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India Equity Research Reports, IPO and Stock News
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http://content.icicidirect.com/mailimages/ICICIdirect_eClerx_InitiatingCoverage.pdf
D i f f e r e n t i a t e d y e t s i m p l e !
eClerx services (ESL), the only listed KPO service provider, continues to
deliver a strong revenue & earnings performance with industry leading
financial metrics. ESL operates in a strategically chosen sweet spot
between pure play BPO & high end KPO (equity research). Current capital
market client engagements have at most ~500-550 people/client while
large organisations typically have ~5,000 such offshorable roles in high
cost geographies & costs anywhere from ~$60,000-75,000/annum. Back
of the envelope calculation suggests an outsourcing market opportunity
of $2.25 billion from just 15 organisations alone. That said, Q4FY12E &
Q1FY13E revenue growth could be soft led by CY12 budget spend delays
for select customers. However, we would buy ESL in weaknesses caused
by such earnings volatility. Rationale being revenue/earnings growth of
19.3%/12% (our estimate) in FY13E, modest relative to 41%/40% CAGR
during FY08-11, yields FY11-13E CAGR of 28.9%/24.9%, respectively.
This implies an attractive PE/G of 0.5x based on FY11-13E earnings CAGR.
Attractive valuation coupled with superior RoE (56.5%) & dividend payout
ratio (~53%) for FY12E influences our BUY rating.
Healthy balance sheet metrics
ESL’s revenue/earnings grew at 41%/40% CAGR during FY08-11. Note,
consistent operational performance was in conjunction with average 40%
EBITDA margins. Cash generation from operation (CFO) remains healthy
& grew at 46% CAGR during FY08-11 with 76% EBITDA converted to CFO.
Measured capex led to a 10-fold jump in cash balance to | 200 crore vs.
~| 22 crore in FY08 and |10 crore during IPO. We believe current PE
could expand given healthy balance metric & industry leading growth.
Investment in technology, knowledge management to drive financial performance
ESL has ~200 dedicated software engineers who automate processes &
help improve internal efficiency. Further, knowledge management &
training reduces hiring lead time & ensures timely re-deployment of
freshers. We believe investments in technology & knowledge
management could help drive a consistent financial performance.
Valuations
ESL is trading at 12.9x & 11.5x our FY12E and FY13E diluted EPS estimate
of | 56.8 & | 63.6, respectively. From a Mcap/sales & EV/EBITDA
perspective, ESL is trading at 4.4x & 9.5x on FY12E; 3.7x & 8.0x on FY13E
basis, respectively. We expect revenues/earnings to grow at 29%/25%
CAGR during FY11-13E coupled with stable EBITDA margins. We value
ESL at 12.9x our FY13E EPS estimate of |63.6 and initiate coverage on the
stock with a BUY rating and a target price of | 820.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
http://content.icicidirect.com/mailimages/ICICIdirect_eClerx_InitiatingCoverage.pdf
D i f f e r e n t i a t e d y e t s i m p l e !
eClerx services (ESL), the only listed KPO service provider, continues to
deliver a strong revenue & earnings performance with industry leading
financial metrics. ESL operates in a strategically chosen sweet spot
between pure play BPO & high end KPO (equity research). Current capital
market client engagements have at most ~500-550 people/client while
large organisations typically have ~5,000 such offshorable roles in high
cost geographies & costs anywhere from ~$60,000-75,000/annum. Back
of the envelope calculation suggests an outsourcing market opportunity
of $2.25 billion from just 15 organisations alone. That said, Q4FY12E &
Q1FY13E revenue growth could be soft led by CY12 budget spend delays
for select customers. However, we would buy ESL in weaknesses caused
by such earnings volatility. Rationale being revenue/earnings growth of
19.3%/12% (our estimate) in FY13E, modest relative to 41%/40% CAGR
during FY08-11, yields FY11-13E CAGR of 28.9%/24.9%, respectively.
This implies an attractive PE/G of 0.5x based on FY11-13E earnings CAGR.
Attractive valuation coupled with superior RoE (56.5%) & dividend payout
ratio (~53%) for FY12E influences our BUY rating.
Healthy balance sheet metrics
ESL’s revenue/earnings grew at 41%/40% CAGR during FY08-11. Note,
consistent operational performance was in conjunction with average 40%
EBITDA margins. Cash generation from operation (CFO) remains healthy
& grew at 46% CAGR during FY08-11 with 76% EBITDA converted to CFO.
Measured capex led to a 10-fold jump in cash balance to | 200 crore vs.
~| 22 crore in FY08 and |10 crore during IPO. We believe current PE
could expand given healthy balance metric & industry leading growth.
Investment in technology, knowledge management to drive financial performance
ESL has ~200 dedicated software engineers who automate processes &
help improve internal efficiency. Further, knowledge management &
training reduces hiring lead time & ensures timely re-deployment of
freshers. We believe investments in technology & knowledge
management could help drive a consistent financial performance.
Valuations
ESL is trading at 12.9x & 11.5x our FY12E and FY13E diluted EPS estimate
of | 56.8 & | 63.6, respectively. From a Mcap/sales & EV/EBITDA
perspective, ESL is trading at 4.4x & 9.5x on FY12E; 3.7x & 8.0x on FY13E
basis, respectively. We expect revenues/earnings to grow at 29%/25%
CAGR during FY11-13E coupled with stable EBITDA margins. We value
ESL at 12.9x our FY13E EPS estimate of |63.6 and initiate coverage on the
stock with a BUY rating and a target price of | 820.
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