eClerx Services

Investors with a two-year horizon may buy the shares of eClerx Services, considering the improving business prospects for the segments (financial services, manufacturing) that the company caters to and the ramp-ups in business that the company is witnessing.

At Rs 376, the stock trades at 11 times its estimated 2009-10 per share earnings. Though not strictly comparable, this is at a discount to most listed mid to small tier IT/BPO players. Strong deal wins and increase in the run-rate of key clients are positives.

We had given an ‘avoid' to eClerx's initial public offering in December 2007, because of concerns on the macro-environment, especially in the US, stiff valuations and scalability factors. The stock did take a knock from its offer price of Rs 315 to Rs 91 levels in October 2008.

Concerns heightenedover bad debt from the failed Lehman Brothers, as it was one of its clients. The company has recovered over half of the Rs 4.9 crore in dues and has written off the rest as bad debt. But eClerx has managed what has been a turbulent 12 months for most IT/BPO/KPO companies quite well.

In FY09, the company saw its revenues grow by 51 per cent over 2007-08 to Rs 193.2 crore, while net profits expanded by 39 per cent to Rs 61.7 crore. In the recent September quarter, eClerx has seen its revenues and operating profits (EDITDA) increase by 10 per cent over last year.

eCerx is a KPO (Knowledge Process Outsourcing) services provider. It provides data analytics — collection and analysis of data, document management and catalogue management services. These services may be deemed to be of higher value than plain data entry or transaction processing work, but lower than services such as business and investment research, financial analysis and the like.

Improving metrics

eClerx has a high client concentration, as is the case with most small sized BPO/KPOs. But the company has witnessed a ramp-up in the revenues from its top five clients, who account for nearly 80 per cent of its revenues, higher than the 75 per cent a few quarters ago.

This suggests that despite the shake-up in the financial services sector in the US and elsewhere, eClerx has not been very significantly affected. Also, the company works on deals that are spread over multiple years, which increases revenue visibility.

The company has also won two large deals in the quarter gone by, competing with BPO/KPO majors. This in an environment of vendor consolidation undertaken by large clients that favour BPO/KPO majors, lends confidence on eClerx's execution capabilities.

From an industry perspective, the fact that most captive KPOs are being sold off or are being scaled down in favour of third party vendors is also positive for a player such as eClerx. The company has increased its operations in SEZs (Special Economic Zones). From accounting for around 24 per cent of revenues a year ago, revenues from SEZs now contribute 38 per cent. This would neutralise the impact of MAT of 15 per cent on the company as current tax incidence is around 12 per cent.

The company derives nearly 61 per cent of its revenues from clients in the US and the rest from Europe.

Industry body Nasscom has observed that the US geography and the BFSI segment are stabilising and most industry research firms indicate a revival in IT/BPO spends by clients. This could benefit vendors such as eClerx.

The company had unfavourable hedges against the dollar pegged at Rs 41-42, which had resulted in forex losses of Rs 11 crore for hedges that matured this fiscal.

But the remaining $12.5 million hedged are at favourable rates of Rs 45-46 in the December quarter and Rs 50 for the March quarter, which should bring in better realisations for the company.

Billing pressure from top-clients and attrition, which has increased in the recent quarter are key risks to this recommendation.