Multiples untenable given moderating growth, margin • eClerx :: ICICI Securities, PDF link

Please Share::

�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��

��

-->
Multiples untenable given moderating growth, margin
• eClerx’ Q2FY15 earnings were a mixed bag. Though dollar revenue
growth was higher than our estimate led by the cable business,
reported EBITDA margins declined QoQ & were below our estimates
• US$ revenues grew 5.1% QoQ (5.6% in constant currency) to $38.1
million, above our 4.5% QoQ growth and $37.8 million estimate
• EBITDA margins declined 161 bps QoQ to 35.2% (39.3% estimate)
led by increased contribution from lower margin cable business,
higher CSR contribution and under-utilisation of facilities partially
offset by lower travel expenses. Reported PAT of | 62.3 crore was
also below our | 69 crore estimate, led by lower margins
Needs 5% CQGR to equal FY14 organic growth…
Q2 dollar revenue growth showed a healthy pick-up (5.2%) vs. a soft Q1
while commentary suggests FY15E growth could mirror FY14 organic
growth of ~13%, likely driven by cable business. Note, eClerx now
requires ~5% CQGR in H2 to achieve the same, which though achievable,
is demanding given client-specific headwinds in top 5 accounts.
Consequently, we lower our FY15E dollar revenue growth estimate to
13% vs. 14% earlier and 13.9% achieved in FY14. Interestingly, eClerx
does not anticipate significant revenue growth acceleration even in FY16E
based on current visibility.
Margins decline sequentially despite improvement in operating metrics…
At 35.2%, Q2 margins were significantly below our 39.3% estimate
despite utilisation improvement and revenue growth as higher CSR
contribution, rising contribution from lower margin cable business
created incremental headwinds. Note, Q2 margins are considerably lower
than 36.8% in Q1; 43.2% in Q2FY14 and 42% for FY14, which had
improved 162 bps during FY08-14 period let in part by currency tailwinds.
We now expect FY15E margins to decline 423 bps to 37.8% (253 bps,
39.5% earlier) led by reasons mentioned.
Prolonged deceleration in top five continues to impact overall growth
Growth in Q2 continues to be driven by non-top 5 accounts (15.9% QoQ,
42.4% YoY) vs. 7.5% QoQ, 32.6% YoY in Q1 and 37.5% YoY in FY14
(32% revenue contribution vs. 29% in Q1; 26% in FY14 and 21% in FY09).
YoY growth in non-top 5 was above its 32.2% CAGR during FY09-14,
primarily due to rising contribution of Agilyst. Growth in top 5 remained
subdued (0.6% QoQ , 1.2% YoY) vs. 7.4% YoY in FY14 and below its
25.1% CAGR during FY09-14. Management commentary suggests
business-ex-cable continues to be soft while top client restructuring in the
sales & marketing vertical continues to impact decision making. Active
clients billed improved by nine QoQ to 74 (65 in Q1), which aided growth
in non-top 5 clients. Over time, the active client base improved by 16 to
64 in FY14 vs. 48 in FY12.
Premium multiple untenable given moderating growth, margins
We estimate eClerx will report rupee revenue, earnings CAGR of 12%,
11% over FY14-16E (average 38.1% EBITDA margins in FY15-16E), vs.
34%, 33% reported during FY09-14 (average 40.1%). Growth deceleration
is being driven by top five account weakness while rising employee cost
structure could impact margins. We continue to value eClerx at 11x (in
line with its FY09-14 average of 10.3x) its FY16E EPS of | 102 to arrive at
our target price of | 1122 and maintain SELL rating as the current
valuations are at 20% premium to its historical average.

LINK
http://content.icicidirect.com/mailimages/IDirect_eClerx_Q2FY15.pdf