eClerx Services (ECLX IN, INR 648, Buy) - Edelweiss

eClerx's Q4FY13 revenues at USD32.3mn (QoQ growth of 3.2%) were in line with Street estimate of USD32.0mn, while EBITDA margin at 39.4%, was above the Street estimate of 38.8% and up 30bps sequentially. The management expects organic growth to remain subdued in FY14 due to changes in client-businesses particularly in the financial services (FS) horizontal. Based on expected weakness in the organic business we trim our FY14 revenue growth to 16% versus 20% earlier thus leading to a 1.4% and 6.0% EPS cut for FY14 and FY15, respectively. Even as organic growth remains soft in near term, we like eClerx for its high ROE and dividend payout. We maintain 'BUY' with TP of INR880 (12x FY15E EPS).

Marginal uptick in pricing and stable margins going forward

eClerx posted revenues of USD32.3mn and a growth of 3.2% (3.6% in constant currency terms) in line with Street estimates. EBITDA margin at 39.4% was above Street estimate of 38.8% up 30bps QoQ. For FY14, the company expects margin to remain at similar levels to FY13 (38.9%). On the pricing front it foresees a minor uptick in FY14 with the caveat of currency remaining in the range of INR53-56/USD. It added 25 clients during the quarter with the bulk of them in the sales and marketing support (SMS) horizontal and in the US region.

Organic growth to remain subdued in the near term

The management reiterated its stance on subdued growth in organic business over the next 9-12 months. In FY13, organic business posted a YoY growth of ~8%. This is due to its FS clients witnessing an overall decline in volumes of derivative products and OTC transactions shifting to stock exchanges. This has slowed the overall pace in FS despite newer services having grown significantly. Hence, we are cutting our FY14 revenue growth assumption to 16% from 20% earlier, implying a CQGR of ~3.5% for FY14.

Outlook and valuations: Long term play; maintain 'BUY'

While organic growth is expected to be soft in the near term, the long term story remains intact due to its gradual scaling up of new processes and strong traction in acquired business (Agilyst). Further we like eClerx for its high ROE (40%+) and dividend payout (40-45%). At 8.8x FY15E EPS we maintain 'BUY/SO' with a TP of INR880 (12x FY15E EPS).

Source : Equity Bulls

Keywords