ECLERX SERVICES Healthy results in uncertain times :: Edelweiss

eClerx’s Q3FY13 revenues at USD31.3mn (QoQ growth of 5%) were higher
than the Street estimate of USD31.0mn. PAT at INR490mn was significantly
higher than our estimate of INR433mn, largely due to higher operating
profits and lower tax rate (16.3% vs. 25.3% in Q2FY13). The management
reiterated organic growth would remain soft owing to regulatory changes
that are impacting clients’ businesses. Even as organic growth remains soft
in near term, we believe the long term story remains intact for eClerx
owing to its cost‐focused business model. At P/E of 8.6x FY14E, we
maintain ‘BUY’.
Good show in uncertain times
eClerx posted revenues of USD31.3mn, growth of 5.0% on a consolidated basis.
However, ~50% of this growth was driven by short term projects which have been
completed during the quarter. EBIT margin saw an expansion of 240bps QoQ to 34.8%
due to short term projects as these resulted in a higher utilisation. North America
posted a growth of 5.0% (12.0% growth in Q2FY13). Europe continues to witness
pressure and declined 0.5% QoQ. Contribution by top 5 clients declined by 100bps QoQ
to 78%.
Organic growth to remain soft
The management reiterated organic business to stay soft. However, probable short
term projects could cause a greater QoQ volatility in the medium term. The slow
organic growth in future is due to ongoing regulatory changes, particularly in the
financial services, that are driving clients to move towards low risk businesses, thus
requiring changes in processes which could impact growth. On the positive side, short
term projects coming up due to these changes could aid growth, although these could
be lumpy in nature.
Outlook and valuations: Attractive; maintain ‘BUY’
We are revising downwards our FY14E USD revenue growth to 20% from 22%, however
revision of USD/INR rate to INR54 from INR52 earlier enables to maintain our EPS at
INR73. Even as organic growth remains soft in the near term, the long term story
remains intact due to its cost‐focused business model and we like it for its high ROE
and dividend payout. At 8.6x FY14E EPS we maintain ‘BUY/SO’ with a TP of INR880.

�� -->