ValuePickr Forum

Eclerx ~ Process Management & Data Analytics Firm

Eclerx (CMP ~ 656) is one of the leading KPO service providers of the country. A sound business model with consistent growth in revenue and profits, high ROE, debt free Balance Sheet, consistent q-o-q growth since last 20 quarters (barring two quarters where there was a marginal miss), good management, good dividend yield (~ 3%) and a reasonable valuation (FY 12 PE ~ 12) looks a good investment opportunity for long term

Some of the risks: 1) Is in the business that most of us would find it difficult to understand 2) High Client concentration â Top five clients contribute to nearly ~ 80% of revenues 3) Exposed to currency fluctuation risk (because of mostly foreign currency billing) 4) There is a global debate going on whether the outsourcing to India will continue in light of the recessionary trends in US and Prez Obamaâs efforts to reduce outsourcing to boost local development and employment trends

Just wanted to know why is it that nobody in this forum has yet written about this company??

2 Likes

I dont quite agree with Risk 1). I would say the business model has not been studied by many but the model is not that difficult to understand.

The other risks are quite valid.

I think there has been creeping acquisition by fund houses even last quarter as well.

Overall a decent company.

Q3/Fy-13 Results out…

Total Income up 29.4% to 170.79 Cr from 131.97 Cr.
EBIDTA up 12% to 66.82 Cr from 59.71 Cr.
Net Profit DOWN 2% to 48.95 Cr from 49.95 Cr.

EBIDTA margin is 39.1% v/s 37.2% (SQ-12) and 45.2% (DQ-11)
NET Profit margin is 28.7% v/s 15.6% (SQ-12) and 37.9% (DQ-11)

Employee costs to Income is 45% v/s 46.1% (SQ-12) and 39.3% (DQ-11)
Other expenses to Income is 15.9% v/s 16.8% (SQ-12) and 15.4% (DQ-11)

Forex Loss of 0.98 Cr v/s Loss of 18.73 Cr (SQ-12) and Gain of 6.27 Cr (DQ-11)

Tax Rate 16.3% v/s 25.3% (SQ-12) and 20.1% (DQ-11)

9M/Fy-13 v/s 9M/Fy-12:
Total Income up 40.8% to 486.2 Cr from 345.32 Cr (Fy/11-12: 472.89 Cr)
EBIDTA up 31.5% to 188.11 Cr from 143.01 Cr (Fy/11-12: 189.74 Cr)
Net Profit DOWN 4.6% to 123.44 Cr from 129.36 Cr (Fy/11-12: 159.77 Cr)

Reported 9-month EPS 40.9 v/s 42.88 (Fy/11-12: 52.99)
Recorded TTM diluted EPS: Rs. 51.04

At 02:25 pm on 25/01/2013, stock on BSE trading at Rs. 648/- DOWN 1.7%

Eclerx is discussed in TED at the following link :http://www.theequitydesk.com/forum/forum_posts.asp?TID=2281

looking at results, the main culprit of lacklustre results is higher employee expenses.

I think the stock is becoming more attractive as it corrects. It closed today at around 630.

With the track record of the company and high ROE and high dividend payout, this is a stock worth watching.

Hitesh bhai with profit under pressure they could reduce divided again this year?

excel,

last year they had the acquisition which probably led to dividend cut. This year I think they should provide good dividend.

I had heard of some foreign brokerage firm coming out with highly bullish targets on eclerx.–probably nomura or such other firm. couldnt find the report though.

Tried on screener.in . Good enough ratios

~Supratik

I was trying to filter the funds working on elcerx.

Is there a site wherein we could find funds/individual working on a stock and vice-versa? I have used rupeeking but a lot of information have probably not been been captured.

http://www.rupeeking.com/deals/list?page=6021&sort=trader+DESC

Please let me know if there is one better.

