Buy Fractal Analytics Ltd For Target Rs.1,010 by Prabhudas Liladhar Capital Ltd
Assets reusability complements margins improvement
FRACTAL’s FY26 annual report suggests that despite macro uncertainties, its enterprise clients continue to make AI investments to achieve competitive advantage, operational agility and margin expansion. The enterprise stickiness is reflected in NRR (+117%), elevated NPS (78) and steady USD growth (11%/15% YoY) in its top 10/20 accounts in FY26. Fractal.ai revenue growth (+14% YoY in USD) was largely supported by HLS (~19% of revenue), up 59% YoY, while the overhang from TMT (~25% of revenue), which declined ~5% YoY, weighed on overall Fractal.ai revenue. The TMT overhang appears to have largely stabilized, while the momentum in rest of the BUs (ex-TMT 22% YoY in USD) along with a multi-year deal (USD17mn+), with a leading US healthcare enterprise, should support growth in FY27 and beyond. Additionally, the company is promoting the adoption of Cogentiq within enterprise setup to standardize repeatable deliveries, drive productivity and enable greater execution consistency across multiple engagements
Reusable assets (Asper.AI and Analytics Vidhya (AV)) are gaining traction among enterprise clients and are part of the Fractal Alpha segment (up 43% YoY in USD). As per our analysis, Asper.AI and AV reported revenue of INR678mn and INR437mn, respectively, in FY26, with the former reporting negative PAT margin, while the latter reported PAT margin of 7.3%. Although these assets remained loss-making at the PAT level, Fractal Alpha’s overall gross margin has improved by 120bps to 71.1% in FY26. Losses at the PAT level are primarily attributable to continued investments in R&D, with R&D expenses as percentage of revenue increasing by ~400bps YoY. Nevertheless, segmental margin loss narrowed to -35.7% from -40.0% in FY25. The strong revenue growth momentum and improving gross margin further validate the strong operating leverage potential and the ability to recoup the benefits of R&D investments over time. We continue to maintain our positive stance on the stock and retain our ‘BUY’ rating.
Conversations shifting from cost optimization to value generation
* The first wave of AI was heavily concentrated on deriving efficiency through faster work deliveries and at a lower cost. Enterprise conversations are now increasingly shifting toward redesigning the complete business process and functions.
* AI spend has moved into core enterprise budget, and programs are also getting broader instead of limiting to a ‘point solution’ or ‘scope-specific’.
* Fortune enterprises need flexibility in the usage of open source/frontier models and are increasingly partnering with vendors who take outcome accountability and risk ownership.
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