eclerx_idirect_251013

7/27/2019 eClerx_IDirect_251013

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October 25, 2013

ICICI Securities Ltd | Retail Equity Research

Result Update

WHAT’S CHANGED…

PRICE TARGET.....................................................................

Changed from | 880 to | 1020

EPS (FY14E) ......................................................................... Changed from | 76.5 to | 83.8

EPS (FY15E).................................... ................................... Changed from | 91.8 to | 102.0

RATING............................................................................................................... Unchanged

Chugging along...eClerx reported Q2FY14 earnings, which were in line with our estimates.Dollar revenues grew 3.4% QoQ to $34.1 million predominantly led by thecable business while EBITDA margins were up 162 bps QoQ led bycurrency tailwinds. Growth was driven by Agilyst (now $20 million+business) while core business continues to be soft. The management

commentary suggests that the deal pipeline is healthy in sales &marketing business (where deal sizes tend to be smaller) whileopportunities in banking are fewer but larger in size. We are adjusting ourestimates to account for the change in rupee assumption and continue tomaintain our BUY rating.

Revenues, margins in line with estimates

US$ revenues came in at $34.1 million (3.4% QoQ growth), in line withour $34.2 million estimate while constant currency revenues grew 3.1%QoQ. Rupee revenues grew 13% QoQ to | 214.6 crore. EBIT margins rose286 bps sequentially to 39.8%, modestly below our 40.6% estimate and36.9% in Q1. Margin tailwinds as well as headwinds were increase inonsite headcount & sales bonuses (-1.8%), increase in legal & recruitment fees (-1.3%), employee cost (-0.8%), depreciation (+0.9%) and currency(+5.8%). At | 67.2 crore, reported net profit grew 8.9% QoQ led bymargin beat and lower tax rate (21.9% vs. 23.7% in Q1).

Operating metric analysis: High attrition and low utilisation, a concern

Growth was broad based across key geographies including the US,Europe, RoW, which grew 3.4% each. Utilisation came in at 65%(declined 100 bps QoQ), lowest in last 10 quarters. Top 5 clients’revenues grew 1.9% QoQ while concentration continues its healthydecline (75% in Q2 vs. 76% in Q1). Five clients were added during Q2taking the active client base to 65. India headcount grew by 154 during Q2while attrition rose – higher than anticipated – 620 bps YoY to 36.4%.

Adjusting estimates modestly, raising target price

We are adjusting our estimates to account for higher rupee rate. We nowexpect revenues, PAT to grow 29%, 48% and 15%, 21%, in FY14E,FY15E, respectively, translating to 22%, 34% CAGR, respectively, duringFY13-15E. We continue to value eClerx at 10x FY15E EPS of | 102 toarrive at our target price of | 1020. We maintain BUY recommendation.

Exhibit 1: Financial Performance

(| crore) Q2FY14 Q2FY14E Q1FY13 Q2FY13 QoQ(Ch %) YoY(Ch%)

Net Sales 214.6 212.1 189.9 161.7 13.0 32.7

EBITDA 92.8 92.9 79.0 60.1 17.4 54.5

EBITDA Margin (%) 43.2 43.8 41.6 37.1 162 bps up 448 bps up

Depreciation 7.4 6.9 9.0 7.7 (17.0) (3.6)

Interest 0 0 0 0 NM NM

Other Income 0.6 (1.7) 10.8 (18.7) NM NMReported PAT 67.2 64.5 61.7 25.1 8.9 167.7

EPS (|) 22.1 21.3 20.4 8.4 8.4 165.0

Source: Company, ICICIdirect.com Research

eClerx Services (ECLSER)

