RESULT UPDATE
eCLERX SERVICES Long term play India Equity Research| IT
eClerx’s Q1FY14 revenues at USD33.0mn (QoQ growth of 2.2%) were in line with Street estimate, while EBITDA margin at 41.6%, was above Street estimate of 38.1% and up 220bps QoQ due to currency benefit of ~400bps. Management anticipates organic growth to remain subdued due to regulatory changes, while Agilyst to be the growth engine. Even as near term organic growth remains soft, we believe the long term story is intact owing to its cost-focused model. Weakness in the organic business leads us to downgrade our FY14/15 revenue growth estimates to 13.7%/13.3% from 16.2%/16.3%, respectively. However, revision of INR/USD estimate from INR55/53 to INR58/56 for FY14/15 and strong margin performance in Q1FY14 leads to 6.5%/7.9% upward revision in EPS for FY14/15. Maintain ‘BUY’ with revised TP of INR953 (12x FY15E EPS).
EDELWEISS 4D RATINGS Absolute Rating
BUY
Rating Relative to Sector
Outperformer
Risk Rating Relative to Sector
Medium
Sector Relative to Market
Overweight
MARKET DATA (R: ECLE.BO, B: ECLX IN) CMP
: INR 807
Target Price
: INR 953
52-week range (INR)
: 910 / 597
Share in issue (mn)
: 30.1
M cap (INR bn/USD mn)
: 24 / 409
Avg. Daily Vol.BSE/NSE(‘000) : 33.1
Revenue in line, margin surprises eClerx posted revenues of USD33.0mn and a growth of 2.2% (2.4% in constant currency terms) in line with Street estimates. EBITDA margin at 41.6% was above Street estimate of 38.1%, up 220bps QoQ, as currency benefit of 400bps offset the wage hike impact of 290bps. For FY14, the company expects margin to remain at similar levels to FY13 (38.9%). On the pricing front, it foresees flat to minor uptick in FY14 with the caveat of currency being in the range of INR58-60/USD.
SHARE HOLDING PATTERN (%) Current Q4FY13
Q3FY13
Promoters *
53.1
53.3
53.8
MF's, FI's & BK’s
14.8
14.5
13.5
FII's
21.4
20.2
21.5
Others
10.7
12.1
11.2
:
* Promoters pledged shares (% of share in issue)
NIL
Organic growth to stay subdued The company expects organic business to continue with its slower growth rates over the course of the year. This is largely due to the softness in financial services vertical where spend has been impacted due to ongoing regulatory changes, even as Agilyst continues the growth momentum. Weakness in the organic business leads us cut our revenue growth assumptions for FY14/15 to 13.7%/13.3% vs. earlier 16.2%/16.3%.
Outlook and valuations: Long term intact; maintain ‘BUY’ Even as we trim the revenue growth, a robust margin performance in Q1FY13 and revision of INR/USD estimate from INR55/53 to INR58/56 for FY14/15 leads to 6.5%/7.9% upward revision in EPS for FY14/15. While organic growth is expected to be soft in the near term, we prefer eClerx for its cost-focused model and high ROEs (40%+) and dividend payout (40-45%). We maintain ‘BUY/SO’ with a revised TP of INR953. Financials Year to March Revenue
Q1FY14 Q4FY13
Growth % Q1FY13 Growth %
FY13
PRICE PERFORMANCE (%) Stock
Nifty
1 month
10.7
3.6
1.7
3 months
24.7
4.3
(4.2)
12 months
27.7
15.0
18.1
Sandip Agarwal
(INR mn) FY14E FY15E
+91 22 6623 3474
[email protected]
1,899
1,743
8.9
1,537
23.6
6,605
8,020
8,765
Omkar Hadkar
EBITDA
791
687
15.1
612
29.3
2,568
3,225
3,376
Net profit
617
482
28.1
493
25.1
1,716
2,317
2,395
+91 22 6620 3147
[email protected]
Dil. EPS (INR)
20.4
16.0
27.7
16.4
24.6
56.9
76.9
79.5
Deepansu Jain
14.2
10.5
10.2
EV/EBITDA (x)
8.1
6.2
5.6
+91 22 4040 7576
[email protected]
EV/Revenues (x)
3.1
2.5
2.1
Dil. P/E (x)
Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
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EW Technology Index
July 19, 2013 Edelweiss Securities Limited
IT Other highlights
Table 1: Key operating metric data Currency concentration (%) USD EURO GBP Others Geographic concentration (%) North America Europe ROW Client concentration (%) Top 5 Billing mix (%) FTE SEZ revenues
•
Revenues stood at USD33.0mn sequential growth of 2.2%.
