Edelweiss: eClerx Services - a breed apart; initiating coverage; Buy

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eClerx Services (ECLX IN, INR 604, Buy)

n  High quality unique player in exciting KPO space

eClerx Services (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. It inks multi-year annuity contracts (more than 50% non-RFP based) facilitated by ongoing engagements. This has helped the company forge a unique revenue model leading to attractive profitability.

n  Sticky annuity business to be replicated across broader set of clients

A bulk of eClerx’s growth since inception has sprung from quality engagements with select marquee clients. We believe, going ahead, this core strength can be extended meaningfully across the broader (beyond top 5) quality client base to provide the next leg of growth. Scalability emanates from the strong process-orientation embedded as an integral element of the company’s DNA.

n  Focus on frameworks, platforms, and training: A key differentiator

eClerx’s ability to automate and re-engineer processes using technology and platforms is a key diffentiator. Also, its knowledge management programme covering 1,800 training modules across different processes ensures quick deployment and replacement of people without affecting delivery. In addition, the in house developed HRMS software training module gives it further impetus.

n  Strong financial track record marked by significant profitability

The company posted 44% CAGR over FY07-10, with 39% EBITDA margin and RoE in excess of 40% in FY10. We expect it to post revenue CAGR of 33% over FY10-13E and reach INR 5.8 bn by FY13E. While EBITDA margin is likely to dilute to 33.5%, RoE is likely to sustain above 44%.

n  Outlook and valuations: Superior business model; initiate with ‘BUY’

Strong financial track record marked by significant profitability and return ratios, strong execution and management are eClerx’s distinctive factors. We value the stock at INR 770 per share based on target P/E of 16x FY12E earnings. The stock at INR 604 trades at a P/E of 12.6x and 10.5x FY12E and FY13E earnings, respectively. We initiate coverage with ‘BUY’ recommendation and ‘Sector Outperformer’ rating.