Fractal Analytics (FRACTAL IN) – Q3FY26 Result Update – Growth momentum continues, well positioned for platform & AI led transition – BUY

The revenue performance (+5.0%/14.0% CC QoQ/YoY) was tad below our estimates, attributed to softness in CPG and TMT verticals. The softness in CPG was macro-oriented, while the weakness in TMT was more structural and client specific. Otherwise, ex-TMT (~70% of revenue) the growth looks encouraging across other verticals (up ~27%+ YoY). Fractal.ai (98% of revenue) grew at a healthy pace (~7.7%/20.9% QoQ/YoY), while segmental margin expansion (+170bps QoQ) looks even more encouraging. However, the sequential softness in Fractal Alpha (-13.3%/+29% QoQ/YoY) attributed to a consol margin dilution of ~50bps QoQ. The company is pivoting from traditional way of billing to output based model, although it contributes marginal portion to the overall billings. We believe, as more products (Cogentiq/Qure.ai) get anchored around client ecosystem, it would make more relevant for Fractal to move away from traditional billing. The elevated NRR (115% 9MFY26), graduating 3 potential accounts to higher client bucket, and robust hunting efforts (added 5 MWC QoQ) should drive growth expansion going forward. On the margins, the AI-led R&D activities should continue to weigh on margins, while benefits achieved through Fractal Alpha would be gradual and provide some respite in FY27E and FY28E. We expect Fractal Alpha to breakeven by late FY27E and start contributing to Consol margins. We are revising our USD revenue estimates (FY27E/FY28E) downward by 100bps/80bps to 18.1%/18.7% YoY, while keeping our EBTITDA margins largely unchanged. Currently, the stock trades at 18x/14x EV/EBITDA FY27E/FY28E. We assign 20x (earlier 22x) EV/EBITDA to FY28E, arriving at a target price of Rs. 1,110. Retain BUY.