eClerx's Q1FY13 result was in-line with our expectations::SPA

eClerx's Q1FY13 result was in-line with our expectations. The company reported revenues of $28.1mn
(SPAe: 28.4mn) of which $2.3mn (90% of the incremental) contribution came from Agilyst. Organically revenue
grew 1% sequentially to $25.8mn and EBITDA Margins expanded by 40bps on the back of INR depreciation to
38.6%. The company also added 8 new clients. Thus, on the back of strong growth and higher than industry
margin profile, we continue to recommend BUY with a 2-year target price of INR 874.0.

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Revenue Growth - Strong
The company has continued to register strong sequential growth
of 10.2% in Q1FY13 to $28.1mn. With this, given a weak global
scenario, the company has witnessed a ten quarters CQGR of
6.5% in USD revenue growth. The company witnessed a 2% volume
growth partially offset by a (1%) decline in pricing, resulting in a
1% growth in USD revenues QoQ organically.
Margins Expansion - Huge
Operating Margin expanded by 240bps sequentially to 35.9%.
The company benefited from non-hedging policy of Agilyst
which expanded its otherwise lower margins. The company's
10.5% offshore wage hikes affected margins by -330bps offset
by INR depreciation (580bps). The one-time legal and
professional fees of 45mn increased G&A spend, but its affect
on margins was offset by S&M efficiency gains.
Sales Pipeline Expanding
With Agilyst acquisition company has reduced its dependency on
top-5 clients from 87% to 80%. Fortune 500 clients contribute 96% of
company's topline. It added 8 new clients with a total client count
rising to 54. The company is witnessing larger traction from first
time offshorers due to cost pressures especially from continental
Europe where majority of its European revenues come from.


Pricing Pressure
The company has been witnessing some pricing pressure to pass
on its INR gains back to clients. It had given volume discounts in
the past. Now, with little pricing adjustment scope we expect no
further margin pressure from pricing front. However, integration
of Agilyst business with the company can cause some pressure on
the bottom-line.
Valuation and Outlook
Given 50% of eClerx's business is dependent on BFSI sector which
is at the fore-front of this economic downturn, we had expected
9% organic growth for the company as mirrored in Q1FY13
numbers and slower deal signinings. We expect Agilyst to
contribute $14mn to the topline in FY13 albeit at a lower margin
profile. The company has a high $ sensitivity (68bps per 1%
change in USD/INR rate) and hence would see a margin expansion
in FY13 though partially offset by lower margin Agilyst business
and pricing pressures. Taking all this into consideration, we
expect the company to witness a 16% EPS CAGR over FY12-14E.
Thus, we retain our BUY recommendation for the stock with a
target price of INR 874.0 based on 12x (PE multiple) FY14E
earnings of INR 73.3.