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KPO player eClerx Services Limited (eClerx) caters to the financial services
industry and offers sales and marketing support (SMS) across retail,
manufacturing and travel verticals. Having grown at a much faster pace than
the industry over the past three years, eClerx continues its growth momentum
due to strong domain focus and high client allegiance. We assign eClerx a
fundamental grade of ‘4/5’, indicating that its fundamentals are ‘superior’
relative to other listed securities in India.
Expected to continue to outperform the industry
While the KPO industry is expected to grow at a 16% CAGR over the next five
years, we expect eClerx to continue to outperform the industry due to: (a)
higher growth (23% CAGR) expected from business analytics where eClerx is
an established player with a niche service offering, (b) efficient internal
processes which have helped eClerx utilise resources better, provide process
control and systemise quality, and (c) the resultant client stickiness.
Efficient systems at operational level sets eClerx apart from its peers
A large and dedicated IT team enables reengineering of internal processes,
leading to automation of repetitive tasks. This has resulted in a broader
employee pyramid and lower average employee costs. Also, eClerx is open to
sharing the benefits of efficiency improvements with its clients which results in
increased client allegiance and higher share of annuity-based contracts.
Client concentration and currency exposure risks exist
eClerx’s top five clients contribute ~85% of the company’s total revenues. This
dependence exposes the company to the risk of client concentration - any loss
(in part or whole) in any of its top client accounts could severely impact
eClerx’s revenue growth and profitability. Further, ~100% offshore presence
exposes eClerx to currency volatility (US$ -75% and Euro - 20% of revenues).
Expect three-year revenue CAGR of 29%
We expect revenues to register a three-year CAGR of 29% to Rs 5.5 bn in
FY13 driven by growth in the top five client accounts across verticals. EBITDA
margin is expected to stabilise from ~39% in FY10 to ~35% in FY13 once the
company ramps up its onsite presence. EPS is expected to rise at a three-year
CAGR of 28% to Rs 53.2 in FY13.
Valuations – the current price is ‘aligned’ with fair value
CRISIL Equities has used the price to earnings ratio (PER) method to value
eClerx. Based on a PER of 13x FY13E EPS of Rs 53.2, we have arrived at a fair
value of Rs 692 per share. We initiate coverage on eClerx with a valuation
grade of ‘3/5’
Valuation Grade: 3/5
We have used the price to earnings ratio (PER) method to value eClerx. We have
assigned a fair value of Rs 692 per share based on a PER of 13x on FY13E
earnings of Rs 53.2 per share. The stock is currently trading at Rs 641 per
share. Consequently, we initiate coverage on eClerx with a valuation grade of
‘3/5’, indicating that the current market price is ‘aligned’ with the fair value.
Undergone a re-rating
The stock has traded at an average P/E multiple of 7.8x post its listing in 2008.
However, it has gone through a re-rating after recovering from the bankruptcy
of its top client (Lehman Brothers). eClerx has traded at an average P/E multiple
of 12x in FY11.
We expect the discount with peers to narrow down further
eClerx is currently trading at a discount to larger global peers like Genpact and
EXL Service, who are trading at 15-16x FY12 earnings. While the discount has
narrowed down (it was ~80% in FY08, ~60% in FY10 and now ~20%) over the
years due to faster earnings growth along with sustainable margins, we believe
the current discount factors in the following concerns:
1. Sustainability of margins as the company grows in size
2. The tax rate for the company in FY11 is ~12% and expected to increase to
~20% over FY12-13. Going forward, with increasing tax rates, PAT growth
is expected to lag behind revenue growth. The same is not true for the
peers as most of them are already paying higher taxes
3. eClerx has a greater proportion of offshore employees compared to its
peers, exposing the company to higher currency risks
However, there is potential for eClerx’s multiple to expand (or discount to
narrow), albeit scarcely, due to following:
1. eClerx has a higher RoE (~50%) compared to peers’ ~12-15%
2. Better earnings growth expected (28% three-year CAGR) compared to
peers’ ~12%
3. More importantly, we expect the company to clock US$ 100 mn in revenues
by FY12 which would provide comfort to existing clients and help tap newer
clients due to stronger balance sheet.