| 927

ting matrix

ing : Buy

get : | 1020

get Period : 12 months

ential Upside : 10%

y Financials

Crore) FY12 FY13 FY14E FY15E

t Sales 473 661 850 978

TDA 190 257 356 405

TDA (%) 40.2 38.9 41.9 41.5

t profit 160 172 253 308

S (|) 53.0 56.9 83.8 102.0

luation summary

FY12 FY13 FY14E FY15E

(x) 17.5 16.3 11.1 9.1

rget PE 19.3 17.9 12.2 10.0

ce to book (x) 8.2 6.4 4.9 3.9

to EBITDA(x) 13.5 10.0 7.2 6.3

NW (%) 46.5 39.1 43.8 42.3

CE (%) 57.5 60.9 63.0 56.0

ock data

arket cap (| crore) | 2802 crore

bt (Sep-13) | 0 crore

sh (Sep-13) | 231 crore

| 2571 crore

week H/L (|) 1070 / 597

uity capital | 30 crorece value 10

Holding (%) 22.4

Holding (%) 14.7

ce movement

0

00

00

00

A u g - 1 1

N o v - 1 1

F e b - 1 2

M a y - 1 2

A u g - 1 2

N o v - 1 2

F e b - 1 3

M a y - 1 3

A u g - 1 3

Nifty eCLerx

alyst’s name

bhishek Shindadkar

[email protected]

ardik Varma

[email protected]




Exhibit 2: Broad based growth across geographies after nine quarters

$ million Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14

North America 22.4 23.5 23.8 24.4 25.2

QoQ growth 12.0 5.0 1.3 2.7 3.4

Europe 5.7 5.6 6.8 6.9 7.2

QoQ growth 0.7 (0.5) 20.7 1.9 3.4

ROW 1.8 2.2 1.7 1.7 1.7

QoQ growth (29.3) 22.5 (21.6) (3.9) 3.4


Exhibit 3: As anticipated, attrition spikes to 36.4% vs. 25.2% in Q1 and 30.2% in Q2FY13

Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14

Indian headcount 5760 5837 5954 6389 6543

Attrition (YTD) 30.2 26.5 27.3 25.2 36.4

Utilisation(%) 68.0 69.0 68.9 66.0 65.0


Exhibit 4: Top 5 revenue contribution declines a healthy100 bps sequentially

Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14

Additions 4 7 6 5 5

Active agreement billed 54 60 73 61 65

Top 5 clients (%) 79 78 78 76 75

Top 5 clients ($ million) 24 24 25 25 26

QoQ growth 4.7 3.7 3.2 (0.5) 1.9

FT 500 (% as of revenue) 96 98 NA NA NA


Risks and concern

The macro continues to be a challenge. Cross currency volatility couldimpact revenue growth in FY14E. However, significant rupee depreciationcontinues to be a key margin tailwind.

Exhibit 5: One year forward (PE) chart

0

300

600

900

1200

1500

A p r -

0 8

S e p -

0 8

F e b -

0 9

J u l - 0 9

D e c - 0 9

M a y - 1 0

O c t - 1 0

M a r - 1 1

A u g - 1 1

J a n - 1 2

J u n - 1 2

N o v - 1 2

A p r -

1 3

S e p -

1 3

Price 16 12 8 4 2


Exhibit 6: Assumptions


Total Employee base 4,405 5,954 6,654 7,404

Additions 747 1,549 700 750

Attrition (LTM) 31.3% 26.8% 27.0% 25.0%

Average $/ | 48.4 54.1 61.0 60.5 [


Utilisation, at 65%, was lowest in the last 10 quarters

Top 5 clients continue to grow below company average for

a second consecutive quarter




Profit & Loss Account

(|crore) FY12 FY13 FY14E FY15E

Total Revenues 473 661 850 978

Growth (%) 38.0 39.7 28.7 15.1

Total Operating Expenditure 283 406 494 572EBITDA 190 257 356 405

Growth (%) 40.7 35.1 38.7 13.9

Depreciation 12.9 23.4 33.1 39.1

Other Income 5 -18 8 34

Exchange difference -17 0 0 0

Interest 0 0 0 0

PBT before Exceptional Items 199 211 331 400

Growth (%) 42.5 5.9 56.9 21.0

Tax 39 39 78 92

PAT before Exceptional Items 160 172 253 308

Exeptional items 0 0 0 0

PAT before MI 160 172 253 308

Minority Int & Pft. from associates 0 0 0 0

PAT 160 172 253 308

Growth (%) 29.9 7.4 47.5 21.8

EPS 53 57 84 102

EPS (Growth %) 31.7 7.4 47.1 21.8


Cash flow statement


Net profit before Tax 199 211 331 400

Depreciation 13 23 33 39

(inc)/dec in Current Assets 22 (25) (42) (11) (inc)/dec in current Liabilities (38) (40) (78) (92)

