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NRI
eClerx Services Ltd>
  • CMP : 2,700.5 Chg : -2.05 (-0.08%)
  • Target : 2,500.0 (18.54%)
  • Target Period : 12-18 Month

25 May 2022

Revenues to improve in coming quarters...

About The Stock

eClerx Services (eClerx) provides business process management, automation and analytics services.

  • It caters to financial services, communications, retail, media, manufacturing, travel and technology companies
  • OCF to EBITDA of >80%, debt free and RoCE of >20%
Q4FY22

eClerx reported Q4FY22 results.

  • Dollar revenues increased 5.2% QoQ to US$77.2 million
  • EBITDA margin declined 100 bps QoQ to 30.8%
  • The company reported 20% organic revenue growth in FY22
What should Investors do?

eClerx’ share price has grown by ~1.7x over the past five years (from ~₹ 1,265 in May 2017 to ~₹ 2,109 levels in May 2022).

  • We maintain our BUY rating on the stock
Target Price Valuation

We value eClerx at ₹ 2,500 i.e. 16x P/E on FY24E EPS

Key Triggers for future price performance
  • Traction in customer care, RPA, analytics & content development, cross sell and up sell to Personiv clients to drive growth
  • Lower roll-offs from one off client specific event, improving deal wins and revival in growth are expected to drive revenues
  • Expect dollar revenues to grow at 18.1% CAGR in FY22-24E
Alternate Stock Ideas

Apart from eClerx, in our IT coverage we also like Zensar.

  • Turnaround led by new CEO, driving deal momentum and increasing annuity revenues key positive
  • BUY with a target price of ₹ 365

Key Financial Summary

Particulars FY19 FY20 FY21 FY22 5 Year CAGR(FY17-FY22) FY23E FY24E 2 Year CAGR (FY22-FY24E)
Net sales 1,430.6 1,437.5 1,564.5 2,160.3 10.2 2,605.8 3,018.6 18.2
EBITDA 307.5 323.5 464.5 672.7 7.5 735.0 851.4 12.5
EBITDA Margin (%) 21.5 22.5 29.7 31.1 - 28.2 28.2 -
Net Profit 228.2 209.0 282.8 429.5 3.9 447.4 519.7 10.0
EPS (|) 60.0 57.3 81.3 121.6 - 134.3 156.0 -
P/E 35.2 36.8 25.9 17.3 - 15.7 13.5 -
RoNW (%) 16.5 16.0 18.8 27.4 - 25.7 26.8 -
RoCE (%) 21.5 19.9 23.3 33.6 - 33.2 34.7 -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter & conference call highlights

  • Revenue in US$ term grew 5.2% QoQ to US$77.2 mn while in rupee terms, revenue grew 5.8% QoQ to | 551.7 crore. In CC terms the company reported growth of 5.5% QoQ & 22% YoY. For FY22, it reported growth of 35.2% to US$284.6mn, out of which 20% was organic growth while rest of the growth came from their recent acquisition ‘Personiv’
  • Revenue growth aided by North America market (69% mix), up 3.7% QoQ. Europe, RoW market reported growth of 5.2%, 20.2% QoQ, respectively
  • Top 10 customers contribute 60% of the revenue mix for Q4 and reported revenue growth of 3.5% QoQ. In terms of client addition on a YoY basis, it added one client in US10mn+ category while it added five, three, six clients in US$5-10mn, US$1-3 mn, US$500K-1mn categories, respectively
  • EBITDA, EBIT grew 2.5%, 1.9% QoQ, respectively, while EBITDA, EBIT margins fell 100 bps each QoQ to 30.8%, 26.1%, respectively. EBITDA margins were impacted by 9.4% QoQ rise in employee expenses amid high attrition
  • In Q4, the company added 806 employees in offshore delivery while 63 employees were added in onshore delivery/support services & Tech services respectively, taking its count in this services to 14,802. The company added five employees in the selling & distribution taking total headcount at the company level to 14,910 (869 net adds). India seat count has been constant at 11,039 in the last four quarters
  • Offshore voluntary attrition stayed high at 42.6% for Q4, was up 520 bps QoQ
  • eClerx indicated that the demand environment continues to be strong for the services that it offers. eClerx is not witnessing any slowdown there. The company also mentioned that it is not seeing any major roll-offs in the foreseeable future. The order pipeline in Q1FY23 is lower than last year
  • The company also mentioned that in comparison to captive where the focus is on key employee’s retention. Hence, the companies may end up paying higher costs in terms of salaries as cost inflation is higher, captive is not profitable business in the long term. In case of its model, it always has flexibility and control on costs
  • eClerx, however, did not rule out any impact on its revenue trajectory in case of US market recession since the market contributes a large chunk to its revenues
  • The company also indicated that it continues to explore M&A opportunity in the market. It mentioned that it is looking for some tuck in acquisitions with sales in the range of US$30-50 mn. The company also mentioned that funding has been drying up in the market especially for many start-ups and also funding costs for PE players is also rising at the other end, which is creating opportunities for players like it in the market
  • The company mentioned that they are committed of paying out 50% of the net income to the shareholders. The company also indicated that it may think of another buyback in the future
  • The company indicated that the wage hike in FY23 will be higher than the earlier comparable years to retain talents & manage supply side constraints. The company also guided that the margins for Q1FY23 will be affected due to the wage hike but expects it to normalise in the remaining three quarters. It maintained margin guidance band of 28-32%
  • The company also said it has negotiated some price hike with some of clients but indicated that it will not be enough to cover the wage hike
  • The cash position stayed healthy at | 680.5 crore for FY22 vs. | 657.2 crore for FY21
  • The company declared a dividend of | 1 per equity share
 
Variance Analysis
 
   Q4FY22   Q4FY21   YoY (%)   Q3FY22   QoQ (%)  Comments
Revenue         591.7         472.8           25.1         559.2              5.8  Revenue was aided by US market which grew by 3.7% QoQ 
Employee expenses         299.6         226.1           32.5         273.8              9.4  
             
Gross Profit         292.1         246.7           18.4         285.4              2.3  
Gross margin (%) 49.4 52.2 -282 bps 51.0 -167 bps  
SG&A expenses         109.8           91.6           19.9         107.5              2.1  
             
EBITDA 182.3 155.1           17.5 177.9              2.5 Margins declined due to higher employee cost
EBITDA Margin (%)           30.8           32.8  -200 bps            31.8 -100 bps  
Depreciation & amortisation 27.9 24.4           14.3 26.4              5.8  
EBIT         154.3         130.7           18.1         151.5              1.9  
EBIT Margin (%)           26.1           27.6  -155 bps            27.1 -100 bps  
Other income (less interest) 4.5 -1.8   -0.9    
PBT            159            129           23.3            151              5.5  
Tax paid 40.3 30.5           32.2 38.4              5.1  
PAT            119              99           20.3            107            11.4  

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