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Steady and boring
The Sep-11 quarter saw eClerx once again live up to street expectations
delivering revenue growth well above larger peers in the Indian IT
services space. While the management’s focus in mining their non top-5
accounts is a step in the right direction, the consequent increase in costs
brought about a contraction in operating margins despite strong currency
tailwinds. Although macro uncertainties have caused demand volatility in
the sector, eClerx’s small scale and niche presence in core processes
should allow it to deliver steady revenue/earnings growth. Retain BUY.
Topline momentum continues to be robust
eClerx delivered another strong quarter with 9% QQ growth in $-revenues (to
24.3m), well ahead of most peers in the Indian IT-BPO space. We are building
in a 33.5%YY growth in $-revenues for FY12 with eClerx expanding seating
capacity to support such growth. While remaining cognizant of the global
uncertainty, eClerx believes that its focus on core client processes should limit
any impact on volume trajectory. Discontinuation of proprietary trading desks
at eClerx’s clients is concerning but the management remains confident of
getting business from the spun-off units. eClerx’s pricing remains inline with
tier-1 IT peers and they are yet to see any pricing pressure.
Operating margins contract despite currency tailwinds
For sustaining and de-risking its revenue growth eClerx has increased focus
on its “Emerging client” accounts, i.e., clients not in the top-5. eClerx
strengthened its sales force to this end and resultant cost increase impacted
margins for the quarter (down 60bpsQQ), despite benefits from a weaker
currency. Company’s operating margins target remains in mid-30s albeit a
benign currency could result in a spike in 2HFY12. DSOs increased by 9 to 76
days and that marred what was otherwise a good operating performance.
While eClerx indicated that this is a one-off and should be addressed over
next couple of quarters, we would keenly watch this metric. A Rs102m forex
gain helped register a 26% QQ growth in net income to Rs442m.
Steady financials and niche position drives BUY recommendation
eClerx faces risks common to companies of its scale. Clients’ concentration
remains high with top-5 clients contributing 86% of revenues, and minor
delays in payment schedules can impact operational prowess as it happened
this quarter. Additionally, the sector as a whole faces concerns of a volatile
demand environment and reduced visibility of revenues. But this needs to be
viewed in light of the steady financial performance they have delivered.
eClerx’s robust operating margins, 40%+ ROE and high dividend pay-out
justifies its valuation premium to sector peers. Our target price of Rs860
values the company at 13x FY13 earnings. eClerx is our only positive
recommendation in the India IT-BPO space. Reiterate BUY.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Steady and boring
The Sep-11 quarter saw eClerx once again live up to street expectations
delivering revenue growth well above larger peers in the Indian IT
services space. While the management’s focus in mining their non top-5
accounts is a step in the right direction, the consequent increase in costs
brought about a contraction in operating margins despite strong currency
tailwinds. Although macro uncertainties have caused demand volatility in
the sector, eClerx’s small scale and niche presence in core processes
should allow it to deliver steady revenue/earnings growth. Retain BUY.
Topline momentum continues to be robust
eClerx delivered another strong quarter with 9% QQ growth in $-revenues (to
24.3m), well ahead of most peers in the Indian IT-BPO space. We are building
in a 33.5%YY growth in $-revenues for FY12 with eClerx expanding seating
capacity to support such growth. While remaining cognizant of the global
uncertainty, eClerx believes that its focus on core client processes should limit
any impact on volume trajectory. Discontinuation of proprietary trading desks
at eClerx’s clients is concerning but the management remains confident of
getting business from the spun-off units. eClerx’s pricing remains inline with
tier-1 IT peers and they are yet to see any pricing pressure.
Operating margins contract despite currency tailwinds
For sustaining and de-risking its revenue growth eClerx has increased focus
on its “Emerging client” accounts, i.e., clients not in the top-5. eClerx
strengthened its sales force to this end and resultant cost increase impacted
margins for the quarter (down 60bpsQQ), despite benefits from a weaker
currency. Company’s operating margins target remains in mid-30s albeit a
benign currency could result in a spike in 2HFY12. DSOs increased by 9 to 76
days and that marred what was otherwise a good operating performance.
While eClerx indicated that this is a one-off and should be addressed over
next couple of quarters, we would keenly watch this metric. A Rs102m forex
gain helped register a 26% QQ growth in net income to Rs442m.
Steady financials and niche position drives BUY recommendation
eClerx faces risks common to companies of its scale. Clients’ concentration
remains high with top-5 clients contributing 86% of revenues, and minor
delays in payment schedules can impact operational prowess as it happened
this quarter. Additionally, the sector as a whole faces concerns of a volatile
demand environment and reduced visibility of revenues. But this needs to be
viewed in light of the steady financial performance they have delivered.
eClerx’s robust operating margins, 40%+ ROE and high dividend pay-out
justifies its valuation premium to sector peers. Our target price of Rs860
values the company at 13x FY13 earnings. eClerx is our only positive
recommendation in the India IT-BPO space. Reiterate BUY.
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