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Results ahead of our and Street’s estimates
eClerx Services’ (eClerx) Q3FY11 profits were well ahead of our and Street’s
estimates, while revenue growth further strengthened to 9% Q-o-Q in USD
terms. It reported revenues of INR 872 mn, up 6% Q-o-Q and net income of INR
360 mn, up 30.3% Q-o-Q, led by higher other income and INR 17 mn of one-off
item. After five quarters of sequential decline in EBIT margins, the current
quarter saw increase of 350bps at 36.9% (excluding one-off items). This
increase is largely percolated from expansion in gross margins, led by lower per
employee costs (operating at optimal utilisation).
Increasing traction in sales and marketing support to drive growth
eClerx continues to see better growth opportunities in its sales and marketing
support services since these offerings are vertical agnostic and businesses are
shifting online from traditional brick-and-mortar model. Adoption of data
management services by large online corporations is also fueling demand in this
segment.
Strategic accounts reaching an inflection point
The company’s effort towards scaling its non-top five clientele is yielding results,
with its contribution up 200bps over the past two quarters. Management sees
the top 6-15 clients reaching critical size so as to scale to the next level.
Board approves raising of maximum INR 10 bn
The board approved and initiated shareholder approval process to raise
maximum of INR 10 bn (long-term resources and debt of INR 5 bn each).
Management has cited bigger acquisition opportunities available over the 12-18
months and its enhanced confidence to consider targets in the USD 40-50 mn
revenue range as being reasons to pass this enabling resolution.
Outlook and valuations: Strong growth to continue; maintain ‘BUY’
Significant profitability, 40% plus return ratios and efficient operations are
eClerx’s distinctive factors (refer our initiation report ‘A breed apart’, dated
January 21, 2011). At INR 684, the stock is trading at P/E of 14x and 12x FY12E
and FY13E earnings, respectively. We expect eClerx to trade at a premium given
the high dividend payout and return ratios. We retain our target price of INR 770
per share, implying P/E of 16x FY12E earnings. We maintain our ‘BUY/Sector
Outperformer’ on the stock.
Company Description
Incorporated in 2000, eClerx is one of the first KPOs to be listed in India and provides
data analytics and customized process solutions to global enterprise clients from its
offshore delivery centers in India. The company provides business solutions leveraging
the cost effective combination of people, process and technology. These provide clients
with benefits beyond cost reduction by designing solutions that incorporate talent
management, process improvements, better reporting and metrics. It currently offers
services to clients in the financial services, retail and manufacturing industries. eClerx’s
TTM revenues stood at USD 70mn and employs over 3,500 people.
Investment Theme
eClerx is a strongly differentiated play in India’s burgeoning KPO space and stands out
by virtue of its business model. The company has built a strong and relatively
uncontested position in specific high opportunity segments such as data analytics &
management and process improvement solutions thus positioning itself as an established
provider of specialised services. It inks multi-year annuity contracts facilitated by
ongoing engagements, which has helped the company forge a predictable revenue
stream leading to attractive profitability. Strong financial track record marked by
significant profitability and return ratios, strong execution and management are eClerx’s
distinctive factors. We expect eClerx’s earnings growth at 21% CAGR over FY11-13E.
Key Risks
Supply side pressures could affect client servicing and margins.
Volatility in exchange rates could impact the company’s financials meaningfully.
Process automation and adverse regulations could impact the existing business
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Results ahead of our and Street’s estimates
eClerx Services’ (eClerx) Q3FY11 profits were well ahead of our and Street’s
estimates, while revenue growth further strengthened to 9% Q-o-Q in USD
terms. It reported revenues of INR 872 mn, up 6% Q-o-Q and net income of INR
360 mn, up 30.3% Q-o-Q, led by higher other income and INR 17 mn of one-off
item. After five quarters of sequential decline in EBIT margins, the current
quarter saw increase of 350bps at 36.9% (excluding one-off items). This
increase is largely percolated from expansion in gross margins, led by lower per
employee costs (operating at optimal utilisation).
Increasing traction in sales and marketing support to drive growth
eClerx continues to see better growth opportunities in its sales and marketing
support services since these offerings are vertical agnostic and businesses are
shifting online from traditional brick-and-mortar model. Adoption of data
management services by large online corporations is also fueling demand in this
segment.
Strategic accounts reaching an inflection point
The company’s effort towards scaling its non-top five clientele is yielding results,
with its contribution up 200bps over the past two quarters. Management sees
the top 6-15 clients reaching critical size so as to scale to the next level.
Board approves raising of maximum INR 10 bn
The board approved and initiated shareholder approval process to raise
maximum of INR 10 bn (long-term resources and debt of INR 5 bn each).
Management has cited bigger acquisition opportunities available over the 12-18
months and its enhanced confidence to consider targets in the USD 40-50 mn
revenue range as being reasons to pass this enabling resolution.
Outlook and valuations: Strong growth to continue; maintain ‘BUY’
Significant profitability, 40% plus return ratios and efficient operations are
eClerx’s distinctive factors (refer our initiation report ‘A breed apart’, dated
January 21, 2011). At INR 684, the stock is trading at P/E of 14x and 12x FY12E
and FY13E earnings, respectively. We expect eClerx to trade at a premium given
the high dividend payout and return ratios. We retain our target price of INR 770
per share, implying P/E of 16x FY12E earnings. We maintain our ‘BUY/Sector
Outperformer’ on the stock.
Company Description
Incorporated in 2000, eClerx is one of the first KPOs to be listed in India and provides
data analytics and customized process solutions to global enterprise clients from its
offshore delivery centers in India. The company provides business solutions leveraging
the cost effective combination of people, process and technology. These provide clients
with benefits beyond cost reduction by designing solutions that incorporate talent
management, process improvements, better reporting and metrics. It currently offers
services to clients in the financial services, retail and manufacturing industries. eClerx’s
TTM revenues stood at USD 70mn and employs over 3,500 people.
Investment Theme
eClerx is a strongly differentiated play in India’s burgeoning KPO space and stands out
by virtue of its business model. The company has built a strong and relatively
uncontested position in specific high opportunity segments such as data analytics &
management and process improvement solutions thus positioning itself as an established
provider of specialised services. It inks multi-year annuity contracts facilitated by
ongoing engagements, which has helped the company forge a predictable revenue
stream leading to attractive profitability. Strong financial track record marked by
significant profitability and return ratios, strong execution and management are eClerx’s
distinctive factors. We expect eClerx’s earnings growth at 21% CAGR over FY11-13E.
Key Risks
Supply side pressures could affect client servicing and margins.
Volatility in exchange rates could impact the company’s financials meaningfully.
Process automation and adverse regulations could impact the existing business
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