We recently met the eClerx Services (eClerx) management for a business update and outlook going forward. While it stated that growth in H1FY13 could moderate due to delays in decision making, discussions with clients over longer time horizon indicate momentum will continue and growth is will pick up in H2FY13. We continue to prefer eClerx for its cost focused business model and expect it to post revenue CAGR of 20% over FY12-14E along with high ROE (over 40%) and a dividend payout of 50%. At P/E of 8.6x FY14E. Maintain ‘BUY’.
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Demand likely to moderate in near term
Management re-iterated that macro economic uncertainty and downsizing on client front continues to impact demand as clients are unwilling to commit. Hence, it foresees H1FY13 growth to remain muted (Q1FY13 revenue growth to be flattish QoQ). However, the fact that clients looking at longer time horizon have stated their intent to migrate healthy volume offshore is encouraging. For the full year, the company expects growth to be in double digits on organic basis. We have built in organic growth of 8% and will wait for Q1FY13 result, post which we will re-visit our estimates.
Agilyst consolidation to cushion growth
eClerx’s recent acquisition of Agilyst (USD14mn revenue) is likely to aid the company’s revenue growth. Agilyst, caters to media and cable broadband verticals and delivers services like work accuracy maintenance, critical error identification, customer experience analysis and end-user support services. This acquisition expands eClerx’s addressable market, reduces client concentration and diversifies vertical dependency.
Outlook and valuations: Long-term story intact; maintain ‘BUY’
Although demand is expected to remain moderate in H1FY13, we expect growth to pick up in H2FY13, and remain confident on eClerx’s cost-oriented business model. At CMP of INR631, the stock is trading at P/E of 10.0x and 8.6x FY13E and FY14E earnings, respectively. We maintain ‘BUY/ Sector Outperformer’.
Regards,
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