- Prabhudas Lilladher initiates coverage with a BUY and a 40% upside target of Rs1,260.
- Valuation sits at 22x FY28E EV/EBITDA, still cheap relative to peers (≈15.1x FY28E EV/EBITDA for the broader market).
- Revenue CAGR of ~27% over a decade, with net revenue retention (NRR) above 120% and 98% client stickiness.
- EBITDA margin slated to climb from ~13% in FY25 to >20% by FY28 through head‑count decoupling and SaaS‑driven Alpha revenue.
- Risks center on escalating R&D and sales‑&‑marketing spend as new Alpha products scale.
You’ve missed the AI analytics surge that could supercharge your portfolio.
Why Fractal Analytics’ 22x EV/EBITDA Signals a Buying Opportunity
Enterprise‑wide analytics is no longer a nice‑to‑have; it is the nervous system of digital transformation. Fractal Analytics sits at the core of this shift, delivering AI‑powered decision tools to Fortune‑500 firms. The research house’s 22x EV/EBITDA multiple for FY28E may look high at first glance, but when you unpack the growth engine it becomes a relative discount. The broader AI‑software sector trades at roughly 30‑35x EV/EBITDA, while Fractal’s projected multiple of 15.1x on a forward basis reflects a 55% margin premium to the market average. In essence, you are paying for a company that is already delivering higher earnings yield while still in the early stages of its SaaS transition.
How Fractal’s Revenue Engine Defies Industry Headwinds
Over the past ten years Fractal has posted a 27% compound annual growth rate (CAGR) in USD revenue, a pace that outstrips the global analytics market’s 12‑15% CAGR. Two metrics illustrate the durability of this growth. First, client retention sits at 98%, meaning almost every contract is renewed—a rarity in a sector where churn often exceeds 10%. Second, net revenue retention (NRR) exceeds 120%, indicating that existing customers are not just staying, they are buying more—through cross‑sell, up‑sell, and moving into higher‑value buckets (USD 20 million+). The top‑tier accounts alone have delivered a 20%+ USD revenue CAGR from FY23 to H1 FY26, underscoring the flywheel effect of deeper relationships.
Margin Expansion Blueprint: From 13% to 20% EBITDA
The upcoming margin lift is the centerpiece of the investment thesis. Fractal plans to decouple revenue from head‑count growth, a strategy that has already reduced the employee‑to‑revenue ratio by 15% year‑over‑year. Simultaneously, the company is narrowing ESOP (employee stock option) expense, which has historically inflated operating costs. Most importantly, the Alpha platform—a SaaS‑centric suite—generates higher‑margin recurring revenue. SaaS models typically enjoy gross margins above 70% because the incremental cost of serving an additional customer is minimal. By shifting the revenue mix toward Alpha, Fractal expects its EBITDA margin to rise from roughly 13% in FY25 to over 20% by FY28, delivering a 44.5% CAGR in PAT (profit after tax) over the same horizon.
Risks: R&D & S&M Spend Could Erode Margins
Growth does not come for free. As Fractal rolls out new Alpha modules, research‑and‑development (R&D) and sales‑and‑marketing (S&M) spend are projected to climb to 18‑20% of revenue. If these investments fail to translate into proportional sales, the margin expansion narrative could stall. Moreover, the company’s heavy reliance on a few mega‑clients introduces concentration risk; a loss of a top‑10 account could shave several percentage points off revenue growth. Finally, currency volatility—most revenue is booked in USD while expenses are INR‑denominated—adds a layer of earnings uncertainty, especially if the rupee weakens further.
Investor Playbook: Bull vs. Bear Cases
Bull Case: The company sustains its 27% revenue CAGR, NRR remains above 120%, and Alpha’s SaaS revenue climbs to 45% of total sales by FY28. EBITDA margin hits 22%, driving a forward EV/EBITDA multiple of 12x. Stock trades at a 40% discount to intrinsic value, delivering upside well above the target price.
Bear Case: R&D and S&M spend overshoot expectations, causing EBITDA margin to plateau at 13‑14%. One or two large accounts churn, pulling NRR below 110% and slowing top‑line growth to sub‑15% CAGR. The market re‑prices the stock to a FY28 EV/EBITDA of 18x, eroding the upside to below 10%.
In summary, Fractal Analytics offers a rare blend of high‑growth, high‑margin fundamentals wrapped in an attractive valuation. If you can tolerate the near‑term spending risk, the upside potential—driven by margin expansion and a sticky client base—makes the BUY rating compelling for forward‑looking portfolios.