eClerx hits upper circuit as analysts raise target price on expectations of recovery in Q2

ET Intelligence group: EClerx, a business process management company, gained 20% on Thursday morning after analysts raised its target price-earnings (P/E) multiple, citing recovery in operations. While reporting a steep fall in revenue and profit for the June quarter on Wednesday after market hours, the company hinted at a revival starting from the September quarter. In addition, it completed share buyback worth Rs 109.5 crore in July which resulted in pruning 5.7% of paid up shares. This should improve earnings per share in the subsequent quarters keeping other parameters constant.

Despite a sharp impact of the COVID-19 pandemic on revenue and profit, the company was able to improve profitability in the form of operating margin (EBIT margin) by controlling sales and distribution costs and by lowering depreciation and amortisation. It also focused on cash conservation.

The company’s revenue fell by 6% sequentially to $ 44.8 million in the June quarter as the pandemic severely affected its major markets including the US, which contributed 71% to revenue and Europe, which accounted for 23% of the revenue. The fall was lower in the rupee terms due to its depreciation against the major currencies during the quarter. Revenue fell by 4.1% sequentially to Rs 336.6 crore while net profit dropped by 6.5% to Rs 51.8 crore. The operating margin improved by 160 basis points to 22.3%. Cash and equivalents improved to Rs 808.1 crore from Rs 528.7 crore in the year-ago quarter, which may offer solace to investors.

Another positive was that the number of days for which sales was outstanding (DSO) contracted to 83 from 88 in the prior quarter reflecting improved collection. The company also retained its seat count to 9,601 for the third consecutive quarter.

At the upper circuit price of Rs 620.5 on Thursday, the stock was traded at a trailing P/E multiple of 9.8. In a report, brokerage Edelweiss Securities raised the 12-month target price of the stock to Rs 1,075 from the earlier target of Rs 767 and increased the valuation multiple to 14 from 10.


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