Fractal Analytics (FRACTAL IN) – Q1FY27 Result Update – TMT overhang; staying structurally constructive – Upgrade to ‘BUY’

Fractal’s revenue growth was muted (-0.4% QoQ CC) in Q1 below our estimate of +0.9% QoQ CC, while EBITDA margin declined sharply by 460 bps QoQ (below of our est. of 320 bps QoQ decline). The rev. miss was largely attributable to weakness in Fractal.ai business due to continued softness in TMT vertical (-14% QoQ in USD). Ex-TMT, the company reported decent USD growth of 3.5% QoQ/23.7% YoY in Q1FY27, implying healthy growth within other pockets. Additionally, Q1 had regular seasonality in Alpha segment (~3% of revenue) that resulted in moderate USD growth (7.4% YoY), otherwise Q1 revenue of Asper stood at USD9m (ARR up 59% YoY), should translate into better growth for H2 on hitting renewals. The weakness in TMT is largely behind and should either stabilize or contribute to growth in Q2, while continued momentum in other verticals should support the overall growth for FY27E. On the margins front, the 1-month wage hike impact (75bps) and talent investments (160bps) aggravated additional margin pressure, again Q2 will have residual (2-month) merit increase impact. In its normal business course, H2 tends to have broader margin recovery due to improving business mix and better operating leverage. However, considering Q1FY27 revenue miss and challenges in TMT segment, we reduce our FY27E/FY28E CC rev. growth estimates to 11.3%/16.6% (12.7%/17.0% earlier). However, we maintain our EBITDA margin estimates of 17.0%/18.0%, on anticipation of better H2 execution. We value the company at 19x EV/EBITDA to arrive at a target price of INR 1,010 and upgrade the stock to BUY (ACCUMULATE earlier).