HDFC Securities is bearish on eClerx Services has recommended sell rating on the stock with a target price of Rs 1085 in its research report dated November 02, 2017.
HDFC Securities' research report on eClerx Services
eClerx Services posted muted numbers, largely inline with our estimates. Revenue came in at USD 48.4mn, -1.8% QoQ CC (USD 47.8mn est.), as growth in the emerging accounts (USD 1.4mn QoQ) was offset by a decline in Top-10 accounts (USD 1.8mn QoQ). Top accounts’ growth was impacted by revenue decline in a large US client (within top-6 and at >USD 5mn annual rev rate). EBIT% was lower by 163bps QoQ at 25.2%, impacted by an increase in onshore delivery and lower offshore utilisation (-230bps impact). While the decline in growth is behind the company, based on an improved pipeline and bottoming-out of large accounts, we believe that challenges persist in the form of (1) Operational re-calibration of business (onshore build-up), (2) Limited growth outlook with shorter project duration resulting in a churn in the portfolio, and (3) Continuity of automation impact, especially in financial services and the cable division. Management alluded to revenue growth in 2HFY18 over 1HFY18.
We expect revenue/EPS growth at 7/2.5% CAGR over FY17-20E, factoring USD revenue growth of 1.0/9.9/10.2% and EBIT% at 26.9/27.6/27.7% for FY18/19/20E, respectively. Our negative view on eClerx is substantiated by sub-par industry growth (EPS CAGR of 2.5% vs ~12%) and premium valuations (>10%). Maintain SELL with a TP of Rs 1,085, 12x Sep19E EPS.
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