Shares of IT consulting and outsourcing multinational company eClerx Services crashed by 12 per cent to hit a more than six-year low on August 5 as HDFC Securities downgraded the stock to sell, after it reported subdued earnings in the June quarter.
The stock has lost 60 per cent of its value in the last 12 months. It hit an intraday low of Rs 506, the lowest level since May 2013, and was quoting at Rs 517, down Rs 60.80, or 10.52 per cent, at 1150 hours IST on BSE.
HDFC Securities downgraded eClerx to sell following margin washout and limited growth visibility.
"eClerx has witnessed USD revenue stagnation (up 0.1 per cent 12-qtr-CQGR) coupled with a structural swing in operating model (shift to onshore) resulting in EBIT margin plummet from 33.5 per cent to 13.8 per cent in the past 12 quarters," it reasoned.
The brokerage remained cautious on high concentration and stagnation of T-10 accounts, shorter duration projects providing limited visibility, and a lower quality of revenue mix. Risks to its thesis include traction in the digital portfolio, and increased off shoring.
"eClerx has lost the plot, we cut EPS estimates by around 16 per cent and P/E to 9x (versus 11x) Jun-21 estimated EPS to arrive at target price of Rs 505," the brokerage said.
The software company reported soft revenue of $50.9 million for quarter ended June 2019, down 0.4 per cent sequentially in constant currency terms (against HDFC Securities' estimates of $52.1 million). The Europe business, which contributed 27 per cent to total revenue, was down 6.1 per cent QoQ on macro challenges in the UK arising from the Brexit mess.
PAT was lower at Rs 39.8 crore (against Rs 59.2 crore in the March quarter), impacted by non-receipt of SEIS benefit. Adjusting for that, PAT is Rs 52 crore (against HDFC Securities' estimates of Rs 55 crore).
eClerx's EBIT margin hit fresh lows of 13.8 per cent, down 480bps QoQ, primarily impacted by employee cost (up 513bps QoQ) on wage hike, campus hiring and ongoing onshore shift.
Margins benefited from Ind AS 116, the new standard on leases, and adjusting for that tailwind, margin declined a whopping 599bps QoQ.
HDFC Securities said shift to onshore is expected to continue. Onshore shift and increase in minimum wages (impact uncertain) will act as near term headwinds to margins, it added.
Onshore headcount as a percentage of total headcount has increased from 3.9 per cent to 7.3 per cent in the past six quarters, but onshore revenue as a percentage of revenue has remained stable (at around 23 per cent) during the same period.
Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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