View: Eclerx has reported Q3FY13 numbers slightly better than our estimates
but the growth in the revenues were largely driven by strong momentum in short
term projects. Weak rampup in the BFS segment (as indicated in commentary),
likely onsite delivery inclusion and unfavorable captive-third party business
preposition remains a risk and would result in revenue/earnings growth moderation
in FY14/15. We maintain our underperform rating on the stock.
Financial Services to remain volatile: It expect volatility in the BFS revenues
as the regulatory driven demand (Dodd Frank, Anti-money laundering, Capital
Adequacy and others approaching deadline) are getting fragmented to small
size projects as clients are nervous on their mid-to-long term plans and are
thus restricting on co-processing on RTB opportunity.
Cable & Telco to drive traction: It expects sustained growth moderation in
its traditional business lines (both in Financial and S&M services) and is relying
heavily on the acquired business line in the Cable & Telco segment. It is
expecting strong growth over its USD 15mn revenue run rate of CY12. We
anticipates risk here owing to weak spending patterns in this verticals and
incremental spend to be largely dependent on RTB (cost cutting) opportunities.
Contemplating onsite: It is also contemplating a thought of an onsite delivery
presence in anticipation of pooling of demand for near-shore delivery by the
clients to avert on country risk. The demand currently is very soft (10-12 seat)
but would change the overall operating metrics is view of lower onsite margins
and the transition/setting up costs, and thus remains the risk to the stock.
Q3 results – What has changed?: We largely maintain our estimates with
Sales/EBIT CAGR of about 18%/13% over FY13-15E modeling for lower revenue
growth anticipation owing to challenging captive/third party business preposition
and likely OPM dilution due to changed revenue mix post inclusion of new
Telecom & Cable business segment (OPM in mid 20% versus over 35% overall).
Key Highlights
Revenue in reported currency grew by 5.6% QoQ at ‘ 1.7 bn from ‘ 1.6 bn in
Q2FY13 driven by strong ramp up in short term projects (unpredictable in nature
but large in numbers contributing over 50% of incremental revenues).
In constant terms revenues grew by 4.5% QoQ.
It has added 7 new clients in the quarter (12 in H1FY13) and has seen spurt in
short period projects supporting its momentum.
Client concentration remains high with Top 5 accounting 78% of the revenues
(86% Q3FY12) but is consistently going down quarter after quarter.
EBIT grew by 13% (QoQ) at ‘ 595mn (EBIT margin up by 240bps QoQ) despite
sharp jump in rental cost during the quarter by 20% as it commissioned
Chandigarh facility and New York office during the quarter (with a supporting
revenue lag). EBIT momentum was supported by flat employee cost and G&A
spends amounting 160bps margin gains over and about 70bp exchange gains.
We believe margins may remain weak hereon as sales growth moderates.
Tax rate went down during the quarter to 16% as it did reversed a goodwill
amortization provision it made couple of quarter ago on its ITS acquisition
(acquired in 2006-07). ETR likely to remain in the 23-24% band in coming
quarters.
PAT grew 95% QoQ at ‘ 490 mn – ahead of our est. of ‘ 416 mn as it booked
lower Fx losses at about ‘ 27mn as against loss of about ‘ 208mn in Q2 largely
on translation gains (‘ 60 mn gain versus loss of about ‘ 90mn).
Valuation: Eclerx has reported Q3FY13 numbers slightly better than our estimates
but the growth in the revenues were largely driven by strong momentum in short
term projects. Weak rampup in the Financial services segment (as indicated in
commentary), likely onsite delivery inclusion and unfavorable captive-third party
business preposition remains would result in revenue/earnings growth moderation
in FY14/15. The stock has corrected by about 11% YTD and is now appears attractive
at 8x FY15E earnings, thus we revise our rating upward to Buy (earlier
Underperformer) valuing stock at 10x FY15E earnings.
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