ECLERX SERVICES LTD : ON A GROWING DIGITAL PATHWAY

The Indian IT industry is witnessing a transformation phase where a strong digital trend is increasingly creating new opportunities for the industry players. This puts eClerx in a sweet spot, also on account of its diversification strategy 



An Indian IT consulting and outsourcing multinational company, eClerx is based in Mumbai and Pune. It provides critical business operation services to over 50 global Fortune 500 league clients, including some of the world’s leading companies across financial services, cable and telecom, retail, fashion, media and entertainment, manufacturing, travel and leisure, software and high technology. Incorporated in 2000, eClerx is one of India’s leading process management and data analytics’ companies and is today traded on both the Bombay Stock Exchange and the National Stock Exchange. The company employs 8,500+ people across its global sites in the US, UK, India, Italy, Germany, Singapore and Thailand. 

Investment Thesis

If we look at the current quarter performance of the company, the Q4 dollar revenue at USD 64 million increased 19.7 per cent QoQ – 19.3 per cent CC of which 6.3 per cent CC was organic growth. While revenue growth has been below the estimates of the analyst fraternity, demand recovery has been faster than expected by the management. The demand uptick was also driven by the incorporation of Personiv and increased utilisation reported at 83.8 per cent. The company saw its employees adjusting and adapting to the ‘work-from-home’ concept comfortably – leading to increased utilisation. Utilisation increased by 260 bps QoQ while it increased 870 bps YoY even though the attrition shot up to 35.8 per cent. This attrition level was seen in the pre-pandemic levels.

Offshore revenues increased by 23 per cent QoQ, leading to EBIT margin at 27.6 per cent, which was clearly above the street estimates, albeit marginally. The recent acquisition of the US-based digital and back-office service provider firm Personiv has started to chip in with incremental revenues and already signs of geographical diversification and new clients’ list are adding incremental growth to the company. The synergies visible augur well for the future growth of eClerx. The acquisition of Personiv was completed in December 2020. eClerx can be expected to benefit from the readily available talent pool and cross-selling opportunities in FY22. The management is upbeat on the double-digit growth opportunity in FY22 after two consecutive quarters of good growth.

The double-digit growth estimation is based on the healthy deal pipeline and also owing to the improving demand outlook for the digital business. One of the reasons why the street is bullish on eClerx is the improvement in its margins. Going forward the eClerx management believes that the improved margins could be maintained. An improvement in margins by about 200 bps was seen in Q4FY21 on account of selling, general and administration savings. The company was able to improve margins also owing to cost savings that happened due to the work-from-home initiative. In the coming quarters this advantage may vanish as more and more staff members are expected to come back to office and work.

Financials

A study of the financial performance of the company shows that on a consolidated quarterly basis its net sales and other operating income increased toRs 472.82 crore in Q4FY21 as compared to Rs 350.93 crore in Q4FY20, clocking gains of 34.73 per cent. The operating profit stood at Rs 158.92 crore in Q4FY21 as against an operating profit Rs 94.49 crore in Q4FY20, registering attractive increase of 68.19 per cent. Q4FY21 recorded a net profit of Rs 98.39 crore as compared to net profit of Rs 55.38 crore in the same quarter in the previous year, gaining 77.66 per cent. 

Financial Highlights
ROCE(HY) Highest at 24.94 per cent
PBDIT(Q) Highest at Rs 152.50 Crore

On an annual basis, its net sales and operating income rose by 482.49 per cent from Rs 1,437.57 crore in FY20 to Rs 1,564.49 crore in FY21. The operating profit rose by 30.32 per cent in FY21 as compared to FY20. The net profit jumped 35.34 per cent in FY21, recording at Rs 282.82 crore as compared to Rs 208.97 crore in FY20. With a growth in net profit of 38.15 per cent, the company declared very positive results in March 2021. The company has declared positive results for the last two consecutive quarters. Over the past year, while the stock has generated a return of 283.3 per cent, its profits have risen by 35.2 per cent. 

The PEG ratio of the company is 0.5. The operating profit margin i.e. operating profits to sales is highest at 32.25 per cent and has grown in each of the last five quarters. The near-term trend in PAT is positive and net sales at Rs 472.82 crore is the highest in the last five quarters. Technically speaking, the stock is trading above its five days’ and 20 days’ DMA, indicating bullishness in the near term. The stock is also trading at its lifetime highs after giving a breakout from its important resistance levels.

Conclusion

eClerx is in good shape and expected to continue to be so given the positive demand environment for digital services. The double-digit organic growth outlook by the management is a welcome sign for investors. The FY22 prediction is bright not only due to a positive demand outlook but also due to improvement in the EBIT margins’ guidance. The margins are expected to be maintained at higher levels in spite of the wage hike due in Q1FY22 and better offshore delivery. The stock is attractive also due to its business mix and with its latest acquisition the resulting geographical diversification will prove to be an added sweetener for shareholders. 

The stock may see a PE expansion in the coming quarters as the revenue improves with a shift in revenue mix to offshoring and a rise in EBITDA margins. The obvious risks to the positive outlook remain as in case the synergies do not work out as planned by the management, which can happen with a lot of acquisitions. Also, the risk remains that the inherent strengths become weaknesses i.e. if the attrition rate grows unexpectedly and if the EBIT margins evaporate. The risk also remains in terms of the volatility that some of the top clients of the company may face given the uncertainty of the present times. In spite of the pertaining risks, predicting a promising growth outlook for the company, we recommend BUY.