eClerx, :: Centrum

Revenue pop postponed, net-income surprises positively
We revise our estimates for eClerx’ revenues and EBITDA margins marginally but
increase our Net Income expectations anticipating lower forex losses than earlier.
We maintain Buy with a new Sep’14 TP of Rs1,105 (Vs earlier Sep’14 TP of Rs 1,068).
Though eClerx’s 2QFY14 revenues were somewhat below our expectations, up only
3.3%/14.4% QoQ/YoY in USD terms (vs. our estimate of 5.6% QoQ), we remain
optimistic about a very strong quarter in the near horizon given more optimism
about the Fin. Svcs. segment and continued sales investments. With better than
expected G&A control and stable pricing, we expect EBITDA margins to be around
the 39% mark for FY14-FY16.

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 Revenue pop only postponed: While rupee revenue was exactly in-line with our
estimates, it was on account of higher rupee realizations than we’d anticipated (Rs 62.9
Vs our estimate of Rs 61.5) and USD revenues were 2.2% below our expectations. But with
optimism about both the financial svcs and cable and telco segments and continued
investments in sales we expect traction to accelerate. With utilizations at a historic low of
65% (which mgmt. attributed partly to differing bench requirements across the
segments, though we think business mix has not changed materially over the last 2
quarters given the stable price realizations), we remain optimistic about revenue growth
and expect a revenue pop in the near future.
 Margin expansion and rupee help this Qtr., but expect G&A leverage in future: Helped
partly by rupee depreciation of 9.4% QoQ, gross margins improved 236bps despite
decrease in utilization (down 100bps to 65%, a full 400bps below the 4QFY13 level of
69%) and slight increases in headcount (2.4% QoQ) and overall wages (0.6% QoQ on avg).
G&A was lower than our expectations despite some one-off items (banker’s fee for the
Agilyst acquisition, onsite recruitment cost etc.). So we anticipate further G&A leverage in
future. S&M investments continued at 7.1% of sales. We expect S&M to remain at this
level (13.0-13.5% of sales) as eClerx continues to invest.
 Optimism about both Fin. Svcs and Cable & Telco segments: With mgmt. citing a
relatively improved environment among its banking clientele, we are optimistic that this
segment will now witness better growth. Mgmt. said that annual run rate for the Cable &
Telco business had crossed USD 20mn now (compared to the run rate of USD 15mn
when they acquired it last year). Given this track record of growth over the last year and
the investment in a new sales office in Philadephia (replacing its earlier temporary
quarters) we expect the Cable & Telco segment to also do well.
 Minor changes to revenue and EBITDA margin estimates; maintain Buy: eClerx is
currently trading at just 6.8x Oct’13-Sep’14 EPS. We note that our EPS estimates are
significantly higher than consensus and eClerx is trading at 10.4x FY15 consensus EPS.
We expect upgrades to consensus. We modify our revenue and EBITDA estimates
marginally and increase our Net income estimates (due to reduced estimates for hedging
losses). We maintain Buy rating and set a revised Sep’14 target price of Rs1,105 (10x 1-
Year Fwd EPS from Sep’14).