ESDS Software Solution Ltd. shares experienced a continued decline on Monday, falling as much as 5% on the BSE. This downturn follows a significant rally since its market debut earlier this month, prompting Choice Institutional Equities to assign a 'Sell' rating on the stock.
The data-centre and artificial intelligence (AI) infrastructure-focused company, ESDS, was listed on September 4. Since then, it has seen a remarkable surge of 289.23% from its initial public offering (IPO) issue price of ₹429 per share. This performance positioned ESDS as India's second-best new listing in terms of returns over its first month, trailing only Paras Defence and Space Technologies Ltd., which recorded a 430% rise.
Brokerage Cites Near-Term Risks, Sets Target
Amid the sharp ascent in the stock's value, Choice Institutional Equities maintained its target price for ESDS at ₹1,550, while simultaneously issuing a 'Sell' rating. The brokerage indicated that despite a positive long-term outlook for the company, the immediate risk-reward balance has become less favorable.
"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," Choice stated in its report.
Long-Term Opportunity vs. Execution Challenges
Choice Institutional Equities remains optimistic about ESDS's long-term prospects, particularly in areas such as sovereign cloud, AI infrastructure, and the growing demand for Graphics Processing Units (GPUs). The brokerage highlighted ESDS's substantial domestic order book, valued at approximately ₹3,000 crore, and an international pipeline exceeding 50,000 GPUs.
However, the firm also pointed to several critical variables and potential challenges, including:
- Pipeline conversion rates
- Deployment timelines for new projects
- Overall utilization of its infrastructure
Furthermore, Choice noted that a rapid expansion in GPU capacity could lead to increased execution demands and significant funding requirements.
First Quarter Financial Performance
For the June quarter, ESDS reported a revenue of ₹133.6 crore. This represented a 20.2% sequential decline but a 7.2% year-on-year (YoY) increase. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) stood at ₹55.9 crore, down 45.5% sequentially but up 6.6% YoY. The EBITDA margin decreased to 41.9% from 61.3% in the preceding quarter.
Profit After Tax (PAT) for the quarter was ₹29.2 crore, marking a 56.8% sequential drop but a 13.8% YoY rise. Choice continues to value ESDS at 18 times its FY28 estimated EV/EBITDA, reiterating its ₹1,550 target price.