~Supratik

They have a 30% + attrition rate… which means theoretically their employee base undergoes a change every 3 years! Not a good augury for a “knowledge” process outsourcing company. Such a high attrition rate could also mean that the work environment & pay are not conducive for skilled employees to thrive.

The fact that the company has been growing despite a high attrition rate means that the employees are essentially dispensable and the nature of work is pretty commoditized / standardised, which could mean that the margins will trend down over the years as competition increases. On the flip side, it means that they have excellent processes in place to ensure that work does not suffer and organisation wide learnings & knowledge are well documented.

The key thing to assess here would be whether eclerx’s clients have any “switching” costs associated with the work they outsource, is the nature of work critical, and how well are they integrated in the regular operations. That could be source of moat! If you study the presentation made by Piramal Enterprises upon their acquisition of ‘Decision Resources Group’ you will understand what I am trying to drive at. An excellent discussion on switching costs is also contained in Pat Dorsey’s book ‘The Little Book that Builds Wealth’.

Trivia: It is amongst the top 10 holdings of HDFC Midcap Opportunities Fund.

Disclosure: No vested interest.

3 Likes

You can get the mutual fund holdings from moneycontrol.

Attrition has been questioned ever since the company went public; Co’s answer is that attrition primarily happens at the bottom of the pyramid (fresh graduates), the whole business model is that Co breaks down relatively complex tasks into specific modules which by themselves are pretty easy to execute and train. This apparently allows the Co to train new recruits in about 2 weeks for these tasks (as per co comments). The value addition happens at the management level where it is much low (and management staff is incentivised through esop’s). This is of course management version…but seeing how they have managed in the last 5 years i am not too worried about it. Ultimately this sector will have close to BPO level attrition!

Also note that the amortization of goodwill is a 5% hit to EPS this year vs. last year but is effectively a non-cash item.

IMHO, market believes this is a pretty high quality co…but is worried about medium term growth. I am more sanguine as i believe growth will return when the global economy rebounds and as long as the return ratios hold and payout remains high (key item to watch for this year as I would like to see it going back to the 40%+ levels after being reduced due to the acquisition payout last year) i’d like to hold this.

ps: Potential LBO of Dell, largest customer, may impact revenues

pps: in my portfolio

I am not debunking the investment thesis. All I am saying is that I have some concerns and unless I can get hold of information which will rationally satisfy me, I will not initiate a position at this stage.

I am adding a few general points to explain my stand… and these apply to every investment idea and not just eClerx.

  1. As Taleb says âLack of evidence of problems is not the same as evidence of lack of problemsâ.

  2. There is a always a tipping point or a** breakpoint**. Michael Mauboussin refers to these as the âgrand ah-whoomsâ. He says that âRepeated, good outcomes provide us with confirming evidence that our strategy is good and everything is fine. This illusion lulls us into an unwarranted sense of confidence and sets us up for a (usually negative) surprise. The fact that phase transitions come with sudden change only adds to the confusion.â

  3. Rather than dismissing a factor / phenomenon as inconsequential (primarily because in the past it did not seem to affect the outcomes), one must investigate and ârationallyâ satisfy one self that the factor / phenomenon is unlikely to have a debilitating impact in the long run. For this one needs to understand the business model of the company thoroughly. The other way of getting around it is to ensure that there is sufficient margin of safety embedded in the purchase price. Here again one must remember that just because the P/E multiple appears optically low it does not mean that there is sufficient margin of safety.

  4. One need not be desperate to deploy cash. As Buffett and Munger have said âI could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches â representing all the investments that you get to make in a lifetime. And once youâd punched through the card, you couldnât make any more investments at all. Under those rules, youâd really think carefully about what you did, and youâd be forced to load up on what youâd really thought about. So youâd do so much better.â

  5. Of course, none of this means that the price will not go up. They are after all dictated by human behaviour.

3 Likes

I was told by a fund manager sometimes back that attrition at low level is good for such kind of setups since it ensures 1) A fresh talent every 2-3 years 2) new employees (fresh grads) come at a cheaper cost

Also 20-30% attrition is more or less common in BPO/KPO Industry

2 Likes

Maneesh,

i wasnt making an investment thesis…and i like ur quotes!

obviously multiple view points make the market

cheers

…and

Thanks so much…nice to know that :slight_smile:

Fully agree with you… but we must endeavour to investigate some of the important viewpoints and individually work out the odds…else we will end up with ‘tunnel vision’.

