Buy eClerx Services - Robust business model; Edelweiss

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eClerx Services (ECLX IN, INR 691, Buy)

We recently attended the maiden analyst meet hosted by eClerx Services (eClerx) since its listing in December 2007. The meet’s key objective was to give the investor community a peek into the company’s operations. Presentations were made by business leads in financial services, sales & marketing support, operations leads in financial services, sales & marketing support, infrastructure head, IT head and finally by the HR head. These included relevant case studies in each of the business segments which gave incisive insights into various client processes handled by the company. Key highlights of the analyst meet are as follows:

n  Execution vests on four key pillars

eClerx’s ability to automate and re-engineer processes using technology and platforms is a key differentiator. Knowledge management for skill development,resource management to ensure smooth recruitment, technology to institutionalise the delivery process, and information security are key pillars on which rides the company’s success.

n  High growth visibility and confident of margin sustenance

Opportunities arising from new work related to regulatory changes (Dodd-Frank bill) in financial services, online shift for retailers and adoption of data management services by large online corporations are key growth drivers, leading to a strong pipeline. Management is confident of sustaining the current operating margin range. However, in our opinion, higher sales investments will result in dip in EBITDA margin to 34% by FY13E, which still remains respectable. 

n  On the prowl for acquisition to gain access to new clients, add capability

eClerx is now aggressively scouting for acquisition as scale becomes critical hereon for larger projects. However, the rationale is clearly to either add new logos (if similar services) or new capabilities (with similar revenue productivity). It is eyeing companies in the USD 10-40 mn revenue range.

n  Outlook and valuations: Robust business model; maintain ‘BUY’

At INR 691, the stock is trading at P/E of 14x and 12x FY12E and FY13E earnings, respectively. We expect eClerx to command a sustainable premium (16x FY12E) to other mid-cap IT and BPO firms, given its higher growth rate, return ratios and dividend payout. We maintain ‘BUY/Sector Outperformer’.