Accumulate eClerx Services - Consolidation - Dolat Capital

Marque clientele: Eclerx despite being a small company has been able to enter several large companies supported by its end to end niche service offerings and execution skills. It clientele list of 54 includes 23 of fortune 500 companies, contributing over 96% of its revenues.

Demand offtake low: It has been witnessing slow demand offtake for large projects/opportunity and is only adding up on regular Run-The-Business (RTB) deals in BFSI segment. Demand in the S&M segment is upbeat but again constitute of several smaller deals.

Captive getting competitive: The captive-third party trade off has been getting skewed in favor of former due to passage of benefits of depreciation and improved efficiency and cost models of these setups.Also, high geographic concentration risk is also leading to business shift away from India. Several clients wish to curb the country risk through multi country offshoring model.

Agilyst integration: We believe integration of acquired cable and telecom (C&T) business would impact the near term margins on account of lower segmental OPM, one time integration cost and incremental amortization. The total transaction is expected to the tune of USD 19-24mn with 6qtr integration process.

View: We believe Eclerx fits our criteria perfectly in terms of possession of scalable niche with strong clientele but lacks visibility owing to high reliance on client mining for business growth. It has been proactive to spread its vertical offering by acquiring Agilyst but has not been expanding its delivery prowess beyond India which could restrict its growth in long term. We reiterate our positive view with a TP of Rs.765 valued at 10x (strong growth and OPM justify high PE) of its FY15E EPS of Rs.76.5.

Source : Equity Bulls

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