ACCUMULATE eClerx Services Q3FY11 Result Update; Quality delivery stands out; Target: Rs 740

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eClerx Services Ltd.

Quality delivery stands out, retain ACCUMULATE

ACCUMULATE

CMP: Rs 686                                        Target Price: Rs 740

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n     Marginal beat on revenues with operating margins performance coming as a major surprise with margins improving by ~330 bps sequentially (ex one off writebacks)

n     Profits at Rs 360 mn(+30%QoQ, +68.6% YoY) ahead of Emkay est( Rs 296 mn) driven by better than expected operational performance,higher forex hedge gains and lower taxes

n     Increase FY11/12/13E earnings by 6.2/6.5/8.8% to Rs 42.9/52.1/57.7 driven by marginal increase in revenues growth assumptions and  currency resets to Rs 45/$ ( V/s Rs 44/$)

n     Retain ACCUMULATE with a revised DCF based March’12 TP of Rs 740(V/s Rs 670 earlier), implying ~14.2x/12.8x March’12/March’13 earnings

In line revenues, margins surprise positively

eClerx reported Dec’10 qtr revenues of US$ 19.6 mn (+8.9% QoQ) , marginally ahead

of Emkay estimates of ~US$ 19.4 mn. Operating margins improved by ~330 bps

sequentially ex benefit of one off costs reversals (ahead of our expectations of flat

margins sequentially). Better than expected operational performance coupled with

higher forex gains drove net profit beat. Company added ~196 people during the quarter

taking the total employee count to 3,527. eClerx management deserves credit for

improving margins in an otherwise challenging supply side environment wherein

larger peers have reported flat to decline in margins sequentially

Top 5 client revenues grow by ~7.6% QoQ, to commence operations in 2nd

phase of Airoli in Q1FY12

Top 5 client revenues increased by ~7.6% sequentially to ~US$ 17 m during the quarter

(non top 5 client revenues also increased by ~17% QoQ to US$ 2.7 mn , albeit on a

small base). Company expects to commence operations from 2nd phase of Airoli facility

in Q1FY12. Company intends to reduce the risk from high client concentration going

ahead through increasing onsite sales presence (intends to close FY11 with sales

strength of 30 V/s ~24 currently)

Raise FY11/12/13E earnings by 6.2%/6.5%/8.8% respectively, retain

ACCUMULATE

We increase our FY11/12/13E earnings by ~6.2%/6.5%/8.8% to Rs 42.7/52.1/57.7

respectively driven primarily by currency resets (reset US$/INR assumptions at Rs 45/$

V/s Rs 44/$ earlier, note that every 1% change in US$/INR impacts eClerx’s earnings by

~2.7%) along with moderate increase in our US$ revenue assumptions. We retain

ACCUMULATE with a revised March’12 TP of Rs 740 (V/s Rs 670 earlier)