•
PAT stood at INR617mn, up 28.1% on sequential basis. Tax rate stood at 23.7% (18.2% in Q4FY13).
•
Contribution from top five clients stood at 76% (78% in Q4FY13). Top five declined sequentially by 0.5%.
•
North America saw a sequential growth of 2.2% in USD terms while Europe grew by 2.2% albeit on a lower base.
•
Net addition of 435 employees, taking the employee count to 6,389.
•
Debtor days stood at 35 (33 in the previous quarter).
•
Cash and cash equivalents stood at INR2,824mn.
•
The company has outstanding hedges worth USD101.8mn at an average rate of INR58.8/USD.
Q112 74.0 21.0 3.0 2.0
Q212 77.0 19.0 3.0 1.0
Q312 80.0 18.0 3.0 -
Q412 79.0 17.0 3.0 1.0
Q113 83.0 14.0 3.0 1.0
Q213 83.0 13.0 3.0 1.0
Q313 82.0 12.0 5.0 1.0
Q413 81.0 15.0 4.0 -
Q114 81.0 15.0 3.0 1.0
61.0 31.0 8.0
65.0 26.0 9.0
70.0 24.0 6.0
70.0 23.0 7.0
71.0 20.0 9.0
75.0 19.0 6.0
75.0 18.0 7.0
74.0 21.0 5.0
74.0 21.0 5.0
88.0
86.0
86.0
87.0
80.0
79.0
78.0
78.0
76.0
93.0 66.0
95.0 64.0
94.0 67.0
95.0 72.0
93.0 62.0
93.0 58.0
92.0 59.0
91.0 60.0
94.0 60.0
67.0
71.0
72.0
72.0
68.0
68.0
69.0
69.0
66.0
Clients added (Nos.)
4
5
8
10
8
4
7
6
5
Clients billed (Nos.)
48
50
53
55
54
54
60
73
61
Utilisation (%)
Source: Company, Edelweiss research
2
Edelweiss Securities Limited
eClerx Services Financial snapshot Year to March Net revenues Software development exp. Gross profit SG&A EBITDA Depreciation & amortization EBIT Other income Profit before tax Tax Exceptionals Net profit Adjusted net profit Diluted EPS (INR) As % of net revenues Gross profit SG&A EBITDA Adjusted net profit Reported net profit Tax rate
Q1FY14 1,899 838 1,061 271 791 90 701 108 809 192 617 617 20.4
Q4FY13 1,743 787 956 269 687 67 620 (31) 589 107 482 482 16.0
55.9 14.2 41.6 32.5 32.5 23.7
54.8 15.4 39.4 27.6 27.6 18.2
% Change 8.9 6.4 11.0 0.4 15.1 34.0 13.1 (451.6) 37.3 78.6 28.1 28.1 27.7
Q1FY13 1,537 652 885 273 612 38 574 46 598 105 21 493 493 16.4
% Change 23.6 28.5 19.9 (1.0) 29.3 135.6 22.2 134.4 35.2 82.4 (100.0) 25.1 25.1 24.6
57.6 17.8 39.8 32.1 32.1 17.6
FY13 6,605 2,953 3,652 1,085 2,568 255 2,312 (182) 2,109 393 21 1,716 1,716 56.9
FY14E 8,020 3,515 4,505 1,281 3,225 345 2,879 166 3,045 729 2,317 2,317 76.9
(INR mn) FY15E 8,765 3,986 4,779 1,402 3,376 444 2,932 219 3,151 756 2,395 2,395 79.5
55.3 16.4 38.9 26.0 26.0 18.6
56.2 16.0 40.2 28.9 28.9 23.9
54.5 16.0 38.5 27.3 27.3 24.0
Change in Estimates
Net revenue
New 8,020
FY14E Old 7,768
% change 3.3
New 8,765
FY15E Old 8,708
EBITDA
3,225
2,945
9.5
3,376
2,966
40.2
37.9
38.5
34.1
Core profit
2,317
2,176
2,395
2,219
PAT margin
28.9
28.0
27.3
25.5
Capex
340
465
395
520
EBITDA margin
3
6.5
(26.9)
% change Comments 0.7 Lower revenue growth of 16% vs 20% earlier in FY14 partially offset by the revision of USD/INR rate to INR55/USD vs. earlier rate of INR54/USD 13.8 Strong Q1FY14 EBITDA margin performance and revision of exchange rate leads to higher PAT 7.9 Impact of higher operating profits partially offset by higher tax (24.0)
Edelweiss Securities Limited
IT Company Description Incorporated in 2000, eClerx is one of the first KPOs to be listed in India and provides data analytics and customized process solutions to global enterprise clients from its offshore delivery centers in India. The company provides business solutions leveraging the cost effective combination of people, process and technology. These provide clients with benefits beyond cost reduction by designing solutions that incorporate talent management, process improvements, better reporting and metrics. It currently offers services to clients in the financial services, retail and manufacturing industries. eClerx’s TTM revenues stood at USD126mn and employs over 6,389 people.
