Shares of ESDS Software Solution Ltd. continued their downward trend on Monday, hitting a 5% lower circuit for the sixth straight trading session. The stock settled at Rs 1,360.15 on the BSE, marking a significant correction from its recent highs.
Despite this recent plunge, ESDS Software has delivered substantial returns to early investors, remaining 217.05% above its initial public offering (IPO) price of Rs 429 per share. The data-centre and artificial intelligence (AI) infrastructure company made its market debut on September 4.
Under Surveillance and Brokerage Concerns
Both the BSE and NSE have placed ESDS Software under the long-term Additional Surveillance Measure (ASM) framework. This regulatory action is designed to alert investors to unusual price movements and heightened volatility, signaling a need for caution.
Amid the stock's sharp rally and subsequent decline, Choice Institutional Equities has assigned a 'Sell' rating on ESDS. The brokerage firm noted that while it holds a constructive long-term view on the company's prospects, the near-term risk-reward balance has become unfavorable.
Choice Institutional Equities stated, "ESDS reported in-line numbers, with the core standalone business remaining stable. However, the delayed Sharon AI deployment pushes the key AI-led revenue contribution from October to November and increases near-term execution risk."
Long-Term Potential and Q1 Performance
Despite the immediate concerns, Choice Institutional Equities remains positive on ESDS's longer-term opportunities. These include growth drivers such as sovereign cloud initiatives, expanding AI infrastructure, and increasing demand for Graphics Processing Units (GPUs). The company boasts a robust domestic order book of approximately Rs 3,000 crore and an international pipeline exceeding 50,000 GPUs.
However, the brokerage highlighted that pipeline conversion, deployment timelines, and asset utilization are crucial variables that could impact future performance, alongside potential execution and funding requirements stemming from a rapid scale-up in GPU capacity.
For the June quarter (Q1), ESDS reported revenues of Rs 133.6 crore, a 7.2% increase year-on-year (YoY) but a 20.2% sequential decline. EBITDA stood at Rs 55.9 crore, up 6.6% YoY, though down 45.5% sequentially, with the EBITDA margin falling to 41.9% from 61.3% in the previous quarter. Profit after tax (PAT) was Rs 29.2 crore, up 13.8% YoY but down 56.8% sequentially.
Choice continues to value ESDS at 18 times its FY28 estimated EV/EBITDA, maintaining a target price of Rs 1,550.