Rising AI pressure, weak Q3 performance weigh on Capillary shares – News Air Insight

ET Intelligence Group: The stock of Capillary Technologies India has lost 35% from its peak three months ago, including 15% drop since February 6 when it declared the December quarter performance. The company, which helps global clients improve customer engagement and rewards programmes through a software-as-a-service (SaaS) platform, faces the threat of revenue and profit contraction amid the rising capabilities of artificial intelligence (AI) models. Additionally, its muted December quarter performance, marked by a 30% fall in net profit amid higher depreciation and non-operating costs, failed to provide assurance to investors.

According to company management, AI-related disruptions will likely help in expanding its scope in the areas of analytics and campaign management. It also expects the impact of the AI shift to be limited as the company employs a ledger approach, which is deeply integrated with the client systems and involves high platform-switching costs.

Incorporated in 2012, the firm provides SaaS products and solutions to enterprises globally. Some of the brands that the company works with are Puma, Asics, Abbott Singapore, Domino’s, Indigo and United Colors of Benetton. North America is its biggest market, contributing 57% to revenue in FY25.

In the ledger approach, the data and the logic used while maintaining the information on loyalty points stays on the company’s software platforms thereby making the client interactions sticky. In addition, its pricing model is based on number of transactions and number of users and not on the number of call centre agents or salespersons – the latter approach is at a higher risk as AI automates these roles.

In a post-earnings call, the management highlighted that 60% of its costs are fixed. Hence, when the business is going strong, these costs grow at a slower pace than revenue, improving profitability. For Capillary, the operating margin before depreciation and amortisation (EBITDA margin) has gradually expanded to 13% in the first nine months of FY26 from FY23 when it had posted an operating loss.

The company added 12 clients in the first nine months of FY26 and reported an order book of Rs 66 crore compared with Rs 53 crore in the year-ago period. As a part of its inorganic strategy, capillary tends to buy its competitors out, which helps in migrating the existing customers onto new products thereby reducing the risk of losing clients. On Tuesday, it acquired SessionM, a loyalty and rewards business from Mastercard for $20 million.

At Thursday’s closing price of ₹511, the stock was traded at nearly six times annualised nine-month revenue till December 2025. The recent fall in the stock price has reduced the price-sales (P/S) multiple from nearly 10 at the time of its IPO in November 2025. While the company has shown revenue traction, investors will keenly track the trend in profit and margin. In the short term, the stock is expected to stay under pressure and continue trading below its IPO price of ₹577 given the negative sentiment towards the technology sector.