Accumulate eClerx Services; target of Rs 740: Emkay

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Accumulate eClerx Services; target of Rs 740: Emkay

Emkay Global Financial Services is bullish on eClerx Services and has recommended accumulate rating on the stock with a target of Rs 740 in its April 6, 2011 research report.

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RELATED NEWS Buy Bank of India; target of Rs 505: IIFL Buy Elecon Eng; target of Rs 104: KRChoksey Buy Bharat Heavy Electricals; target of Rs 2760: Emkay ALSO READ See previous views by Emkay Global Financial Services See what other Experts & Brokerages are saying about eClerx Services See messages about eClerx Services eClerx Services BSE | NSE 30/05/12 Are Mutual Funds betting on eClerx Services?

Emkay Global Financial Services is bullish on eClerx Services and has recommended accumulate rating on the stock with a target of Rs 740 in its April 6, 2011 research report.

"eClerx Services differs from other pure BPO players as eClerx's work involves specialized domain knowledge and judgement based processing which are core to the clients's business operations. eClerx derives an equal proportion of business from the 2 segments-Capital Markets and Sales and Marketing Support. Within the Capital Markets segment, company provides services to 8 of the top 14 global investment banks. Company has ~2,000 resources within this BU with the addressable target market at ~2, 80,000 resources as per company. The company believes that the proposed Dodd Frank bill would provide strong volume growth opportunities as all the transactions would be cleared through one central clearing agency."

"The Sales and Marketing Support division is a horizontal service offering for the company as and sees that as a bigger opportunity cutting across verticals. As per Fortune, 62% of the ecommerce companies are expected to up their ecommerce tech spend in 2011. With most of the online IT budgets currently in-house, co sees market share gains going forward. Investors all through have been concerned on sustainability of eClerx's high operating margins. Company allayed fears on the same and believe that it would be able to sustain margins in the 'low to mid ' 30's range. We note that eClerx's higher EBITDA margins are on account of higher gross margins (55%+) which are similar to offshore gross margins for Tier 1 IT services companies. Company indicated that given the strong demand environment, it was able to get COLA adjusted price increments from the clients."

"Company intends to replicate it's success at top 5 clients to the next level of clients (top 5-20) given that they are also global/Fortune 1000 names which would help reduce client concentration as well as drive the next leg of growth for the company. Company is targeting to increase it's onsite sales fleet to 40+ (V/s 26 as of Dec'10 qtr end and ~20 as of FY09 end). In terms of inorganic growth strategy the company is looking at either (1) similar businesses (with little/minimal client overlap thereby providing client mining and cross sell opportunities, ideal target revenue sizes of USD 8-10 million p.a), (2) addition of niche services capabilities ( ideal target revenue sizes of USD  35-40 million)."

"On the HR front, 20% of the company's staff are managers (Experts) for whom hiring is equally distributed between (a) internally trained people and (b) campus hiring and industry laterals. Attrition is lower at 10-20% in this segment. Remaining 80% of the talent pool forms the part of Analyst category where company hires graduates on a Just In Time basis, and also faces high attrition of 40%+ here. eClerx currently trades at ~13.2x/12.1x FY12E/FY13E earnings of Rs 52.3/57.3. We have an Accumulate rating on the stock with the target price of Rs 740. We remain positive on eClerx given strong and flawless execution coupled with high return ratios (ROE's - 40%+ in FY11E-13E) along with a 35-40% dividend payout and strong cash generation," says Emkay Global Financial Services research report.

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To read the full report click on the attachment