Cheers :slight_smile:

A recent report

http://www.valuenotes.com/buy/eClerx-Services-EBIT-margins-up-240-bps-q-o-q-to-35-during-Q3FY13/180501/13240056.00/C?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+ValuenotesCompanyReports+%28ValueNotes+Company+Research+Reports%29

`Supratik

Another post by ICICI direct

Another post by ICICI direct

Highlights of the Call by Capital Market:

  • The Total revenues grew by 7% QoQ to Rs 215.2 crore for the quarter ended September 2013 and net profit grew by 9% QoQ to Rs 67.2 crore for the same period. In USD terms, operating revenue grew by 3% QoQ to USD 34.1 million during the quarter.

  • The S&D Expenses increased due to addition of Onsite Head Count and increased sales bonus. The G&A Expenses increased due to Legal and recruitment fee and contracted services during the quarter.

  • The India head count is at 6543 (6389 in Q1) and Onsite headcount is 62 (60 in Q1) in Q2’FY14. Also, the attrition is much higher and increased sharply to the 36.4% in Q2’FY14 compared to the 25.2% in Q1’FY14. It indicated that the Q2 is traditionally high attrition quarter due to the wage hikes.

  • The Utilization is lower at 65% in Q2’FY14 compared to 66% in Q1’FY14. This is due to the higher attrition coupled with the new additions in the shared services during the quarter. Further, it indicated that the utilizations will improve once the business mix improves among the verticals.

  • The Emerging client continues to grow robustly during the quarter.

  • It expects the pricing to be stable going forward.

  • On Deal pipeline and Deal closures, it indicate that 1) the outlook in banking in positive 2) On online business it has worsened (only bright spot is emerging a/c’s) 3) its reasonably optimistic on the Cable business (but similar levels to the past few quarters).

  • On Company growth trajectory, it indicated that deal pipeline is similar to the same level as compared to the one year back. So, it expects similar level of growth that witnessed for the past few quarters going forward.

  • On verticals, it indicated that the Cable& telecom business is on right trajectory and the Financial services are positive (macros trend is on the cost reduction).

  • It has signed Letter Of Intent for additional space in Mumbai; this will take India seats to 6800+ in Q1’15 Also, the new office in Philadelphia, takes formal onshore presence to four locations.

  • The Capex spend likely for new facilities are at Rs 15 crore in H2FY14, mainly into the Mumbai and Philadelphia facilities.

  • It has USD 17.9 million @ 53.59/$ hedges matured in Q2FY14 vs USD 17.7 million @ 52.89/$ in Q1FY14. The average loss on hedge maturity is Rs 7.0 per USD in Q2’FY14 vs. Rs 3.3 per USD in Q1FY14.

  • The Total outstanding hedges now at USD 96.3 million at average Rs 61.00/USD, 2.8 times last quarter revenue vs. average of 2.5 times in preceding 4 quarters. Out of this 8% are forwards, 2% are options.

  • Total Cash and Cash equivalents of Rs 231.1 crore (excluding escrow) as on 30thSeptember 2013 compared Rs 282.4 crore as on 30thJune 2013.

  • The DSO increased to 41 days in Q2’FY14 compared to 35 days in Q1’FY14. It indicated that the acceptable range is 30-40 days for the Company.

Hi Vijay,

Are you still following the company ? This is a good quality company available at cheap valuations 12-13 times ttm. In this market, people are paying higher PE’s for quality companies with growth potential. Any projections of how much eps it can make this year…?