eClerx Services: Buy

Among mid-tier technology players, only a select set has consistently grown across market cycles. BPO/KPO businesses have, however, generally found strong traction.

eClerx Services a mid-sized BPO and KPO player, has expanded its client base across its key offerings — cable and telecom, financial services, and sales and marketing services. This has delivered consistent growth in financials.

A desirable geographic-mix, declining client concentration and sustained customer additions are key positives for eClerx.

At ₹1,410, the stock trades at a little over 14 times its likely FY15 per share earnings, making it a reasonable bet for investors with a two-year horizon.

This valuation is lower than the 15-18 times earnings multiple that most performing mid-tier IT players trade at.

In general, demand for BPOs remains strong as it is not a discretionary expenditure. For the top-tier IT players, the BPO sector continues to grow at an impressive pace — over 20 per cent in some cases — reflecting the strong demand in the space.

In FY14, the company’s revenues increased by 32.6 per cent over 2012-13 to around ₹852 crore , while net profit rose 47.5 per cent to around ₹256 crore. eClerx’s net margin, at 30 per cent, is among the highest in the industry and far ahead of most mid- and small-tier IT and BPO companies.

The company has seen dependence on its top clients decline steadily over the last couple of years, as it adds newer customers.

The top five clients now account for 71 per cent of eClerx’s overall revenues, compared with nearly 90 per cent a couple of years ago. Revenues from emerging customers have been growing at 33-40 per cent over the past four-five quarters.

This trend has also gained momentum after the company made a significant acquisition in Agilyst, a US-based KPO player, a couple of years ago. In addition to helping it penetrate the US market, this acquisition added significantly to eClerx’s client base.

The focus on adding new customers, rather than depending heavily on a few older clients, has held the company in good stead. Many small offshore players fell off the radar when large IT spenders reduced the number of vendors they dealt with. But eClerx bucked this trend and has staved off client attrition.

Over the past four quarters, the company has, in fact, added 15 new customers, taking its number of clients to 65. eClerx has maintained its utilisation rates at 64-66 per cent in the past, though it dipped to 61 per cent in the recent quarter.

The company has indicated that this figure would significantly improve over the rest of the fiscal. It is likely to compare favourably with the figures reported by many mid-tier IT companies.

The company has also kept costs under check. Its selling and distribution costs are under control, at 12-14 per cent of revenues, even as it seeks to woo new customers. Employee costs too have been contained to less than 35 per cent of revenues in the previous two fiscals.

The company has a healthy geographic mix, with the US contributing to 73 per cent of its overall revenues and Europe pitching in with about 22 per cent. This is a healthy blend as the US is still the largest market for outsourcing of BPO and KPO services, even as an under-penetrated Europe market continues to grow at a healthy pace.

Another key advantage for eClerx is that almost its entire workforce, is based out of India, thus optimising costs. Attrition, although reduced from the levels over 30 per cent, is still quite high at 24.6 per cent. Sharp wage hikes to stem this may affect the company’s margins.