STOCK IDEAS - eClerx Services Ltd

Company name- eClerx Services Ltd

 

BSE code - 532927

 

NSE Code - ECLERX

 

eClerx Services Ltd (eClerx) is a Mumbai based Knowledge process outsourcing (KPO) service provider. It supports both domestic and global clients on a real time basis across their complex businesses. It provides data analytics and customized process solutions through cost effective combination of people and technology. eClerx specializes in financial services and retail & manufacturing verticals besides newly added travel and hospitality vertical. It also provides readymade process outsourcing and management services and along with a multitude of data aggregation, mining and maintenance services. It enjoys multi-year contracts with its clients. Forbes has recognized it in their list of best under a billion companies for Asia-Pacific.

 

Business-

Information and knowledge are key requirements of Businesses across the Globe. Compilation of market, product, competitor and other data, its analysis and interpretations to arrive at knowledge and utilizing this knowledge for running businesses is essential. This only leads to growth and development of an organization driving revenues. KPO refers to such activities and process solutions provided by the service provider related to information assimilation, analysis, interpretations and ability of service provider to arrive at right conclusions.

 

eClerx devises solutions addressing common problems faced by industry. For example by analyzing millions of customer web transactions it identifies buying patterns or by analyzing prices it helps clients optimize revenues on their products. Services are highly valued by customers.

 

It follows a unique business model. It services various parts of the same organization by understanding the customers business as a whole. Working from its own facility it services its customers on their processes, systems and database. This model helps it provide multiple services related to one service for the same customer. With this vertical growth it also grows horizontally by providing similar services across customers. Geographical growth is also provided for by services across geographies across clients. Number of customers being serviced has thereby more than doubled from 22 at the end of FY2007 to 50 at the end of FY 2008.

 

eClerx operates from its three offices in Mumbai. It's Ghatkopar office was added in FY08 and has a capacity of 380 seats. After taking possession of Pune's SEZ facility in Dec'07 it has started operations from this facility in April'08. This has a seating capacity of 1000 seats. Besides it also has marketing offices in Austin, London and New York.

 

For KPO providers the knowledge and experience of professionals is of utmost importance compared to size as in a Business process-outsourcing firm.

A dedicated knowledge management team helps training and process documentation systems, structures and policies. It also has a team for developing software automation tools for service delivery helping increase productivity and helping customers gain output and save on costs with better control. Total headcount has touched almost 1800 for eClerx.

 

North America and European union dominate in its revenues from various geographies. In FY08 North America contributed 66.9 percent to total revenues, Europe 29.8 percent, while 3.3 percent came from Asia Pacific. Billing is done predominantly in dollars.

 

Investment rationale-

The global KPO industry is expected to grow to $17 billion by 2010. India has large number of English proficient professional having ability and experience owed to large & developed service industry. It has world's second largest reservoir of Engineers, Scientists and IT professionals. Further it adds almost three million graduates, professional degree and diploma holders every year. With all this and cost arbitrages Seventy percent of KPO market is to be outsourced to India. This offers opportunities and indicates towards market available for players like eClerx.

 

Looking at European market and for growth eClerx took inorganic route for growth. It thereby acquired Igentica Travel solutions Limited, UK in FY08. This provided it strong hold in Europe adding 28 large customers. It also added a new vertical travel and tourism to its armory. Igentica had sales figures of 800 thousand pounds at the time of acquisition July 07. This grew to 1.2 millions after acquisition and is now fully Integrated with eClerx.

 

Pune SEZ has started operations with around 400 people. It has contributed 50 percent of first half's growth while others contributed the remaining. Operations would increase in a phased manner and reach full strength of around 1200 people. The contributions will strongly add to growth of eClerx.

 

Number of customers has grown from 50 in start of current fiscal to 57 at the end of first half. Three customers were added in the second quarter alone. Customers' number is further expected to grow by at least three if not more every quarter.

 

From the proceeds of IPO in Dec'07 it has Rs 22 crores intact for acquisitions, Rs 10 crores for additional facilities and Rs 16 crores for general corporate purposes. From Rs 180 crores allocated towards Infrastructure investment it has utilized almost 80 percent in the Pune SEZ. It has Rs 87.88 crores as cash on its books and has no debts.

 

EClerx plans to use the allocated funds for growth in days to come. It is looking at suitable opportunities for inorganic growth to add new verticals, facilities and clients. In next 6-12 months with valuations becoming attractive any appropriate opportunity would be utilized said Mr P.D.Mundra, Executive-Director, eClerks.

 

Concerns

Unprecedented liquidity crisis is seen across the globe. With this most of the financial, banking and other corporate undergo consolidation. Capacity reductions will lead to demand reductions. Coming months are crucial for European and US companies. eClerx has major stakes in Financial and Retail& manufacturing verticals. Its revenue exposure to North American and Europe is major. However it has multi year contracts with customers and many contracts even do not have any exit clause for customers or successors. Thus eClerx will be at receiving end only in terms of growth. Growth may be subdued in remaining part of Fiscal. However demand growth will return in medium to long term.

 

Valuations-

Eclerx posted an impressive topline of Rs 49.09 crores which grew robust 44.4 percent y-o-y for the quarter ending September. Net Profit at Rs 14.08 crores also surged good 94.41 percent y-o-y. Net profit would have surged more but for write-off of One million dollars of receivables due to bankruptcy filed by one of its clients in financial arena. However they identified eClerx as critical vendor and the contract was assigned to one of purchaser. A cure amount of $0.52 million has been received by eClerx against outstanding receivables that will be accounted for during Third quarter results. It is closely working with successors of its customer companies both in US and Europe for determining continuing support requirements. Write-offs also affected the margins that slipped down.

Going forward with global recession demand slowdown is likely to be seen in near-term. Thus we may see the growth being reduced as compared to past few years. However new Pune SEZ operations and expansions, Igentica integration, addition of a new Travel and hospitality vertical, addition of new clients and opportunities in compliance related services will all give some impetus to growth. These will help eClerx to beat the expected growth of 20-25 percent by IT-ITES. With some concerns for the near term, it still is a good long-term bet for investors.

	Q2	Annual	Annual E
	FY09	FY08	FY09
Net sales	49.10	121.66	155.72
OP	15.21	48.47	60.73
PAT	14.08	44.58	56.06
Capital	18.92	18.87	18.92
EPS	7.45	25.95	29.71

 

Margin
OP	30.98	39.83	39
PAT	28.67	36.64	36
Price	97	Date	5/12/2008
PE	3.74	P/BV	1.39
Book Value	69.88	EV	99.04
EV/EBIDTA	2.04	Mcap	183.56
		(rs.crore)

 

Shareholding	30-Sep-08
Promoter	60.29
FII	2.6
Public	5.27
Others	31.84
Total	100