eClerx

eClerx

TCS, Eclerx, Exide Industries, Federal Bank, Hindustan Zinc, Infoedge

 TCS, Eclerx, Exide Industries, Federal Bank, Hindustan Zinc, Infoedge

eClerx Services

eClerx Services

eClerx Services

eClerx Services

eClerx Limited

eClerx Limited

eClerx Services

eClerx Services

eClerx Limited

eClerx Limited

eClerx Services

eClerx Services

eClerx Services

eClerx

eClerx Services

Investors with a two-year horizon may buy the shares of eClerx Services, considering the improving business prospects for the segments (financial services, manufacturing) that the company caters to and the ramp-ups in business that the company is witnessing.

At Rs 376, the stock trades at 11 times its estimated 2009-10 per share earnings. Though not strictly comparable, this is at a discount to most listed mid to small tier IT/BPO players. Strong deal wins and increase in the run-rate of key clients are positives.

We had given an ‘avoid' to eClerx's initial public offering in December 2007, because of concerns on the macro-environment, especially in the US, stiff valuations and scalability factors. The stock did take a knock from its offer price of Rs 315 to Rs 91 levels in October 2008.

Concerns heightenedover bad debt from the failed Lehman Brothers, as it was one of its clients. The company has recovered over half of the Rs 4.9 crore in dues and has written off the rest as bad debt. But eClerx has managed what has been a turbulent 12 months for most IT/BPO/KPO companies quite well.

In FY09, the company saw its revenues grow by 51 per cent over 2007-08 to Rs 193.2 crore, while net profits expanded by 39 per cent to Rs 61.7 crore. In the recent September quarter, eClerx has seen its revenues and operating profits (EDITDA) increase by 10 per cent over last year.

eCerx is a KPO (Knowledge Process Outsourcing) services provider. It provides data analytics — collection and analysis of data, document management and catalogue management services. These services may be deemed to be of higher value than plain data entry or transaction processing work, but lower than services such as business and investment research, financial analysis and the like.

Improving metrics

eClerx has a high client concentration, as is the case with most small sized BPO/KPOs. But the company has witnessed a ramp-up in the revenues from its top five clients, who account for nearly 80 per cent of its revenues, higher than the 75 per cent a few quarters ago.

This suggests that despite the shake-up in the financial services sector in the US and elsewhere, eClerx has not been very significantly affected. Also, the company works on deals that are spread over multiple years, which increases revenue visibility.

The company has also won two large deals in the quarter gone by, competing with BPO/KPO majors. This in an environment of vendor consolidation undertaken by large clients that favour BPO/KPO majors, lends confidence on eClerx's execution capabilities.

From an industry perspective, the fact that most captive KPOs are being sold off or are being scaled down in favour of third party vendors is also positive for a player such as eClerx. The company has increased its operations in SEZs (Special Economic Zones). From accounting for around 24 per cent of revenues a year ago, revenues from SEZs now contribute 38 per cent. This would neutralise the impact of MAT of 15 per cent on the company as current tax incidence is around 12 per cent.

The company derives nearly 61 per cent of its revenues from clients in the US and the rest from Europe.

Industry body Nasscom has observed that the US geography and the BFSI segment are stabilising and most industry research firms indicate a revival in IT/BPO spends by clients. This could benefit vendors such as eClerx.

The company had unfavourable hedges against the dollar pegged at Rs 41-42, which had resulted in forex losses of Rs 11 crore for hedges that matured this fiscal.

But the remaining $12.5 million hedged are at favourable rates of Rs 45-46 in the December quarter and Rs 50 for the March quarter, which should bring in better realisations for the company.

Billing pressure from top-clients and attrition, which has increased in the recent quarter are key risks to this recommendation.

eClerx Services to debut on bourses

On 31 December 2007

eClerx Services will list on exchanges on Monday, 31 December 2007. The stock will be placed in the B1 group on BSE.

The company had fixed the IPO price at the top end of the Rs 270-315 price band. At the IPO price of Rs 315, the PE multiple works out to 14.65, based on the year ended March 2007 EPS of Rs 21.50.

eClerx Services IPO had ended on 7 December 2007 with 26.30 times subscription. The issue received bids for 9.83 crore shares as against 37.40 shares on offer.

