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Spark Capital: eClerx Services Ltd. 1QFY14 result review - Tepid US$ Revenues, Retain Reduce




Spark Capital Advisors(India) Private Limited


23 Jul 2013





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eClerx Services Ltd. 1QFY14 result review - Tepid US$ Revenues, Retain Reduce eClerx reported 1QFY14 results, with US$ revenues coming at $33 mn in line with our $ 32.9 mn estimate, up 2.2% qoq. EBITDA margins came in at 41.6% ahead than our 38.9% estimate, up 224 bps qoq, with currency benefits offsetting offshore wage hikes given. Currently, Agilyst stands at an annual run rate of US$ 20 mn vs. US$ 10 mn in 4QFY12, implying CQGR of ~15%. Management commentary suggests that the organic business could continue to remain weak, growing at a rate of 2-4% qoq. The company added 5 new clients this quarter. Top 5 clients contribution declined to 76% from 78% in Q4. Though it is heartening to see the revenue growth being driven by non top 5 clients (11% qoq) pressure on top clients (flat qoq) means weak US$ revenues in the coming quarters, given the size of top 5 clients. Thus, at the back of tepid native business, eClerx US$ revenues could grow 12% YoY in FY14E. EBITDA margins could come in 40.2% with currency benefits, however increased depreciation and tax rates (24%) could have an adverse effect on the PAT margins. Thus, on feeble outlook, we continue to retain REDUCE with target price of Rs.760. Revenue momentum in Top 5 clients and any corporate actions are key downside risks to our rating. US$ Revenue growth of 2.2% qoq: Constant currency growth came in at 2.4% CC. Growth was led by non top 5 clients which grew by 11% qoq whereas top 5 clients were flat qoq. Across geography, US, Europe & ROW grew 2% qoq each. Agilyst contributed ~ US$ 5 mn this quarter. Utilisation dropped to 66% from 69%, led by heavy hiring (435 net additions). EBIT Margins improved 136 bps qoq: EBIT margins improved 136 bps qoq with currency benefit of 400 bps offsetting salary hike impact (-290 bps qoq).S,G&A expenses were lower due to one time cost benefit of Rs. 20 mn. Depreciation has been higher by 22 mn and is expected to be around the same range with amortization of goodwill. Retain reduce: Though Agilyst continues to be upbeat, S&M & BFS continues to be tepid. With weak Q1 & feeble outlook, we expect FY14E US$ revenues to grow at 12% YoY. Adjusting for depreciation, increased amortization & increased tax rates, we now expect eClerx’s revenues & EPS to grow at 16% and 33% in FY14E and to grow 10% and remain flat in FY15E respectively. Thus, on 10x of FY15E EPS estimate of Rs.75.8, we continue to maintain Reduce with target price of Rs. 760 vs. Rs. 690 earlier.(10x FY15E EPS estimate of Rs.69)

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