eClerx Services - Deceleration ahead, but still remains healthy; visit note; Buy :: Edelweiss PDF link

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eClerx Services (ECLX IN, INR 735, Buy)

We recently met the management of eClerx Services (eClerx) for business update and outlook going forward. While near-term growth could moderate, we believe the cost efficiency that eClerx provides to its clients, will continue to drive 20% revenue CAGR over FY12-14E. Further, we also note disproportionate investments happening towards growing non top 5 clients. Overall, we continue to believe the eClerx has built a solid business model (cost focused) that is continuing to grow over 20%, generating ROE of 40% and with a dividend payout of 50%. In the near term, due to slower growth, stock performance may remain muted. At P/E of 11.4x FY13, we maintain ‘BUY’ with target of INR845.   

To enter FY13 on slower momentum

Macro economic uncertainty and downsizing at client side seem to be hitting demand as clients are unwilling to commit. Hence,  eClerx may begin FY13 on slow note. Owing to relatively weak Q4, annualized revenues growth as it enters FY13 has dropped to 7.4% vs historical years where it stood at over 12%+ (refer Chart 1 on page 2). We expect quarterly growth to moderate to 4-5% in near term vs 7% in the past eight quarters. However, what is encouraging is the fact that clients looking at longer time horizon have stated their intent to aggressively use and migrate healthy volume offshore.

Margins to remain stable

eClerx’s EBITDA margin (ex-currency) at 38% is expected to remain stable as pricing continues to hold ground and S&M investments are already accounted. We forecast 41% margin for FY13 (incl. currency benefit).   

Outlook and valuations: Long-term story intact; maintain ‘BUY’

At CMP of INR 735, the stock is trading at P/E of 11.4x and 10.2x FY13E and FY14E earnings, respectively. We expect eClerx’s P/E premium to sustain given its healthy return ratios. Maintain ‘BUY/ Sector Outperformer’rating on the stock.

eClerx Services - Deceleration ahead, but still remains healthy; visit note; Buy

Regards,