eClerx Services: Buy :: Business Line

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In an environment of improving sentiment among outsourcers, demand for IT services and, more so BPO/KPO offerings of offshore vendors, have gained significant traction.

Companies that deliver BPO/KPO services are less susceptible to changes in technology spends. Given that these projects are generally related to cost-optimisation strategies in customer organisations — helping to maintain their business efficiency — the outsourcing spends generally tend to be steady.

For the top-tier IT players, the BPO sector continues to grow at an impressive pace, in excess of 25 per cent in some cases, reflecting the strong demand in the space. eClerx Services, a mid-sized BPO and KPO player, is likely to benefit as it operates in segments where there are substantial outsourcing opportunities for both top- and mid-tier IT companies.

Positives

The company has continued to expand its client base across its key offerings — cable and telco, financial services, and sales and marketing services. It has also delivered consistent growth in its financials.

A desirable geographic-mix, reducing client concentration and sustained customer addition are key positives for the company. Its important operating parameters have also improved over the past year.

At Rs 1,095, the eClerx stock trades at 11 times its likely FY15 per share earnings, which is marginally lower than its historic average, making it a reasonable bet for investors with a two-year horizon.

Also, it is cheaper compared with many mid-tier companies that trade at 12-13 times forward earnings. Given the strong rally that the stock has seen over the past few months, investors can accumulate more shares of the company on declines linked to the broader markets.

eClerx’s net margin, at 31 per cent, is among the highest in the industry and far ahead of most mid- and small-tier IT and BPO companies.

Client additions

In the first half of FY14, the company’s revenues increased 28 per cent to around Rs 405 crore over the same period in 2012-13, while net profit rose 73 per cent to around Rs 129 crore. With expansion of its customer base, eClerx has seen the dependence on its top five clients decline steadily over the last couple of years. They now account for 75 per cent of the company’s overall revenues compared with nearly 90 per cent a couple of years ago.

This has also been made increasingly possible after the company made a significant acquisition in Agilyst, a US-based KPO player.

In addition to helping it penetrate the US market, this acquisition added to eClerx’s client roster.

The focus on adding new customers, rather than depending heavily on a few clients, has held the company in good stead. Many small offshore players were taken off the radar when large customers reduced the number of vendors they dealt with. But eClerx bucked this trend and has not seen client attrition.

Over the past four quarters, the company has, in fact, added 11 new customers, taking its client base to 65.

eClerx has been able to maintain its utilisation rates at 65-69 per cent over the past several quarters, in line with the figures reported by many mid-tier IT companies.

Even as the company derives more growth from new customers, its selling and distribution costs have been largely under control, in the range of 12-14 per cent of revenues, over the past several quarters.

The cost control has been aided by efficiently deriving more business from existing clients, while at the same time carefully targeting new customers.

The company has a healthy geographic mix, with the US contributing to 74 per cent of its overall revenues and Europe pitching in with about 21 per cent.

This is a healthy blend as the US is still the largest market for outsourcing of BPO and KPO services, even as an under-penetrated Europe market continues to grow at a healthy pace.

Another key advantage for eClerx is that almost its entire workforce, barring a select few, is based out of India.

This optimises the company’s costs substantially. In fact, its offshore workforce proportion is among the highest in the industry.

Risks

Attrition is still quite high at around 36 per cent. Sharp wage hikes to stem this may affect the company’s margins. Increasing competition from mid-tier BPOs and some select large offshore vendors may lead to pricing pressures. This could also affect margins.