53% revenue decline. This inverse relationship between revenue and employee costs suggests either new hiring undertaken before revenue materialised or challenges in workforce productivity and utilisation.

On an annual basis, FY25 results showed net sales of ₹14.00 crores (down 17.6% from FY24) but profit after tax of ₹9.00 crores (up 50% from FY24). The improvement in profitability despite declining sales was driven by significantly higher operating margins (71.4% in FY25 vs 41.2% in FY24) and lower tax incidence. However, the declining revenue trend at the annual level is concerning for a growth-oriented software company.

Industry Context: Underperforming a Challenging Sector

The broader computers, software and consulting sector has faced headwinds in 2025, declining 22.30% over the past year. Shradha AI Technologies has outperformed this sector benchmark with a one-year return of 16.21%, demonstrating relative resilience. However, the stock's 34.25% year-to-date decline in 2025 has erased much of this outperformance, with the stock now trading well below all key moving averages.

The company operates in an intensely competitive landscape dominated by large-cap IT services firms and numerous small players. For a micro-cap company with quarterly revenues in the ₹3-6 crore range, achieving scale and sustainable competitive advantages is particularly challenging. The volatile revenue pattern suggests the company may be dependent on a limited number of large projects or clients, creating concentration risk.

The software consulting business typically requires continuous investment in talent acquisition, technology capabilities, and sales infrastructure to maintain growth momentum. Shradha AI Technologies' modest scale and inconsistent revenue trajectory suggest it may be struggling to make these investments whilst maintaining profitability.

Peer Comparison: Mixed Positioning in Micro-Cap Software Space

Shradha AI Technologies trades at a P/E ratio of 19.14x, positioned in the middle of its peer group. However, its ROE of 11.29% lags significantly behind CapitalNumbers' 28.11% and Dev Information's 15.02%, suggesting weaker profitability and capital efficiency. The company's price-to-book ratio of 2.54x is reasonable but not compelling given the modest return profile.

The company's debt-free status (negative debt-to-equity ratio) is a positive differentiator, providing financial stability that some peers lack. Its dividend yield of 1.65% is the highest in the peer group, offering some income support to investors. However, the combination of mid-tier valuation multiples and below-average returns on equity suggests the market is appropriately pricing in the company's operational challenges.

Valuation Analysis: Premium Pricing for Uncertain Growth

At the current market price of ₹36.49, Shradha AI Technologies commands a market capitalisation of ₹222.42 crores and trades at a P/E ratio of 19.14x trailing twelve-month earnings. Whilst this is below the industry average P/E of 33x, the valuation appears expensive given the company's weak return on equity, volatile revenue trajectory, and uncertain growth outlook.

The company's price-to-book ratio of 2.54x implies the market is willing to pay 2.54 times the book value of ₹14.29 per share. For a company generating ROE of just 11.29%—barely above the cost of equity for most investors—this premium appears difficult to justify. Quality software companies trading at similar P/BV multiples typically deliver ROEs in excess of 20%.

The stock's valuation grade has deteriorated to "Very Expensive" from previous ratings, reflecting the disconnect between valuation multiples and underlying business fundamentals. The PEG ratio of 0.44x might appear attractive on the surface, but this metric is distorted by the lumpy quarterly growth rates and doesn't adequately capture the business quality concerns.

Shareholding Pattern: Stable Promoter Base, Zero Institutional Interest

The shareholding pattern reveals a stable promoter holding of 74.66% with no changes over the past several quarters. Led by Sunil Raisoni (25.13%) and various related entities, the promoter group demonstrates long-term commitment with zero pledging of shares—a positive indicator of confidence and financial stability.

However, the complete absence of institutional investors—zero holdings from FIIs, mutual funds, and insurance companies—is a significant red flag. Institutional investors typically conduct rigorous due diligence before investing, and their absence suggests concerns about the company's business model, governance, or growth prospects. The 25.34% non-institutional holding consists entirely of retail investors, indicating limited professional investor interest.

The lack of institutional participation also implies limited research coverage and market attention, contributing to the stock's high volatility and poor liquidity. For potential investors, this creates additional risk as the absence of institutional buying support could exacerbate downside volatility during market corrections.

Stock Performance: Bearish Trend Reflects Fundamental Concerns

The stock's performance reveals a tale of two periods. Over a two-year horizon, Shradha AI Technologies has delivered exceptional returns of 100.49%, significantly outperforming the Sensex's 29.53% gain with positive alpha of 70.96 percentage points. This period likely captured the company's transition to profitability and initial growth momentum.

However, 2025 has been brutal for shareholders. The stock has declined 34.25% year-to-date, underperforming the Sensex by a massive 41.89 percentage points. The negative alpha across all timeframes from one week to six months indicates consistent underperformance, reflecting growing market concerns about the company's deteriorating fundamentals and uncertain outlook.

From a technical perspective, the stock entered a bearish trend on November 13, 2025, at ₹36.30, and currently trades below all major moving averages (5-day, 20-day, 50-day, 100-day, and 200-day). The 52-week range of ₹30.60 to ₹63.64 shows the stock trading 42.66% below its peak, with immediate support at the 52-week low level. The high beta of 1.50 indicates the stock is 50% more volatile than the broader market, amplifying both gains and losses.

Investment Thesis: Quality and Valuation Concerns Outweigh Growth Potential

The investment case for Shradha AI Technologies rests on several pillars, each requiring careful evaluation. The company operates with zero debt and maintains a strong balance sheet with ₹48.68 crores in investments, providing financial flexibility. The promoter group holds 74.66% with no pledging, demonstrating alignment with minority shareholders. On a half-yearly basis, H1 FY26 revenue growth of 59.69% and profit growth of 40.28% year-on-year appear encouraging.

However, these positives are overshadowed by significant concerns. The company's return on equity of 11.29% is inadequate for a software business and well below peer benchmarks. Quarterly revenue volatility—swinging from +96% growth to -26% contraction—indicates poor business visibility and potential client concentration risks. The heavy reliance on other income (36.69% of PBT in Q2 FY26) masks underlying operational weakness. Complete absence of institutional investors suggests limited professional conviction in the business model.

The valuation appears stretched at 19.14x P/E and 2.54x P/BV for a company generating barely double-digit ROE. The stock's "Very Expensive" valuation grade and declining Mojo score from 70 (Buy) to 43 (Sell) over recent months reflect deteriorating fundamentals. Technical indicators remain bearish with the stock trading below all key moving averages and in a confirmed downtrend.

Outlook: What Lies Ahead

The forward outlook for Shradha AI Technologies remains uncertain. The company needs to demonstrate consistent quarter-on-quarter revenue growth and reduce its dependence on volatile project-based income. Improving return on equity through better capital deployment is critical to justifying the current valuation premium. Without these improvements, the stock faces continued downward pressure as the market reprices growth expectations.