Accordingly, we believe eClerx would continue to trade at a discount to its larger
peers and have assigned a P/E multiple of 13x.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
KPO player eClerx Services Limited (eClerx) caters to the financial services
industry and offers sales and marketing support (SMS) across retail,
manufacturing and travel verticals. Having grown at a much faster pace than
the industry over the past three years, eClerx continues its growth momentum
due to strong domain focus and high client allegiance. We assign eClerx a
fundamental grade of ‘4/5’, indicating that its fundamentals are ‘superior’
relative to other listed securities in India.
Expected to continue to outperform the industry
While the KPO industry is expected to grow at a 16% CAGR over the next five
years, we expect eClerx to continue to outperform the industry due to: (a)
higher growth (23% CAGR) expected from business analytics where eClerx is
an established player with a niche service offering, (b) efficient internal
processes which have helped eClerx utilise resources better, provide process
control and systemise quality, and (c) the resultant client stickiness.
Efficient systems at operational level sets eClerx apart from its peers
A large and dedicated IT team enables reengineering of internal processes,
leading to automation of repetitive tasks. This has resulted in a broader
employee pyramid and lower average employee costs. Also, eClerx is open to
sharing the benefits of efficiency improvements with its clients which results in
increased client allegiance and higher share of annuity-based contracts.
Client concentration and currency exposure risks exist
eClerx’s top five clients contribute ~85% of the company’s total revenues. This
dependence exposes the company to the risk of client concentration - any loss
(in part or whole) in any of its top client accounts could severely impact
eClerx’s revenue growth and profitability. Further, ~100% offshore presence
exposes eClerx to currency volatility (US$ -75% and Euro - 20% of revenues).
Expect three-year revenue CAGR of 29%
We expect revenues to register a three-year CAGR of 29% to Rs 5.5 bn in
FY13 driven by growth in the top five client accounts across verticals. EBITDA
margin is expected to stabilise from ~39% in FY10 to ~35% in FY13 once the
company ramps up its onsite presence. EPS is expected to rise at a three-year
CAGR of 28% to Rs 53.2 in FY13.
Valuations – the current price is ‘aligned’ with fair value
CRISIL Equities has used the price to earnings ratio (PER) method to value
eClerx. Based on a PER of 13x FY13E EPS of Rs 53.2, we have arrived at a fair
value of Rs 692 per share. We initiate coverage on eClerx with a valuation
grade of ‘3/5’
Valuation Grade: 3/5
We have used the price to earnings ratio (PER) method to value eClerx. We have
assigned a fair value of Rs 692 per share based on a PER of 13x on FY13E
earnings of Rs 53.2 per share. The stock is currently trading at Rs 641 per
share. Consequently, we initiate coverage on eClerx with a valuation grade of
‘3/5’, indicating that the current market price is ‘aligned’ with the fair value.
Undergone a re-rating
The stock has traded at an average P/E multiple of 7.8x post its listing in 2008.
However, it has gone through a re-rating after recovering from the bankruptcy
of its top client (Lehman Brothers). eClerx has traded at an average P/E multiple
of 12x in FY11.
We expect the discount with peers to narrow down further
eClerx is currently trading at a discount to larger global peers like Genpact and
EXL Service, who are trading at 15-16x FY12 earnings. While the discount has
narrowed down (it was ~80% in FY08, ~60% in FY10 and now ~20%) over the
years due to faster earnings growth along with sustainable margins, we believe
the current discount factors in the following concerns:
1. Sustainability of margins as the company grows in size
2. The tax rate for the company in FY11 is ~12% and expected to increase to
~20% over FY12-13. Going forward, with increasing tax rates, PAT growth
is expected to lag behind revenue growth. The same is not true for the
peers as most of them are already paying higher taxes
3. eClerx has a greater proportion of offshore employees compared to its
peers, exposing the company to higher currency risks
However, there is potential for eClerx’s multiple to expand (or discount to
narrow), albeit scarcely, due to following:
1. eClerx has a higher RoE (~50%) compared to peers’ ~12-15%
2. Better earnings growth expected (28% three-year CAGR) compared to
peers’ ~12%
3. More importantly, we expect the company to clock US$ 100 mn in revenues
by FY12 which would provide comfort to existing clients and help tap newer
clients due to stronger balance sheet.
Accordingly, we believe eClerx would continue to trade at a discount to its larger
peers and have assigned a P/E multiple of 13x.
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