Investment Theme eClerx is a strongly differentiated play in India’s burgeoning KPO space and stands out by virtue of its business model. The company has built a strong and relatively uncontested position in specific high opportunity segments such as data analytics & management and process improvement solutions thus positioning itself as an established provider of specialised services. It inks multi-year annuity contracts facilitated by ongoing engagements, which has helped the company forge a predictable revenue stream leading to attractive profitability. Strong financial track record marked by significant profitability and return ratios, strong execution and management are eClerx’s distinctive factors. We expect eClerx’s earnings growth at 14% CAGR over FY13-15E.
Key Risks Supply side pressures could affect client servicing and margins. Volatility in exchange rates could impact the company’s financials meaningfully. Process automation and adverse regulations could impact the existing business
4
Edelweiss Securities Limited
eClerx Services
Financial Statements Key Assumptions Year to March
Income statement FY12
FY13 FY14E FY15E
Macro GDP(Y-o-Y %) Inflation (Avg)
6.2 8.9
5.0 7.4
6.0 5.2
7.0 6.0
Repo rate (exit rate)
8.5
7.5
6.8
6.0
48.0
54.5
58.0
56.0
USD/INR (Avg) Company USD revenue growth (%)
FY12
FY13
FY14E
FY15E
Net revenue Cost of revenues
4,729 2,039
6,605 2,953
8,020 3,515
8,765 3,986
Gross profit
2,690
3,652
4,505
4,779
793
1,085
1,281
1,402
1,898
2,568
3,225
3,376
129
255
345
444
1,769
2,312
2,879
2,932
223
(182)
166
219
-
21
-
-
Total SG&A expenses EBITDA Depreciation & Amortization
29.1
24.6
-
Employees
13.7
13.3
(INR mn)
Year to March
EBIT
-
-
-
Net addition (nos.)
747 1,549
735
800
Pricing growth (%)
4.5
(6.8)
2.9
-
Profit before tax
1,992
2,109
3,045
3,151
Average manpower cost (YoY growth)
9.1
2.8
2.7
3.4
Provision for tax
394
393
729
756
SG&A as % of revenue
16.8
16.4
16.0
16.0
Net profit
1,598
1,716
2,317
2,395
Financial assumptions
-
-
-
-
Profit After Tax
1,598
1,716
2,317
2,395
17.0
17.8
16.2
18.0
Profit after minority interest
1,598
1,716
2,317
2,395
6.2
3.0
5.0
5.0
55.1
58.3
78.7
81.4
Tax rate as % of PBT
19.8
18.6
23.9
24.0
Shares outstanding (mn)
30
30
30
30
Capex (INR mn)
251 1,115
340
395
Diluted EPS (INR)
53.1
56.9
76.9
79.5
Depreciation Yield on cash & cash equivalents (%)
Other income Exceptionals
Basic EPS (INR)
Debtor days
33
31
35
36
CEPS (INR)
59.6
67.0
90.5
96.5
Payable days
12
11
12
13
Dividend payout (%)
32.0
43.0
45.0
45.0
Cash conversion cycle (days)
20
20
23
23 Year to March
FY12
FY13
FY14E
FY15E
Cost of revenues Gross margin
43.1 56.9
44.7 55.3
43.8 56.2
45.5 54.5
SG&A expenses
16.8
16.4
16.0
16.0
EBITDA margins
40.1
38.9
40.2
38.5
EBIT margins
37.4
35.0
35.9
33.5
Net profit margins
33.8
26.0
28.9
27.3
Year to March
FY12
FY13
FY14E
FY15E
Revenues EBITDA
38.2 41.0
39.7 35.3
21.4 25.6
9.3 4.7
EBIT
41.0
30.7
24.5
1.8
PBT
43.1
5.9
44.4
3.5
Net profit
30.5
7.4
35.0
3.4
EPS
30.5
7.3
35.0
3.4
Common size metrics
Growth ratios (%)
5
Edelweiss Securities Limited
IT Balance sheet
(INR
Cash flow metrics
FY12
FY13E
FY14E
FY15E
Year to March
FY12
FY13E
FY14E
FY15E
299 696
303 769
303 769
303 769
Operating cash flow Investing cash flow
1,721 (832)
2,143 (1,229)
2,211 (381)
2,545 (376)
Reserves & surplus
