eClerx Services: Q4FY13 result - In-line quarter; inexpensive valuation - IDBI Capital

- Marginal beat on revenue: eClerx's revenue of US$32.3 mn, up 3% QoQ, was marginally ahead of IDBIest of US$31.9 mn. While standalone business (read native biz) reported flat revenue sequentially, 15% QoQ growth in Agilyst (based on our calculation) led to marginal beat on revenue as against our estimate.

- EBITDA margin at 39.4% came 110bps higher than IDBIest: eClerx reported EBITDA of Rs687 mn (+3% QoQ) was 4% higher than IDBIest of Rs661 mn. EBITDA margin (39.4%) was 30bps higher than Q3FY13, as against our estimate of 88bps decline. 110bps beat on EBITDA margin came from better than estimated gross margin (+30bps) thanks to a) better realisation rate and b) increase in utilization rate along with lower sales and distribution (S&D) cost as a percentage of revenue (13.7% v/s 15.6% in Q3). The management expects S&D to remain in the range of 13.5% to 14% of revenue going forward in order to increase the client coverage.

- 8.5% beat on net profit is on account of better margin and lower depreciation and tax rate: Net profit of Rs483 mn in Q4 came 8.5% above IDBIest of Rs445 mn owing to healthy beat at EBITDA margin, lower depreciation (9% decline QoQ) and effective tax rate (18.2% against IDBIest of 20.5%).

- Commentary on FY14: eClerx reported 25% US$ revenue growth in FY13 driven by strong performance by Agilyst (+17%) as native biz grew by 8% YoY due to weakness in Financial Service segment. The management expects no material change in organic biz as it expects single digit revenue growth in FY14, whereas it expects inorganic biz to drive growth in FY14. eClerx is most optimistic for Cable biz (Agilyst), followed by SMS (due to healthy client additions) and least optimistic on Financial Services from revenue growth perspective. The management reiterated its low-to-mid 30s EBIT margin target for FY14 vis-a-vis 34.7% reported in FY13. We build in 120bps/60bps decline in EBIT margin to 33.5%/32.9% for FY14/FY15 respectively. Tax rate will go up to 20.5%-21.5% in FY14. § Operating metrics: Geo-split, employee metric, Utilisation rate, Attrition rate, DSO and Hedges: Europe grew 15% while ROW declined 12% QoQ. Headcount increase of 2% sequentially (117 v/s 77 in Q3) was on account of high unchanged utilization rate (69%) and to backfill increased attrition rate at 27.3% (26.5% in Q3). DSO at 33 days still remains best in class, although increased by 2 days sequentially. The company has US$56.9 mn/US$13.5 mn hedges outstanding at US$/Rs of 55.4/59.8 maturing in FY14/FY15 respectively. eClerx added 25 new clients in FY13 v/s 10 in FY12.

Outlook and Valuation: Upgrade to BUY

Pratik Gandhi (pratik.gandhi@idbicapital.com 91-22-43221367) forecasts 12.7%/12.2% US$ revenue growth for FY14/FY15, factoring in 9%/11% growth in native biz and 36%/20% growth in Agilyst biz (on low revenue base). Weak outlook on native biz growth (high single digit growth) will remain an overhang on valuation. At CMP of Rs650, valuation of 9.4x/8.6x on FY14E/FY15E looks inexpensive given high ROE (40%+) and ~50% dividend payout ratio. Hence, we upgrade the stock to BUY from ACCUMULATE with a TP Rs758 (10x FY15E EPS).

Source : Equity Bulls

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