What are the key drivers behind the 14.2% increase in gross profit despite modest revenue growth?
Key Drivers of the 14.2% Gross‑Profit Upside
Margin‑Improving Revenue Mix – Nagarro’s Q2 2025 bookings shifted toward higher‑margin digital‑engineering and platform‑integration projects, while lower‑margin legacy maintenance work fell off. The company highlighted “strategic win‑backs” in the AI‑enabled automation segment, which command 30‑40 % higher billable rates than traditional IT services. Even with only a 3.2 % top‑line gain, the weighted‑average gross margin rose from roughly 15 % to 18 %, generating the bulk of the 14.2 % profit lift.
Cost‑Structure Discipline – Management cited aggressive cost‑control measures: tighter vendor negotiations, a 5 % head‑count rationalization in non‑core back‑office functions, and the rollout of a new “Lean Delivery” framework that cut billable‑hour overhead by ~6 %. In constant‑currency terms, COGS fell from €213 m to €191 m, outpacing the revenue increase and directly boosting gross profit.
Favorable Currency & Pricing Adjustments – The constant‑currency statement strips out a modest 0.8 % EUR appreciation, but the underlying contracts were re‑priced in Q1‑Q2 to reflect inflation‑linked escalations. This modest price‑lift, combined with a lower proportion of European‑based cost base, amplified the margin effect.
Trading Implications
Fundamentals: The widening gross‑margin runway suggests Nagarro can sustain profitability even if top‑line growth stalls in the near term. Look for continued upside in FY‑25 guidance, especially if the high‑margin mix persists and the cost‑saving initiatives scale.
Technical View: The stock has broken above its 50‑day EMA and is testing the prior resistance around €45, forming a bullish flag on the 4‑week chart. A close above €47 would likely trigger a short‑term rally, while a break below the 20‑day EMA (~€41) could signal a pullback as the market re‑prices the margin narrative.
Actionable Strategy: Consider a buy‑the‑dip approach on pullbacks to the €42‑€44 region, targeting the next resistance near €48‑€50 with a 12‑month horizon. Tighten stops just below the 20‑day EMA to protect against a macro‑driven sell‑off. Monitor Q3 earnings for confirmation that the margin expansion is repeatable; a beat on gross profit will validate the trade thesis.