ValuePickr Forum

Eclerx ~ Process Management & Data Analytics Firm

2)It

Thanku Manish…hence the relatively low valuations and opportunity i guess…

Highlights of the call by Capital Mkt:

The Operating Revenues grew by 2% QoQ to Rs 219.5 crore for the quarter ended December 2013. In USD terms, the Revenues grew by 4.7% QoQ (4% in cc terms) to USD 35.7 million for the quarter ended December 2013.

The Q3 revenues include some preponed work from Q4 (1/4thof revenues) by clients during the quarter. It expects some impact of this on Q4 growth.

The Revenue growth from Top 5 grew by 8% YoY and Emerging grew by 35% QoQ respectively during the quarter. The Emerging revenue has continued to outpace growth in strategic clients in line with firm strategy.

The OPM fell by 300 bps QoQ to 37% on the back of rise in Selling and Distribution costs due to increase in onsite headcount, bonus and commission and travel. Accordingly, Operating profit fell by 6% QoQ to Rs 80.5 crore. Also, net profit fell by 7% QoQ to Rs 62.3 crore.

The L1 visa holders also added to the onsite head count during the quarter.

The SEZ approval received for new floor in Airoli and planned go live on Apr]14 (600 Seats). It is discussing additional floors in Airoli to consolidate Mumbai facilities, subject to regulatory approval.

The Final payment is done for Agilyst acquisition (for the total acquisition cost ~ $21 million) during the quarter.

The head count has increased to 6620 in Q3fFYf14 compared to 6543 in previous quarter. Also, the onsite head count increased to 72 from 62 in previous quarter. However, the attrition fell to 31.8% (seasonal trend) compared to 36.4% in previous quarter.

The staff utilization increased to 66% in Q3fFY14 compared to the 65% in Q2fFY14.

It added 2 clients during the quarter.

The Cable business grew faster on the low base, Financial Services also grew fast during the quarter.

In the Cable business, there is lot of demand for its services. The digital and digital market has lot of demand and is another key area.

The billing rates expected to be flat to slight uptick for the FYf15.

The Total outstanding hedges at USD 95.6 million at average INR 62.77/$ as on 31stDecember 2013.

The DSO days are at 33 days during the quarter.

The Total Cash and Cash equivalents are at Rs 314.6 crore excluding escrow as on 31stDecember 2013.

On demand environment, it indicated that there is no significant change and expects to grow same pace of 10-15% in USD terms in the medium term. On margins, it indicated that it will continue to operate in the mid 30% going forward. It continues to look at inorganic opportunities.

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This company is **STILL **available at cheap valuation (13 PE) despite of recent run up and company performance is really good.

Hi,

I think in generating profits/cash, they have done excellent so far. They have distributed dividends as well but i guess if they dint have any acquisition in mind, capex requirements were low, they could have distributed more. They have started accumulating cash, most of the networth consists of cash which earns next to nothing. If they would have done some buyback earlier(i guess right now the stock price is inflated so wont make much sense), or had the declared huge dividends, shareholders were better served. Also, as margins are high, competition would be snapping at its heels so stock price going higher from here is very less assuming revenue growth becomes costlier. If i compare it with Accelya Kale, i find latter the better in terms of serving the shareholders. Any views?

Ashish

As I see it this company is a good management team but they themselves are wanting to grow at 10% or so. Latest Q numbers are also in line with that growth number.

Overall margins are good but I dont understand the competitive advantage companies like this have as about a dozen other companies are doing either 100% or very similar activities. The art becomes that of retaining institutional clients.

Average compensation per employee is 6.2L/year which is low and signals that the kind of services being provided are low value addition services.

Please dont get me wrong: I think this is a wonderful business but at 15~16 times earnings might be a bit overpriced.

Would be obliged if you can ping in your thoughts.

Ishaan,

For service based IT companies 6.2L/year is not at all low. If you see Infosys, TCS, WIpro a person having 4-5 years of experience will have salary around 6-6.5L/Year.

For product companies it can be considered low.

Company have been growing above 20% year consistently for past 10 years. You cannot judge growth by just one quarter numbers

Dividend yield above 2 percent. So you are paying company 14PE. Both sales and net profit have been growing > 20 for last few years.

And the best part is company have been able to generate some tremendous free cash flows which is what matters. If you do a DCF valuation you will find the company still attractive.

Current Price 1450
Market Cap around 6000 Cr.
Current PE 18
Debt 0
ROCE 56%
Profit Growth 3 year 12%
Profit Growth 5 years 25%
OPM > 35% much higher than its peers and even the bigger companies like Infy, TCS, Wipro etc.
Promoter, Started by Current Promoter who is 42 years old and no succession issue for long time to come
Areas, BPO/ KPO/ Digital Marketing
It is expanding its footprints by acquisition
Top 5 customers concentration reduce to less than 60% now.
Rumours of interest from overseas biggies ,
Dividend Yield 1%

any comments, I have a 5% holding of my portfolio, planning to increase it to 20%

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I am also holding eclerx and feel this is a company with strong Moat due to its long experience in financial back office process outsourcing. It has a long experience in this area and has built good process knowledge which coupled with sticky clients contributes to its having high margins.

