Published on 17/02/2017 3:29:34 PM | Source: Reliance Securities Ltd

Reduce eClerx Services Ltd For Target Rs.1,315.00 - Reliance Sec

Posted in Broking Firm Views - Long Term Report | #Eclerx Services Ltd #IT Sector #Broking Firm Views Report #Reliance Securities Ltd


Disastrous Performance on All Counts

eClerx Services (eClerx) has delivered a disastrous performance in 3QFY17 with below par numbers on all key parameters. Revenue declined by 3.5% QoQ in USD terms (-2.6% QoQ in CC terms) to $47.2mn (4.4% below our estimate). EBIT margin nosedived by 620bps QoQ (643bps below our estimate), which resulted in 11.5% QoQ crash in net profit to Rs860mn (15.6% below our estimate). Decline in gross profit margin (falling below 50% for the first time ever owing to higher employee cost and onsite contractors) drove sharp fall in EBIT margin. This reflects continuing challenges on revenue front, and the key issues – rising automation, higher in-sourcing initiatives by clients and M&A activity – are likely to persist at least till 1QFY18E .

 

Challenging Environment, Automation Continue to Drag Growth

Revenue declined by 3.5% QoQ to $47.2mn (-2.6% in CC terms) in 3QFY17, marking the 4th successive quarter of QoQ de-growth (2nd successive quarter of YoY decline) and the lowest absolute revenue in last 6 quarters. eClerx faced issues from 3 top-10 clients – one in Financial Services, one in Digital and one in Cable – which led to a major part of the revenue decline.

From clients’ perspective, revenue from Top-10 clients declined by 1.4% QoQ, while revenue from emerging clients plummeted by 9.7% QoQ. Notably, this marks the 4th successive quarter of QoQ drop from Top-10 clients and 2nd consecutive quarter of decline from emerging clients. Even on YoY basis, revenue from emerging clients dipped by 7.4%. Ambiguity over proportion of revenue prone to risk from automation continues to remain a key concern. Capex remained low at Rs38mn in 3QFY17 (vs. Rs69mn in 2QFY17), taking total capex to Rs168mn in 9MFY17 (vs. Rs401mn in 9MFY16). Attrition declined to 33.1% in 3QFY17 from 41.3% in 2QFY17, one of the few bright spots in 3QFY17.

 

Outlook & Valuation

Amidst a challenging business environment, eClerx’s business outlook is likely to remain subdued at least till 1QFY18E. Poor quarterly performance on margin front is a major cause for concern. We have downwardly revised our revenue, EBIT margin and EPS estimates for FY18E by 7%, 446bps and 19%, respectively. Consequently, we expect an EPS decline in FY18E. We believe that the stock should not command a higher multiple owing to the above factors and downgrade our recommendation on the stock to REDUCE from HOLD with a revised Target Price of Rs1,315 (from Rs1,450 earlier).

 

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