Buy This Small cap IT/ITES Stock For Solid Gains

Sharekhan is betting on the stock of Expleo Solutions for solid gains. Wile the brokerage report has cited gains of 20% from the current levels, the stock has fallen, leaving potential gains of at least 23% from current levels.

Industry to see good growth

According to Sharekhan, specialised testing service market to outpace the traditional testing services market Software testing forms 6% of the total software development budget and has lot of room to grow, considering the rise of agile and DevOps application development methodologies. "As per industry estimates, the size of the software testing market stayed at $43 billion in 2020 and is expected to record a CAGR of 7% over 2020 to 2026," the brokerage has said.

Demand to be major driver for growth

Higher customisation of software and increasing demand for automated application testing services are major drivers for strong growth in specialised testing services (STS). "We believe STS is expected to outgrow the traditional testing services (TTS) market, led by higher demand for next-generation testing (mobile, security, UI/UX, testing of RPA, RPA in testing and AI in testing) services. New-gen testing is expected to post a 13% CAGR over FY2020-FY2026.

Outlook for Expleo getting better

Sharekhan believes that a strong BFSI client base, global delivery capability, and favourable demand tailwinds in the BFSI industry would help the company to boost its revenue growth going ahead. "Further, Expleo Solutions has invested on building an intelligent quality platform that covers automation of the overall agile and DevOps software delivery process, security, performance, environment and data, as well as quality management, and test automation," Sharekhan has said.

Strong Q1 FY 2023 performance

Expleo Solutions Limited's Q1FY23 performance was strong with higher-than-expected USD revenue growth of 9.4% q-o-q and beat in margin. Revenue in rupee terms grew by 12.2% q-o-q and 44.8% y-o-y to Rs. 127 crore, led by strong growth across verticals (expect for cards & payments) and geographies (excluding Europe).

North America revenue increased

"We highlight here that revenue share of North America increased to 12.8% (versus 4.3% in Q4FY22) as revenue contribution of Rs. 8 crore (contributed more than 57% of sequential revenue growth of 12.2%) from acquisition of Lucid Technology," Sharekhan has said.

Investments to help increase non BFSI space

According to the brokerages, these investments would help it increase its presence in non-BFSI domains such as automotive, aerospace, and manufacturing. Management highlighted that the amalgamation of all the Indian Expleo Group entities under Expleo Solutions would enhance the company's new capabilities (engineering services), industry portfolio (aerospace, automobiles, defence, industrial, and media and entertainment), market expansion, cross-selling and sales enhancement.

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Expleo Solutions is well-poised to deliver strong growth in FY2023, given its strong offerings in niche areas, continued new logo additions, healthy deal pipeline, good client mining, and additional revenue from the acquisition. Cash levels of Expleo Solutions stood at Rs. 148 crore, implied 10% of current market capitalisation.

Sharp upside potential of near 23%

Sharekhan saw an upside potential of nearly 20% in the stock in its report. However, the shares of the company have fallen 3%, thus leaving potential for a 23% upside in the stock.