Challenge for the company is to now sustain this growth and there are two critical questions to look at.

  • growth in its core area of financial services. Thus industry is cyclical and can be heavily impacted by economic slowdown. We need to check if they can continue to grow in this sector.

  • growth in telecom and digital business. Challenge here is that eclerx will not have the process expertise and moat is still developing if they can build a expertise similar to their core business. They would face more competition here and it may impact their margins. We need to watch out how they are able to grow these businesses

I have had experience of brief interaction with the top management and they come across as sensible and competent people who are conservative and are very close to business operations. This is also the feedback I have got from few people in the mutual fund and venture capital industry. This gives me confidence in the management capabilities

I plan to build more position as I see more positive trend on the key questions I listed above.

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With:

  • PE of 18
  • 1 year FW PE of 15
  • Div Yld of 2.18
  • PEG of 0.31
  • Zero debt
  • Consistent topline and bottomline growth

It is a great buy even at current price. It will just become a better buy after the Q1 results!

I agree One of the best stocks
Margins consistently over 35%
debt 0
ROCE of above 50%
Promoter driven company, with promoter age 42 years
moving into digital
risks are that company takes projects which last 1 to 3 years and company need to keep getting businesses,
I agree one of the best stock

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Great results
Profit increased to 95 cr from 75 same quarter last year and management had announced share buy back also
Story looks promising any comments

Yes, results are very good. I am ruing the fact that I did not add more at 1400/- a month back. Now price will shoot up till the buyback is in vogue. I see prices going up to 2200/-.

Results were good YoY. But profit margins fell QoQ.

I sold out my holding today because the score of Eclerx fell my my rating system. Might reconsider buying if there is a price correction.

eClerx seems a very solid stock. It is trading near its Intrinsic value which is very rare when market is at peak and none of the quality stocks are available at cheap price.

In my views eClerx must be hold for 8-10 years of horizon with 50% investment now and remaining 50% on every dip.

8-10 years! That is a very long term horizon.

Yes it’s a long term hold.

You have perfectly nailed the point related to MOAT. I would like to add that one can compare eclerx with GENPACT (NYSE:G) which is Indian KPO listed on NYSE.

If you looks at G apparently shareholder value creation has not been that phenomenal. I might be wrong as my statement is just on the basis of max available share price chart.

The only important question right now for me is GROWTH and challenge coming from AUTOMATION. Very soon artificial intelligence will kill lots of back office processes which eclerx champion.

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Hi Atul,

Why and how do you think that AI will kill back office processes? Are they so repetitive in nature that the pattern of work can be easily captured by a sophisticated algorithm?

I thought that there are a lot of nuisances and corner cases involved in these office work.

Picking up the easier pattern by an intelligent agent and introducing itself into the system creates even more complexity and corner cases.

In my opinion, AI would actually drastically increase the human work due to more complexity getting introduced. Only the nature of human work would change.

I might be wrong though.

Regards.

Hi Nishant:

Though I am not a subject matter expert on this going by news available in media and my own experience of working in bank I feel a lot can be automated easily. For example reconciliation, counter party confirmation and recording transactions are things which can be automated. Human intervention will be required but at a very high level i.e. for supervision and monitoring. So you will be able to achieve a lot with less number of people. Now if eclerx has ability to retain benefit of this efficiency and apply news techniqucies to achieve this kind of effiiency is a thing to watch.

Though right now even I think all this is quite a futuristic thinking. However, we should not ignore that pace of change is quite fast.

I am providing two links which may be helpful :slight_smile:

Complex job of auditing expense bill is being automated.

Automation risks 69 per cent jobs in India, says World Bank
http://economictimes.indiatimes.com/jobs/looming-threat-automation-risks-69-per-cent-jobs-in-india-says-world-bank/articleshow/54687904.cms

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Yes, tasks such as reconciliation and counterparty confirmation have already been automated. They do not present any new threat to I.T. companies. But the point raised pertains to Artificial Intelligence (AI) and not automation.

AI goes beyond automation. AI can process data far more efficiently than humans, and recognize speech, image, text and patterns of online behavior. In AI, the computer “learns” over time. The computer analyses new information, compares it with existing data and identifies patterns, similarities and differences. Over time, it improves its ability to classify information and predict, making it easier to take data-driven decisions. AI helps to customize service delivery to each individual. For example, in a banking context, the computer can analyze your income & spending patterns and make customized recommendations. KYC, Anti-Money Laundering and Regulatory Compliance are some of the other areas where AI is expected to make an impact.

Though reports suggest automation is picking up, whether it presents a threat or an opportunity is difficult to say. I think a lot depends on each company’s individual profile and how it responds to the challenge.