CF from operations 172 153 238 309

Other Investments (72) 65 0 0

Other income 5 (18) 8 34

(Purchase)/Sale of Fixed Assets (25) (27) (40) (42)

CF from investing Activities (83) (35) (32) (8)

Inc / (Dec) in Equity Capital 3 7 0 0

Dividend & Divendend tax (76) (60) (123) (158)

Interest Paid on Loans 0 0 0 0

CF from Financial Activities (72) (53) (123) (158)

Exchange rate differences 1 0 0 0

Opening cash balance 152 169 235 317Closing cash 169 235 317 460


Balance sheet


Equity 30 30 30 30

Reserves & Surplus 314 408 539 689

Networth 343 438 569 719Minority Interest 0 0 0 0

Loans 0 0 0 0

Source of funds 348 447 578 729

Gross Block 88 124 164 206

Acc.dep 44 69 102 141

Net Block 44 55 62 65

CWIP 5 1 1 1

Investments 0 0 0 0

Debtors 42 65 109 119

Cash & Cash equivalents 169 235 317 460

Loans and advances 30 47 53 61

Current liabilities 5 7 9 10Provisions 93 126 166 191

Application of funds 348 447 578 729


Ratio Analysis

(Year-end March) FY12 FY13 FY14E FY15E

Per share data (|)

EPS 53.0 56.9 83.8 102.0

Cash EPS 70.1 77.5 120.4 145.4BV 113.6 145.0 188.1 237.7

DPS 17.5 25.0 35.0 45.0

Cash Per Share 55.8 77.7 105.0 152.3

Operating Ratios (%)

EBITDA Margin 40.2 38.9 41.9 41.5

PBT / Total Operating income 42.1 31.9 38.9 40.9

PAT Margin 33.8 26.0 29.8 31.5

Debtor days 33 36 38 43

Creditor days 4 4 3 4

Return Ratios (%)

RoE 46.5 39.1 43.8 42.3

RoCE 57.5 60.9 63.0 56.0RoIC 133.1 119.3 136.7 138.4

Valuation Ratios (x)

P/E 17.5 16.3 11.1 9.1

EV / EBITDA 13.5 10.0 7.2 6.3

EV / Net Sales 5.4 3.9 3.0 2.6

Market Cap / Sales 5.9 4.2 3.3 2.9

Price to Book Value 8.2 6.4 4.9 3.9

Solvency Ratios

Debt/EBITDA 0.0 0.0 0.0 0.0

Debt / Equity 0.0 0.0 0.0 0.0

Current Ratio 2.5 2.6 2.7 3.2

Quick Ratio 2.5 2.6 2.7 3.2


Financial Summary




Company Description

eClerx Services (ESL) provides knowledge process outsourcing (KPO)services. Incorporated in 2000, ESL optimises core day-to-day processesof its clients. With more than 7,000 employees, the company providesservices using a mix of data analytics and customised process solutions from its offshore delivery centres in India. ESL’s services portfoliocomprises data analytics, operations management, data audits, metricsmanagement and reporting services. Also, delivery teams consist ofgeneralists, domain specialists and in-house software professionals whoautomate and streamline existing clients’ processes.

Exhibit 7: Recommendation History

600

800

1,000

1,200

O c t - 1 3

O c t - 1 3

S e p - 1 3

A u g - 1 3

J u l - 1 3

J u l - 1 3

J u n - 1 3

Price Target Price

[


Exhibit 8: Recent Releases

Date Event CMP Target Price Rating

27-May-13 Q4FY13 Result Update 664 810 BUY

5-Jul-13 Q1FY14 Preview 740 810 BUY

22-Jul-13 Q1FY14 Result Update 798 880 BUY

13-Aug-13 Quick Comment 784 880 BUY

7-Oct-13 Q2FY14 Preview 903 880 BUY

24-Oct-13 Q2FY14 Result Update 927 1020 BUY





ICICIdirect.com Coverage Universe (IT)CMP M Cap

(|) TP(|) Rating (| Cr) FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E

Eclerx (ECLSER) 927 1,020 Buy 2,790 56.9 83.8 102.0 16.3 11.1 9.1 10.0 7.2 6.3 60.9 63.0 56.0 39.1 43.8 42.3

