eClerx shares surge 9% on strong Q4 but Nuvama sees upside capped

Shares of eClerx Services rallied over 9 per cent in Monday's trade following its March quarter results. But Nuvama Institutional Equities expects growth for eClerx to remain subdued in the near term due to cut in client spends impacted by weak global macro. It suggested a share price target of Rs 1,670, which suggest a marginal decline over a 52-week high of Rs 1,676.65 hit on May 29.

Nuvama said eClerx's sequential revenue growth of 0.9 per cent compared with Street’s estimate of 1.4 per cent. EBIT margin expanded by 190 bps QoQ to 25.3 per cent, higher than Street’s estimate of 24 per cent. Profit at Rs 132.20 crore was in line with estimate of Rs 129 crore, Nuvama said adding that the IT firm also announced the appointment of Mr. Kapil Jain as Group CEO and MD, to lead its next phase of growth journey.

The Q4 Ebitda margin expanded 210 bps due to lower supply-side pressure and employee cost cuts by the company in advance, in anticipation of a slowdown.

That said, Nuvama expects revenue growth for eClerx to stay under pressure, as clients are looking to cut discretionary spends. Roll-offs in the current quarters were smaller but any higher-than-expected roll-offs can impact growth trajectory, it said.

Inexpensive valuation limits downside potential, Nuvama said. 

The company management expects Q1FY24 to face headwinds as well, with possibility of revenue growth being in the low single digit or even marginally negative. It hoped growth to rebound in H2FY24.

For the March quarter, headcount declined sequentially by 677 — a first decline in last nine quarters.

Offshore voluntary attrition increased 460 bps QoQ and down 1,290 bps YoY — within the company's comfort range. They believe easing supply-side pressure will help maintain FY24 Ebitda margins similar to Q4FY23 (30 per cent).

Nuvama expects margins for eClerx to improve YoY due to lower supply-side challenges. It has revised its FY24 and FY25 EPS estimates by 3.7 per cent-5.4 per cent and maintained its ‘HOLD’ rating on the stock with an increased target of Rs 1,670 from Rs 1620, valuing the stock at 13 times FY24E EPS.

 

Also read: ICICI Lombard shares rally 14% as ICICI Bank to increase stake. Motilal sees stock at Rs 1,400

Also read: BHEL shares at Rs 34 or Rs 85? Here’s are new stock target prices post Q4 results