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eClerx Services Q4FY12: Economic slowdown catching up

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eClerx came out with its Q4FY12 results, which were slightly below SPA Securities’ estimates. eClerx has registered a revenue growth of 0.4% QoQ to $25.5mn (SPAe: 26.1mn). The FY12 EPS of Rs54.9, however exceeded their guidance on the back of improvement in margins from 39.3% to 40.1% due to Rs depreciation. SPA expect Agilyst to start adding to the topline from Q1FY13 with an annual revenue run-rate of USD 14mn. On the back of inorganic growth push, SPA expect the company’s FY14 EPS at Rs73.


Q4FY12 Revenue growth – sluggish

eClerx reported a moderate volume growth of 0.4% QoQ in Q4FY12, with no change in pricing. The revenues for FY12 at USD 97.5mn were slightly below their expectations of USD 98.1mn. This could be attributed to the volatility in the top-5 clients spending, which continues to contribute 85%+ to eClerx’s topline. However revenue at Rs4,728mn (SPAe: Rs 4,650mn) grew at 38.2% helped by 7% dip in Rs. eClerx has USD 94.3mn outstanding hedges for FY13/14 at Rs49.1/USD and cash and equivalents of Rs2,686mn or Rs92.4/share.


Full Year Margin improvement

eClerx has improved its EBITDA Margins from 39.3% in FY11 to 40.1% in FY12 leading to an EPS growth of 34.9% to Rs54.9. The margins for Q4FY12 however, declined sequentially by 600bps to 38.2% due to (i) One time G&A spike by 190bps on the back of M&A transaction cost and decommissioning of an old facility (ii) ongoing increase in S&M investments by 330bps and (iii) Rs appreciation.


Growth Avenues

As eClerx continues to (i) increase its SG&A spend and (ii) add to its onsite team (52 at present), it is trying to expand its business outside its top-5 clients. It added 10 new clients in FY12


Inorganic Growth Push

eClerx recently acquired Agilyst (service provider for US telecom and cable companies) for USD 15.75mn upfront payment and a maximum of USD 13mn in payout by H1FY14 subject to business performance. Agilyst since acquisition has won 1 big deal pushing its standalone annual revenue run-rate to USD 14mn.


Outlook and Valuation

eClerx expect the organic growth to be 6% in FY13 due to higher volatility in Top 5 client’s spending and slower pick up in non-top-5 clients causing a lack of revenue generation opportunities. However with Agilyst starting contribution by Q1FY13 SPA Securities expects eClerx’s topline to grow by 30% & 18% in FY13 & FY14. On the margins front SPA expect eClerx to come off a bit to 35.5% & 36.7% in FY13 & FY14 due to (i) Pricing pressure from top-5 clients and (ii) wage inflation (10.5% offshore and 3% onsite) though partially offset by Rs depreciation in H1FY13. Thus, on the back of inorganic growth coupled with lower margins, SPA Securities expects EPS to grow at 15.2% CAGR over FY12-14E vis-à-vis 37.5% CAGR over FY08-12.

eClerx had enjoyed premium valuation due to its higher than industry margins, growth rates and being the only listed Indian KPO; but with tapering growth SPA Securities has risk-adjusted their valuation multiple, lower by 15% to 12x, continuing to recommend BUY for the stock, with a 2 year Target Price of Rs874 and its revenue from Non-Top-5 clients grew by 36% bringing them at speed with that of Top-5 client’s at 38%.

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