Disappoints again… • eClerx’ Q3FY15 :: ICICI Securities, report

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Disappoints again… • eClerx’ Q3FY15 earnings were generally soft as dollar revenue growth and EBITDA margins came below our estimates • US$ revenues grew 2.1% QoQ (3.1% in constant currency) to $38.9 million, below our 3.3% QoQ growth and $39.3 million estimate • EBITDA margins declined 160 bps QoQ to 33.6% (34.7% estimate) led by increased contribution from lower than company average margin cable business and higher SG&A expenses partially offset by currency tailwinds. Reported PAT of | 60.8 crore was also below our | 68.2 crore estimate, led by lower margins and other income FY15E growth likely to be in low teens… eClerx reported 3.1% QoQ constant currency (CC) revenue growth during the quarter (2.1% in dollar). Though healthy in a seasonally weak quarter, it fell short of the required 5.1% CQGR during H2FY15E to achieve our 13% FY15E growth estimate. The management commentary earlier had indicated FY15E growth could mirror FY14 organic growth of ~13%, which now appears tough. Sequentially, revenues from top 5 accounts declined for a third time in last four quarters (-0.8%) indicating revenue flux in these accounts. Consequently, we further lower our FY15E dollar revenue growth estimate to 11% vs. 13% earlier as weakness in top customers could likely offset acceleration in non top-5 accounts. Sluggishness of top customers continues to impact margins… At 33.6%, Q3 margins were significantly below our 34.7% estimate despite utilisation improvement, currency tailwinds as rising contribution from lower margin cable business and SG&A expenses created incremental headwinds. Note, Q3 margins are considerably lower than 36% in H1; 40.5% in Q3FY14 and 42% for FY14, which had improved 162 bps during FY08-14 period led in part by currency tailwinds. We now expect FY15E margins to decline 653 bps to 35.5% (423 bps, 37.8% earlier) led by reasons mentioned. Headwinds in top 5 accounts to persist going into FY16E Growth in Q3 continues to be driven by non-top 5 accounts (8.6% QoQ, 41.8% YoY) vs. 15.9% QoQ, 42.4% YoY in Q2 and 37.5% YoY in FY14 (34% revenue contribution vs. 32% in Q2; 26% in FY14 and 21% in FY09). Growth in top 5 remained weak (-0.8% QoQ, -2.6% YoY) vs. 7.4% YoY in FY14 and below its 25.1% CAGR during FY09-14. Management commentary suggests momentum could continue in favour of emerging clients in cable and sales & marketing verticals while top 5 customers, BFSI vertical could continue to see headwinds. FY16E revenue growth could mirror that of FY15E pending acceleration in top customers. Client mining aided growth in non-top 5 clients (revenue/customer grew 8.6% QoQ to $192k vs. $176k in Q2) as active clients billed were flat QoQ (74). Premium multiple untenable given moderating growth, margins We estimate eClerx will report rupee revenue, earnings CAGR of 12%, 11% over FY14-16E (average 36.9% EBITDA margins in FY15-16E), vs. 34%, 33% reported during FY09-14 (average 40.1%). Growth deceleration is being driven by sluggish growth in top five account 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. We maintain our SELL rating as the current PE multiple represents significant premium (20%) relative to its historical average despite moderating growth and tapering margins

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