eClerx Services - 3QFY17 Result Update - Disastrous Performance on All Counts - Reliance Securities

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).

Shares of ECLERX SERVICES LTD. was last trading in BSE at Rs.1402 as compared to the previous close of Rs. 1409.15. The total number of shares traded during the day was 1620 in over 257 trades.

The stock hit an intraday high of Rs. 1423 and intraday low of 1400. The net turnover during the day was Rs. 2278612.

Source : Equity Bulls

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