2,437
3,291
4,388
5,522
Financing cash flow
(717)
(786)
(1,220)
(1,261)
Shareholders funds
3,432
4,362
5,459
6,593
Net cash flow
171
128
610
908
(8)
(8)
(8)
(8)
Capex
(251)
(1,115)
(340)
(395)
3,424
4,355
5,452
6,586
Dividends paid
(512)
(737)
(1,043)
(1,078)
45 416
60 560
100 943
120 874
Profitability & efficiency ratios
28
728
300
300
Year to March
FY12
FY13E
FY14E
FY15E
-
-
-
-
Current Investments
999
1,199
1,399
1,599
ROAE (%) ROACE (%)
46.6 72.9
44.0 82.9
47.2 79.9
39.7 64.9
Cash and equivalents
As on 31st March Equity capital Share premium account
Deferred tax liability Sources of funds Capital work in progress Tangible assets Intangible assets Non current investments
1,687
1,815
2,425
3,333
Debtors days
33
31
35
36
Sundry debtors
422
688
835
912
Payable days
12
11
12
13
Loans and advances
375
390
428
471
Cash conversion cycle (days)
20
20
23
23
Other current assets
636
636
699
769
Current ratio
2.6
2.1
2.6
3.1
1,432
1,713
1,963
2,153
161
228
296
343
1,021
1,492
1,382
1,450
Year to March
FY12
FY13E
FY14E
FY15E
250
(8)
284
360
Uses of funds
3,424
4,355
5,452
6,586
Total asset turnover Fixed asset turnover
1.4 10.7
1.7 7.6
1.6 6.3
1.5 7.3
Book value per share (INR)
113.9
144.7
181.1
218.8
Equity turnover
1.4
1.7
1.6
1.5
Total current assets (ex cash) Trade payable Others current liabilities Net current assets (ex cash)
Free cash flow
(INR mn)
Operating ratios
Valuation parameters
Year to March
FY12
FY13E
FY14E
FY15E
Year to March
FY12
FY13E
FY14E
FY15E
Net profit Depreciation
1,598 129
1,716 255
2,317 345
2,395 444
Diluted EPS (INR) Y-o-Y growth (%)
53.1 30.5
56.9 7.3
76.9 35.0
79.5 3.4
Others
(120)
(86)
(159)
(219)
CEPS (INR)
59.6
67.0
90.5
96.5
Gross cash flow
1,607
1,885
2,503
2,620
Diluted PE (x)
15.2
14.2
10.5
10.2
Less: Changes in WC
(113)
(258)
292
76
Price/BV (x)
7.1
5.6
4.5
3.7
Operating cash flow
1,721
2,143
2,211
2,545
EV/Sales (x)
4.4
3.1
2.5
2.1
251
1,115
340
395
1,470
1,028
1,871
2,150
10.9 8.1
8.1 6.4
6.2 5.9
5.6 -
Less: Capex Free cash flow
EV/EBITDA (x) EV/EBITDA (x)+1 yr forward
Peer comparison valuation Market cap (USD mn)
Name
Diluted PE (X) FY14E FY15E
EV/EBITDA (X) FY14E FY15E
ROAE (%) FY14E
FY15E
ECLERX SERVICES CMC
409 674
10.5 12.8
10.2 10.6
6.2 9.0
5.6 7.1
47.2 29.9
39.7 29.6
HCL Technologies
10,477
15.7
14.8
9.4
8.4
26.3
23.2
Hexaware Technologies
537
9.1
8.8
5.8
5.4
26.0
24.1
Info Edge
585
23.4
19.5
16.7
12.7
21.7
21.3
27,550
16.0
14.1
10.2
9.1
23.9
23.3
Infotech Enterprises
335
8.0
7.7
3.4
3.1
17.4
15.8
Persistent Systems
353
9.3
8.8
3.7
3.1
20.9
18.6
Tata Consultancy Services
57,473
20.6
18.5
14.5
12.9
36.4
32.8
Wipro
16,251
13.7
12.4
9.7
8.7
22.7
21.2
4,258
12.1
11.0
NA
NA
NA
NA
Median
-
13.2
11.5
9.2
7.8
24.9
23.2
AVERAGE
-
13.9
12.5
8.9
7.6
27.2
25.0
Infosys
Tech Mahindra
Source: Edelweiss research 6
Edelweiss Securities Limited
eClerx Services
Additional Data Directors Data V. K. Mundhra Anjan Malik Pradeep Kapoor Vikram Limaye Alok Goyal
Chairman Director Non-Executive and Independent Director Non-Executive and Independent Director Non-Executive and Independent Director
PD Mundhra Jimmy Bilimoria Anish Ghoshal Sandeep Singhal Biren Gabhawala
Executive Director Non-Executive and Independent Director Non-Executive and Independent Director Non-Executive and Non Independent Director Non-Executive and Independent Director