The qualified institutional buyers' (QIBs) category was subscribed 31.59 times. The non institutional investors' category, made up of corporates and high net-worth individuals, was subscribed 36.36 times. The retail investors' category was subscribed 12.37 times.

eClerx Services IPO had managed to get a CRISIL IPO Grading of 3 out of a scale of 5. This rating of 3 indicates that the fundamentals of eClerx Services are inline (average) with that of other listed companies in India.

eClerx Services proposes to utilise the net proceeds to fund acquisitions, infrastructure investments and for setting up additional facilities.

eClerx Services’ portfolio of services comprises data analytics, operations management, data audits, metrics management and reporting services. It provides service solutions using a mix of custom designed data processes with the assistance of delivery teams comprising generalists and domain specialists, and in-house software to automate processes.

eClerx Services reported a profit after tax of Rs 40.52 crore on sales of Rs 86.12 crore in the year ended March 2007.

eClerx Services Allotment Status

eClerx Services Allotment Status

eClerx, BGR Energy, Transformers, Brigade Enterprises, Jyothy Lab

eClerx Services 270 to 315 95 to 100


BGR Energy 425 to 480 380 to 400


Transformers & Rectifiers 425 to 465 180 to 200


Brigade Enterprises 351 to 390 110 to 120


Jyothy Lab. 690 230 to 240


Burnpur Cement Ltd. 12 2 to 3


Edelweiss 825 780 to 800


Renaissance Jewellery 150 20 to 25


Kolte Patil 145 75 to 80


Kaushalya Infra 60 13 to 14


SVPCL 42 - 3 to -4

eClerx Services IPO Analysis

Promoted by P D Mundhra and Anjan Malik, both with master’s degree in business administration from Wharton School, University of Pennsylvania, in 2002, eClerx Services provides data analytics and customised process solutions to global enterprise clients from its offshore delivery centers in India. Data analytics, operations management, data audits, metrics management and reporting services are offered to clients in the financial services, retail and manufacturing industries. This process is also termed as knowledge process outsourcing (KPO).

Employing about 1,300 people with operations in India, the UK, the US and Ireland, eClerx Services has three delivery centers in Mumbai: one at Sewri and two at Ghatkopar. The three have an aggregate capacity of about 1,035 workstations. Clients include more than 15 `Fortune 500’ companies including leading personal-computer (PC) component manufacturers, one of America’s largest cable companies, a number of global investment banks and some of the world’s largest commercial banks.

The present public issue of Rs 101 crore in the price band of Rs 270 to Rs 315 per share comprises 8.90 lakh equity shares of Rs 10 each offered for sale and fresh issue of 23 lakh (at the higher price band) to 28.5 lakh shares (at the lower price band), depending on price discovery. Expansion and acquisitions will require Rs 50 crore and the balance will be used for the general expenditure.

Strengths

• Has been enjoying multi-year partnership with the some of its largest clients including leading global corporations. Gets a high percentage of new work through reverse enquiry from existing clients. Has shown strong growth in its revenue and net profit over the last few years. Over the period beginning from financial year ending March 2004 (FY 2004) to FY 2007, revenue grew at CAGR of 58% and profit after tax (PAT) at CAGR of 113%. The Indian business process outsourcing (BPO) / KPO industry has also shown an annual growth of more than 50% over the last five years.

• Has three delivery centers in Mumbai with aggregate capacity of about 1,035 workstations. Entered into a memorandum of understanding with DLF Akruti Info Parks (Pune) for 75,000 square feet and a seating facility of 900 workstations as part of expansion. The first phase is expected to be operational in the March 2008 quarter (Q4) of FY 2008, with the remaining capacity to be made available in FY 2009. Intends to set up additional facilities in Chennai, National Captial Region (NCR), Pune and Mumbai. Explores options for acquisitions and strategic investment opportunities in companies with specific domain expertise operating in the US and Western Europe to expand the scope of existing services and add new clients/ geographic markets.

Weaknesses

• A substantial portion of the revenue comes from a small number of clients. The five largest clients accounted for more than 86% of the total income in the six months ended September 2007.

• Operates in an industry with very high attrition rate. The attrition rate was 37% in FY 2007. As a customised solution provider with high complexity of programs, has to incur high cost on specialised and critical training of employees.

Valuation

The rupee appreciation has impacted performance in recent past. Financial performance was good in FY 2007: revenue was up Rs 86.12 crore over FY 2006, with operating profit margin (OPM) 400 basis points (bps) down to 50.2% over FY 2006) and profit after tax (PAT) 69% higher to Rs 40.52 crore . However, the top line increased 16% on an annualised basis to Rs 50.15 crore, OPM dipped 1,100 bps to 39.2% and PAT down about 19% to Rs 16.47 crore in the six months ended September 2007 (H1) over the same period in 2006. The main reasons for such adverse performance was the significant appreciation of the rupee against the US dollar and increase in employee and personnel cost to 34.4% of revenue in H1 of FY 2008 from 28.50% of revenue in FY 2007.

