ValuePickr Forum

Eclerx ~ Process Management & Data Analytics Firm

The challenge with eclerx (or similar sized &type of companies) is that they do not have any major competitive advantage from the larger established IT players. Infosys, TCS, CTS, Accenture, IBM all are in the KPO space and have much deeper client relationships. So, growth will not be easy for eClerx. But on the other hand the numbers that the company generates and its valuation is compelling.

Hi abhishek,

I agree with your comments on the presence of kpo from bigger companies, but like you said, the nos. this company is generating seem to suggest there is demand for their service. May be clients are preferring to work with a company for whom this is bread & butter!!

By the way, did you take a look at accelya ? Valuation is very comparable there too. Any thoughts on it?

Hi Abhishek

Their margins are too good and consistent… They must be having some advantage over other cos… And valuations are compelling as you say… If we can establish margins and growth will sustain, then the stock can deliver a lot…

Was tracking the co from 1yr in bits and pieces… Had thought never to invest in IT or anything related… But reviewing it after missing Accelya…

Thought of buying it yesterday for long term portfolio … But its up by 14% and now feeling like missed the chance :frowning:

The feeling is mutual :frowning: Atleast i could have traded

Hi Guys…

I am still holding on to it and intend to continue to hold. A large part of growth in recent numbers can also be attributed to the weak rupee. However, I don’t think that there is a significant risk from big players because in a KPO Business, client stickiness is a big factor and usually these companies don’t change their partners very easily

One important point is missed in this forum - Business Model.

  1. eClerx has small development team which understand the its key verticals well and develops the tools to automate the mundane KPO tasks.

  2. It hires freshers and they use these tools to do daya to day tasks with machine precison. Freshers and lower rung is least expsnsive.

  3. Due to #1, onsiteteam size is very very less and offshore headcount drives the business hence its cheap.

  4. Attrition is high as employess do nto find this job worth them too muchto add any value but as per mgmt its not their concerns. Attrition is from lower levels mostly so it does not impact their operation. Downside is that they have to maintain a decent bench size.

  5. #1 & #2 makes its financials damn good -RoE, RoCE, Margin etc. It pays out good amount as dividend. Their BS is extremely healthy.

Key Risks: 74% revenue comes from top 5 customers. Any single customer loss may derail the growth for sometime. It has happened in 2008 crisis once. Mgmt is trying hard to reduce this dependance but this is happening very slowly.

I am invested into it since long and holding it as multibagger. So far mgmt has invested the IPO proceeds very very judiciously and grown the company fabulously. Whether eClerx will deliver or not its always debated in various forums. Its true for any growth stocks but as long as it is generating profit one can continue the ride.

3 Likes

Good inputs Manish :slight_smile:

Thanu Manish… Any inputs on Eclerx competitive advantage over other I.T cos will be helpful…

Manish what prevents other cos from threatening eClerx… Is it client stickiness as Vijay has mentioned and the advantages you have mentioned…

Following are what holds fort for eClerx:

  1. Their business model. Other players are not looking so keen for KPO space and eClerx is trying to carve a niche for heself.

  2. Line between KPO and BPO is blurring. All big players keen on BPO space and its crowded but thats not the case for KPO. What i liked about eClerx is that since inception it has never been tempted to enter BPO space and has single minded focus on KPO. I love companies with such focus. In today’s competitive world only such compenies survive.

  3. KPO Focus gives an edge to eClerx. They have just started and their domain knowledge is diffrentioating them and in turns creates client stickyness.

Having said all above below are two challanges whereeClerx is struggling:

  1. Unable to go beyond top 5 clinet - its an old issue and eClerx’s stand is that they have enough business yet to minehence the delay. They are increasing their sales force though for new customers acquisition.

2)It may not be next INFY but its at the same stage what INFY was in 1990s, nobody is yet clear that how big is KPO segment hence a lots of if and buts.

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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%

1 Like

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.

2 Likes

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!