Revising to Hold on expensive valuations
eClerx delivered revenue growth slightly ahead of our expectations with strong
growth across both non-top-5 and top-5 clients. Though EBITDA margins at 40.5%
were 342bps below our expectations, investments in Selling & Distribution were
responsible for 206bps margin decline while G&A increase took away another
53bps. We think only better than expected traction can provide upside to our
estimates and given the sharp run-up since we initiated coverage, we urge new
investors to wait for a better entry point. We revise our rating downward to Hold,
but maintain our 1-year target price of Rs1,260.
Revenue ahead of expectations with some pull-in of projects from 4QFY14:
Though revenue growth was slightly ahead of expectations, this was the effect of a
budget-flush like situation with some clients, where planned activity for 4QFY14
was moved up to 3QFY14. Management suggested that almost 25% of the growth
this quarter could be due to this reason. We note that top-5 and non-top-5 growth
was strong with incremental revenue from both categories at USD0.8Mn (third
successive quarter where incremental revenue from non-top-5 has met or exceeded
top-5 contribution) thereby lowering top-5 client concentration further to 74%.
Investing more in Sales and Marketing to drive non-top-5 growth: Sales and
distribution (S&D) costs jumped 18.1% QoQ due to both addition in headcount as
well as provisioning for bonuses. Even excluding the reclassification of some
employees deputed from India as part of onsite sales, there has been an uptick in
sales headcount. We hope that sales investments to mine the non-top-5 financial
services clients will improve the non-top-5 growth even further.
Growth trajectory to remain unchanged despite client budget uptick for IT:
Since eClerx’s services mostly cater to operations, they do not expect a material
improvement to their growth trajectory even in the event of improved client
spending on IT. We think that there is potentially more work for eClerx as increased
spending on new systems creates more short-term projects such as data cleansing.
However, we think that these services may already be a significant portion of the
portfolio in the top-5 clients and improving traction might need closer alignment to
clients outside the non-top-5 and await results of the new sales strategy.
Downgrading to Hold given expensive valuation after recent sharp run up: We
retain our revenue estimates (awaiting clear signs of an improved growth trajectory
from sales investments) and reduce our margin estimates on account of sharp
increases in S&D costs. eClerx is currently trading at 12.2x 1-Year forward EPS. Given
concerns on client concentration and long-term scalability, we retain our target
multiple of 11x (and note that our target multiple for HCL Tech and Wipro is only
14x) and maintain our 1-Year TP of Rs1,260. Key upside risk to our call is from better
than expected revenue traction (which will mean EPS estimate upgrades) while the
key downside risk comes from significant rupee appreciation.
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eClerx delivered revenue growth slightly ahead of our expectations with strong
growth across both non-top-5 and top-5 clients. Though EBITDA margins at 40.5%
were 342bps below our expectations, investments in Selling & Distribution were
responsible for 206bps margin decline while G&A increase took away another
53bps. We think only better than expected traction can provide upside to our
estimates and given the sharp run-up since we initiated coverage, we urge new
investors to wait for a better entry point. We revise our rating downward to Hold,
but maintain our 1-year target price of Rs1,260.
Revenue ahead of expectations with some pull-in of projects from 4QFY14:
Though revenue growth was slightly ahead of expectations, this was the effect of a
budget-flush like situation with some clients, where planned activity for 4QFY14
was moved up to 3QFY14. Management suggested that almost 25% of the growth
this quarter could be due to this reason. We note that top-5 and non-top-5 growth
was strong with incremental revenue from both categories at USD0.8Mn (third
successive quarter where incremental revenue from non-top-5 has met or exceeded
top-5 contribution) thereby lowering top-5 client concentration further to 74%.
Investing more in Sales and Marketing to drive non-top-5 growth: Sales and
distribution (S&D) costs jumped 18.1% QoQ due to both addition in headcount as
well as provisioning for bonuses. Even excluding the reclassification of some
employees deputed from India as part of onsite sales, there has been an uptick in
sales headcount. We hope that sales investments to mine the non-top-5 financial
services clients will improve the non-top-5 growth even further.
Growth trajectory to remain unchanged despite client budget uptick for IT:
Since eClerx’s services mostly cater to operations, they do not expect a material
improvement to their growth trajectory even in the event of improved client
spending on IT. We think that there is potentially more work for eClerx as increased
spending on new systems creates more short-term projects such as data cleansing.
However, we think that these services may already be a significant portion of the
portfolio in the top-5 clients and improving traction might need closer alignment to
clients outside the non-top-5 and await results of the new sales strategy.
Downgrading to Hold given expensive valuation after recent sharp run up: We
retain our revenue estimates (awaiting clear signs of an improved growth trajectory
from sales investments) and reduce our margin estimates on account of sharp
increases in S&D costs. eClerx is currently trading at 12.2x 1-Year forward EPS. Given
concerns on client concentration and long-term scalability, we retain our target
multiple of 11x (and note that our target multiple for HCL Tech and Wipro is only
14x) and maintain our 1-Year TP of Rs1,260. Key upside risk to our call is from better
than expected revenue traction (which will mean EPS estimate upgrades) while the
key downside risk comes from significant rupee appreciation.
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