HCL Tech* (HCLTEC) 1,055 1,260 Buy 73,644 56.6 81.0 91.0 18.6 13.0 11.6 11.9 8.3 7.7 36.7 39.1 33.2 30.6 32.0 27.6

Infotech (INFTC) 230 265 Buy 2,565 20.7 24.0 26.5 11.1 9.6 8.7 5.7 4.7 4.3 26.5 27.9 26.3 18.6 18.7 17.8Infosys (INFTEC) 3,309 3,550 Hold 190,000 164.9 187.5 208.8 20.1 17.6 15.8 14.1 11.9 10.6 28.5 28.3 26.8 25.7 24.6 23.1

KPIT Technologies (KPISYS) 146 150 Hold 2,813 10.5 14.6 17.1 13.8 10.0 8.5 7.8 6.1 5.3 27.8 28.0 28.1 22.8 24.8 23.4

Mastek (MASTEK) 161 180 Buy 395 14.0 24.2 33.6 11.5 6.6 4.8 2.4 1.3 0.9 5.6 11.2 15.6 6.5 10.2 12.7

Mindtree (MINCON) 1,374 1,450 Buy 5,713 81.8 112.0 131.5 16.8 12.3 10.4 11.5 8.8 7.9 29.5 30.9 27.5 25.8 27.8 26.0

NIIT Ltd. (NIIT) 20 22 Hold 329 1.5 1.6 4.4 13.0 12.2 4.5 9.9 6.4 5.2 NM NM 1.9 3.8 4.1 10.3

NIIT Technologies (NIITEC) 275 330 Buy 1,662 35.4 42.5 47.1 7.8 6.5 5.8 4.5 3.6 3.3 26.7 28.3 27.3 21.3 21.5 20.5

Sasken Com (SASCOM) 139 135 Hold 295 13.1 12.1 13.8 10.6 11.5 10.1 3.5 3.3 3.0 5.2 6.1 7.3 7.6 7.5 8.3

Persistent (PSYS) 774 825 Buy 3,095 46.1 59.2 74.8 16.8 13.1 10.3 7.7 6.5 5.4 27.3 27.6 28.3 19.8 21.4 22.8

TCS (TCS) 2,009 2,450 Buy 393,450 71.0 97.0 110.1 28.3 20.7 18.3 21.3 15.2 13.7 45.8 47.8 40.9 36.0 36.2 31.8

Tech Mahindra (TECMAH) 1,537 1,400 Buy 35,726 82.4 105.0 116.0 18.7 14.6 13.2 10.7 9.0 8.4 40.3 37.0 30.6 33.5 31.0 26.2

Wipro (WIPRO) 471 550 Buy 116,070 25.0 30.2 32.9 18.9 15.6 14.3 12.9 11.0 10.1 23.6 26.2 23.4 21.6 23.2 23.2

RoE (%)

Sector / Company

EPS (|) P/E (x) EV/EBITDA (x) RoCE (%)

Source: Company, ICICIdirect.com Research,,*June year end




RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns

ratings to its stocks according to their notional target price vs. current market price and then categorises them

as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional

target price is defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;

Buy: > 10%/ 15% for large caps/midcaps, respectively;

Hold: Up to +/-10%;

Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk,ICICI Securities Limited,1st Floor, Akruti Trade Centre,Road No. 7, MIDC,Andheri (East)

Mumbai – 400 093

[email protected]

ANALYST CERTIFICATION

We /I, Abhishek Shindadkar MBA Hardik Varma MBA research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accuratelyreflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific

recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

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underwriter of securities and participate in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationship with a significant percentage of

companies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. ICICI Securities

generally prohibits its analysts, persons reporting to analysts and their dependent family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts

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The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and

meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without

prior written consent of ICICI Securities. While we would endeavour to update the information herein on reasonable basis, ICICI Securities, its subsidiaries and associated companies, their directors and

employees (“ICICI Securities and affiliates”) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities

from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities

policies, in circumstances where ICICI Securities is acting in an advisory capacity to this company, or in certain other circumstances.

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eclerx_idirect_251013

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