CRISIL assigns valuation grade of 3/5 to eClerx Services

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CRISIL assigns valuation grade of 3/5 to eClerx Services

CRISIL Research has come out with its report on eClerx Services. The research firm has maintained the fundamental grade of 4/5 to the company in its October 19, 2011 report.

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eClerx Services BSE | NSE 31/05/12 Are Mutual Funds betting on eClerx Services?

CRISIL Research has come out with its report on eClerx Services . The research firm has maintained the fundamental grade of 4/5 to the company in its October 19, 2011 report.

eClerx Services Ltd's (eClerx's) Q2FY12 results were better than CRISIL Research's expectations. While revenue growth was in-line, PAT margin was higher than expected. Strong growth across non-top five clients and steady mining of top five clients resulted in robust topline growth during the quarter. EBITDA margin declined slightly due to the expected ramp-up in sales and marketing (S&M). PAT margin was higher than expected due to forex gains. We maintain the fundamental grade of 4/5.

Q2FY12 result analysis
• eClerx's Q2FY12 revenues grew by 8.8% q-o-q (35% y-o-y) to US$ 24.3 mn; up 14.2% q-o-q (38% y-o-y) in Indian rupee terms. This was mainly driven by a strong rebound in growth from non-top five clients, up 26.9% q-o-q after a 9.7% decline in the previous quarter. Revenues from top five clients maintained the steady growth trajectory and increased 6.3% q-o-q.

• EBITDA margin declined slightly by 32 bps q-o-q to 38.9% due to the expected acceleration in S&M efforts towards non-top five clients. Employee cost as a percentage of sales declined 106 bps due to increase in staff utilisation to 71% from 67% in Q1FY12. However, the reduction in employee cost was offset by higher general and administrative (G&A costs) on the back of increase in legal and professional expenses.

• Adjusted PAT margin improved by 359 bps q-o-q to 38.9% due to higher forex gains. The increase in forex gains from Rs 40.2 mn in Q1FY12 to Rs 102.4 mn in Q2FY12 was partly driven by the period-end revaluation of forex assets. Adjusted EPS for Q2FY12 was Rs 15.3 as compared to Rs 12.2 in Q1FY12.

Key developments
• Debtor days increased further to 76 days from 67 days in Q1FY12 due to client specific administration delays.
• Five new clients were added in this quarter. Total number of active clients increased to 50.
• Fortune 500 or FT 500 clients contributed the maximum revenue (97%).

Valuations: Current market price is aligned
We continue to use the price to earnings ratio (PER) method to value eClerx at Rs 714. We are likely to raise our estimates and fair value post interaction with the management. At the current market price of Rs 737 and current fair value, the stock merits a valuation grade of 3/5.

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To read the full report click on the attachment