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Analyst meet takeaways
At the analyst meet, eClerx exuded confidence in near to medium term
revenue growth prospects. eClerx also asserted that inorganic growth will
not be targeted at the expense of margins. High client concentration
remains a risk and is unlikely to change for now. That said, eClerx
remains focused on growing the long tail of clients. Margin management
remains a priority and wage inflation pressures notwithstanding, eClerx
believes that current margin levels are sustainable. A 33% earnings Cagr
over FY10-13, 40%+ROE and a 50%+ dividend pay-out supports our
target price of Rs820, which is based on 14x FY13CL diluted earnings
Revenue growth: While eClerx does not give any revenue guidance, management
indicated that growth is not an issue in the near to medium term. Recent investor
worries have centred on eClerx’s plans for inorganic growth but management
indicated that they intend to maintain their margin focus through any such move.
Is size a constraint? Per eClerx, most of its business is sole-sourced and not RFP
(request for proposal) driven and hence size is not as big a constraint. That said,
there are many RFPs where eClerx is not invited. Many of eClerx’s clients have
undertaken vendor consolidation exercise over the last few years and eClerx’s track
record in this has been mixed. Its small size hasn’t precluded eClerx from outwinning
larger peers in many such instances. Also, eClerx believes that clients are
targeting different categories of vendors for different services. Proprietary parts
stay within the organisation, large standardised processes are farmed out to Tier-1
IT players while niche vendors like eClerx are sought out for smaller middleware.
Client concentration: With top-5 clients contributing 86% of eClerx’s revenues,
high client concentration remains a risk. While eClerx remains focused on growing
client #6-15, the concentration is unlikely to change in the near term. Per eClerx,
its dependence on sole-sourced business and focus on cross-selling newer services
to existing clients implies that client concentration will remain. eClerx is also open
to inorganic measures to diversify its client base but asserted that this
diversification will not come at the expense of margins.
Margin management: At 35%, eClerx’s EBIT margins are nearly 3x its peers in
the BPO space. eClerx has consciously stayed away from the low margin voice
segment and that drives its much higher margins c.f. BPO peers. While admitting
that wage inflation is much higher than the price increases at their client end,
eClerx asserted that current margin levels can be maintained. Also, in most of the
contracts, eClerx competes with captive centres of its clients or Tier-1 IT
companies. As a result, they rarely see situations of predatory pricing.
Human resources: Average wage inflation of 12-14% has meant that eClerx has
had to rely on managing the employee pyramid to manage wage costs. Analysts
(front line processing function) form 80% of total headcount. Attrition for this group
is in the 35-40% range but the cost of hiring and training this group is also much
lower. Robustness of the hiring model here helps eClerx minimise bench
requirements. Managers who form 20% of the employee base are the key
repository of client relationships and domain knowledge. Half of these are internal
promotees while the other half is hired either from Tier-2 business schools or from
other companies. Attrition for this group is in the low double digits.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Analyst meet takeaways
At the analyst meet, eClerx exuded confidence in near to medium term
revenue growth prospects. eClerx also asserted that inorganic growth will
not be targeted at the expense of margins. High client concentration
remains a risk and is unlikely to change for now. That said, eClerx
remains focused on growing the long tail of clients. Margin management
remains a priority and wage inflation pressures notwithstanding, eClerx
believes that current margin levels are sustainable. A 33% earnings Cagr
over FY10-13, 40%+ROE and a 50%+ dividend pay-out supports our
target price of Rs820, which is based on 14x FY13CL diluted earnings
Revenue growth: While eClerx does not give any revenue guidance, management
indicated that growth is not an issue in the near to medium term. Recent investor
worries have centred on eClerx’s plans for inorganic growth but management
indicated that they intend to maintain their margin focus through any such move.
Is size a constraint? Per eClerx, most of its business is sole-sourced and not RFP
(request for proposal) driven and hence size is not as big a constraint. That said,
there are many RFPs where eClerx is not invited. Many of eClerx’s clients have
undertaken vendor consolidation exercise over the last few years and eClerx’s track
record in this has been mixed. Its small size hasn’t precluded eClerx from outwinning
larger peers in many such instances. Also, eClerx believes that clients are
targeting different categories of vendors for different services. Proprietary parts
stay within the organisation, large standardised processes are farmed out to Tier-1
IT players while niche vendors like eClerx are sought out for smaller middleware.
Client concentration: With top-5 clients contributing 86% of eClerx’s revenues,
high client concentration remains a risk. While eClerx remains focused on growing
client #6-15, the concentration is unlikely to change in the near term. Per eClerx,
its dependence on sole-sourced business and focus on cross-selling newer services
to existing clients implies that client concentration will remain. eClerx is also open
to inorganic measures to diversify its client base but asserted that this
diversification will not come at the expense of margins.
Margin management: At 35%, eClerx’s EBIT margins are nearly 3x its peers in
the BPO space. eClerx has consciously stayed away from the low margin voice
segment and that drives its much higher margins c.f. BPO peers. While admitting
that wage inflation is much higher than the price increases at their client end,
eClerx asserted that current margin levels can be maintained. Also, in most of the
contracts, eClerx competes with captive centres of its clients or Tier-1 IT
companies. As a result, they rarely see situations of predatory pricing.
Human resources: Average wage inflation of 12-14% has meant that eClerx has
had to rely on managing the employee pyramid to manage wage costs. Analysts
(front line processing function) form 80% of total headcount. Attrition for this group
is in the 35-40% range but the cost of hiring and training this group is also much
lower. Robustness of the hiring model here helps eClerx minimise bench
requirements. Managers who form 20% of the employee base are the key
repository of client relationships and domain knowledge. Half of these are internal
promotees while the other half is hired either from Tier-2 business schools or from
other companies. Attrition for this group is in the low double digits.
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