eClerx - Result Update - Q1FY13 - SPA Securities

eClerx's Q1FY13 result was in-line with our expectations. The company reported revenues of $28.1mn (SPAe: 28.4mn) of which $2.3mn (90% of the incremental) contribution came from Agilyst. Organically revenue grew 1% sequentially to $25.8mn and EBITDA Margins expanded by 40bps on the back of INR depreciation to 38.6%. The company also added 8 new clients. Thus, on the back of strong growth and higher than industry margin profile, we continue to recommend BUY with a 2-year target price of INR 874.0.

Revenue Growth - Strong

The company has continued to register strong sequential growth of 10.2% in Q1FY13 to $28.1mn. With this, given a weak global scenario, the company has witnessed a ten quarters CQGR of 6.5% in USD revenue growth. The company witnessed a 2% volume growth partially offset by a (1%) decline in pricing, resulting in a 1% growth in USD revenues QoQ organically.

Margins Expansion - Huge

Operating Margin expanded by 240bps sequentially to 35.9%. The company benefited from non-hedging policy of Agilyst which expanded its otherwise lower margins. The company's 10.5% offshore wage hikes affected margins by -330bps offset by INR depreciation (580bps). The one-time legal and professional fees of 45mn increased G&A spend, but its affect on margins was offset by S&M efficiency gains.

Sales Pipeline Expanding

With Agilyst acquisition company has reduced its dependency on top-5 clients from 87% to 80%. Fortune 500 clients contribute 96% of company's topline. It added 8 new clients with a total client count rising to 54. The company is witnessing larger traction from first time offshorers due to cost pressures especially from continental Europe where majority of its European revenues come from.

Pricing Pressure

The company has been witnessing some pricing pressure to pass on its INR gains back to clients. It had given volume discounts in the past. Now, with little pricing adjustment scope we expect no further margin pressure from pricing front. However, integration of Agilyst business with the company can cause some pressure on the bottom-line.

Valuation and Outlook

Given 50% of eClerx's business is dependent on BFSI sector which is at the fore-front of this economic downturn, we had expected 9% organic growth for the company as mirrored in Q1FY13 numbers and slower deal signinings. We expect Agilyst to contribute $14mn to the topline in FY13 albeit at a lower margin profile. The company has a high $ sensitivity (68bps per 1% change in USD/INR rate) and hence would see a margin expansion in FY13 though partially offset by lower margin Agilyst business and pricing pressures. Taking all this into consideration, we expect the company to witness a 16% EPS CAGR over FY12-14E. Thus, we retain our BUY recommendation for the stock with a target price of INR 874.0 based on 12x (PE multiple) FY14E earnings of INR 73.3.

Source : Equity Bulls

Keywords