Auditors - Walker, Chandiok and Co. *as per last annual report
Holding - Top10 Perc. Holding
Perc. Holding
Hdfc Asset Management Co Ltd
4.86
Citigroup Glbl Mkts Maurit
2.37
Prudential Icici Asset Mgmt Co
2.31
HSBC Bank Mauritius
2.24
Tata Asset Management Ltd
1.38
Pictet & Cie
1.31
Pictet Country Fund Mauritius
1.31
Shinsei Uti India Fund
1.26
Idfc Mutual Fund
1.03
Idfc Sterling Equity Fund
1.03
*as per last available data
Bulk Deals Data
Acquired / Seller
B/S
Qty Traded
Price
No Data Available
*in last one year
Insider Trades Reporting Data
Acquired / Seller
B/S
Qty Traded
No Data Available
*in last one year
7
Edelweiss Securities Limited
RATING & INTERPRETATION
Company
Absolute
Relative
Relative
reco
reco
risk
CMC
BUY
SO
L
HCL Technologies
BUY
SO
Absolute
Relative
Relative
reco
reco
Risk
ECLERX SERVICES
BUY
SO
M
H
Hexaware Technologies
BUY
SO
REDUCE
M
SU
M
Infosys
BUY
SO
Infotech Enterprises
L
BUY
SO
H
Wipro
BUY
SO
L
Persistent Systems
BUY
SO
L
Tata Consultancy Services
HOLD
SP
L
Tech Mahindra
BUY
SO
M
Info Edge
Company
ABSOLUTE RATING Ratings
Expected absolute returns over 12 months
Buy
More than 15%
Hold
Between 15% and - 5%
Reduce
Less than -5%
RELATIVE RETURNS RATING Ratings
Criteria
Sector Outperformer (SO)
Stock return > 1.25 x Sector return
Sector Performer (SP)
Stock return > 0.75 x Sector return Stock return < 1.25 x Sector return
Sector Underperformer (SU)
Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe within the sector
RELATIVE RISK RATING Ratings
Criteria
Low (L)
Bottom 1/3rd percentile in the sector
Medium (M)
Middle 1/3rd percentile in the sector
High (H)
Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING Ratings
Criteria
Overweight (OW)
Sector return > 1.25 x Nifty return
Equalweight (EW)
Sector return > 0.75 x Nifty return Sector return < 1.25 x Nifty return
Underweight (UW)
Sector return < 0.75 x Nifty return
8
Edelweiss Securities Limited
eClerx Services Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098. Board: (91-22) 4009 4400, Email: [email protected] Vikas Khemani
Head Institutional Equities
[email protected]
+91 22 2286 4206
Nischal Maheshwari
Co-Head Institutional Equities & Head Research
[email protected]
+91 22 4063 5476
Nirav Sheth
Head Sales
[email protected]
+91 22 4040 7499
Coverage group(s) of stocks by primary analyst(s): IT CMC, eClerx Services, HCL Technologies, Hexaware Technologies, Infosys, Info Edge, Infotech Enterprises, Persistent Systems, Tata Consultancy Services, Tech Mahindra, Wipro
Recent Research Date
Company
19-Jul-13
Hexaware Gaining traction; Technologies Result Update
19-Jul-13 18-Jul-13
Info Edge
Title
Price (INR)
Recos
107
Buy
317
Reduce
1,660
Hold
Waning recruitment singes growth; Result Update
Tata Excellent but out of reach ; Consultancy Result Update Services
Distribution of Ratings / Market Cap Rating Interpretation
Edelweiss Research Coverage Universe
Rating Distribution* * - stocks under review > 50bn Market Cap (INR)
118
Buy
Hold
120
49
Reduce
Total
17
186
Between 10bn and 50 bn
< 10bn
56
Rating
Expected to
Buy
appreciate more than 15% over a 12-month period
Hold
appreciate up to 15% over a 12-month period
Reduce
depreciate more than 5% over a 12-month period
12
9
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