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Strong margin performance offsets TMT weakness

Fractal’s Q4 performance was mixed, with rev. growth of 3.7% QoQ in INR terms materially below our estimate of 8.3%, while EBITDA margin expanded sharply by 530 bps QoQ, ahead of our est. of 260 bps improvement. The rev. miss was largely attributable to weakness in the Fractal.ai business, particularly within the TMT vertical, which declined sharply by 14% QoQ, attributed to client-specific issues. Ex-TMT company reported strong growth of 27.5% YoY in FY26 in INR, validates healthy growth within other pockets. Further, the Alpha segment (~3% of revenue) continues to scale with losses steadily narrowing, aided by growing mix of IP-led and license-linked revenues through Asper.ai and Cogentiq. Management remains confident of robust medium-term growth, driven by accelerating enterprise AI adoption which will expand Fractal’s addressable opportunity. On the margins front, the focus is to drive FPP/output/outcome-based constructs from currently ~40% to ~60% of revenue over the next three years. At the same time, unit economics played out strongly in FY26, revenue per billable FTE up 5% YoY which gives confidence to drive better margins for FY27E/FY28E. However, given Q4FY26 revenue miss and challenges in the TMT segment, we reduce our FY27E/FY28E consol. rev. growth estimates to 16.4%/16.9% from 21.5%/22.7% earlier. However, we raise our EBITDA margin estimates to 17.0%/18.0% from 15.9%/16.9%, driven by strong Q4 margin performance. We are also narrowing losses from associates for FY27E/FY28E, given Qure.ai reaching a steady state. We value the company at 20x EV/EBITDA to arrive at a target price of INR 1,040 and downgrade the stock to HOLD (BUY earlier).

Revenue:

In INR terms, revenue stood at Rs. 8.86 bn, up 17.0% YoY but below our estimate of Rs. 9.25 bn, driven primarily by the Fractal.ai segment (~98% of revenue), which grew 3.4% QoQ & 17.1%. Fractal Alpha reported revenue of Rs. 244 mn, compared to Rs. 214 mn in Q3FY26. Within the Fractal.ai segment, YoY growth was driven by HLS, BFSI and CPG, while the TMT segment declined due to certain client-specific issues.

Margin:

Operating margin performance was strong in Q4FY26, with EBITDA margin at 20.3%, up 530 bps QoQ and 340 bps YoY, driven by gross margin expansion (+47 bps YoY), lower SG&A expenses (+140 bps YoY), and one-time benefits from a UK grant and variable pay adjustments (+147 bps YoY). Gross margin expansion was aided by improving engagement mix toward output-based contracts, pricing gains, productivity improvements, and rupee depreciation benefits, partly offset by annual wage hikes.

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