Buy eClerx Services; target of Rs 874: SPA Research

“eClerx came out with its Q4FY12 results, which were slightly below our estimates. The company has registered a revenue growth of 0.4% QoQ to $25.5mn (SPAe: 26.1mn). The FY12 EPS of INR 54.9, however exceeded our guidance on the back of improvement in margins from 39.3% to 40.1% due to INR depreciation. We expect Agilyst to start adding to the topline from Q1FY13 with an annual revenue run-rate of $14mn. On the back of inorganic growth push, we expect the company's FY14 EPS at INR 73.”

“The company reported a moderate volume growth of 0.4% QoQ in Q4FY12, with no change in pricing. The revenues for FY12 at $97.5mn were slightly below our expectations of $98.1mn. This could be attributed to the volatility in the top-5 clients spending, which continues to contribute 85%+ to the company's topline. However revenue at INR 4,728mn (SPAe: INR 4,650mn) grew at 38.2% helped by 7% dip in INR. eClerx has $94.3mn outstanding hedges for FY13/14 at INR 49.1/$ and cash and equivalents of INR 2,686mn or INR 92.4/share. 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 INR 54.9. 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) INR appreciation.”

“We 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 we expect the company's topline to grow by 30% & 18% in FY13 & FY14. On the margins front we 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 INR depreciation in H1FY13. Thus, on the back of inorganic growth coupled with lower margins, we expect EPS to grow at 15.2% CAGR over FY12-14E vis-à-vis 37.5% CAGR over FY08-12. The company had enjoyed premium valuation due to its higher than industry margins, growth rates and being the only listed Indian KPO; but with tapering growth we have risk-adjusted our valuation multiple, lower by 15% to 12x, continuing to recommend BUY for the stock, with a 2 year target price of INR 874,” says SPA Research report. 

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