At the lower band of Rs 270 per share, P/E works out to 15.9 times the annualised EPS of Rs 17.0 for the six months ended September 2007 on post-issue equity of Rs 19.40 crore. At the upper band of Rs 315 per share, P/E would be 18 times the annualised EPS of Rs 17.5 on post-issue equity of Rs 18.87 crore for the six months ended September 2007. There is no listed comparable peer KPO company. However, Firstsource Solutions, a major player (almost 10 times the size of eClerx Services and growing at a face pace) in the BPO industry, is trading at P/E of 15 times its annualised consolidated EPS.

eClerx Services IPO Analysis

The age of information has not just flooded us with a vast amount data but also brought along a number of ways in which one could use data meaningfully to one’s advantage. While large corporations realised the importance of data, the outsourcing and consulting players caught hold of the idea to turn it into profitable business models.

eClerx Services is one such knowledge process outsourcing (KPO) business from India, which jumped on to the bandwagon early on, to provide data analytics and customised process solutions to global enterprises. eClerx was established in 2000, and has grown by leaps and bounds to have over 15 Fortune 500 clients and achieve a critical mass in the industry.

eClerx now plans to raise Rs 101 crore via an initial public offering, which constitutes an offer for sale from its promoters P D Mundhra, Anjan Malik and Burwood Ventures of 8.9 lakh shares, as well as a fresh issue of shares priced between Rs 270-315 a share. The company aims to use the issue proceeds to carry out acquisitions, make infrastructure investments and set up additional facilities.

Analyse it

eClerx’s service portfolio comprises of data analytics, operations management, data audits, metrics management and reporting services. It analyses competitive data from the day-to-day operations of large corporations by mining clients’ transactions and designing process solutions for clients’ specific business needs.

These processes lead to increased revenues and reduced operating costs for its clients across a variety of business functions, which include marketing, pricing, manufacturing and supply chain management. Its clientele is largely derived from industries such as financial services, manufacturing, retail, travel and hospitality.

The nature of its operations requires eClerx to have a high level of management involvement across all the functions of its clients’ businesses over a multi-year time frame. The result is strong client relationships which are ongoing in nature.

However, there are two important implications of this. The company depends heavily on its few clients for a significantly large proportion of its revenues – over 86 per cent of its revenues come from the top five clients.

On the flipside, the deep involvement of eClerx across various functions of its clients’ businesses makes it difficult for its clients to exit the relationship, “That’s because the nature of services provided is ‘business as usual’ and non-discretionary,” claims Anjan Malik, promoter and director of eClerx Services.

Growth concern

As the services provided by eClerx are more complex than mere transaction processing, the company is required to employ a workforce with specialised skill-sets. On the one hand, such workforce is scarce and on the other, attrition is steep.

This is probably the reason behind the company’s rising wage bill as a percentage to sales, which has gone up from 26 per cent in FY06 to over 33 per cent in H1 FY08. Selling and administrative expenses too are on a rise, as the company dabbles its feet into new industry verticals in order to expand its footprint.

This coupled with a steep appreciation in rupee against the dollar has eroded the company’s operating profit margin by almost 1500 basis points from 54 per cent in FY06 to 40 per cent in H1 FY08.

The net profit margin too has narrowed consistently from 50 per cent in FY06 to 32 per cent in H1 FY08. This is likely to go down further with the introduction of minimum applicable tax of 12.5 per cent from FY09 onwards. Again, eClerx is at a higher risk from the depreciating dollar as over 70 per cent of its revenues come from the US, while about 25 per cent from the UK and Europe.

The company has, however, not disclosed information about the onsite and offshore proportion of its work. Further, other operating metrics such as utilisation and attrition rates too are not available.

Valuation

eClerx will be the first pure KPO outfit to list on the bourses, and hence, there are no strictly comparable peers. However, from the broader IT enabled services spectrum, it could be pitted against BPO companies such as Firstsource Solutions. At about 16-19 times its estimated FY08 earnings, eClerx appears to be reasonably priced, compared to its BPO peers. Crisil has rated this IPO three on five indicating average fundamentals.

However, the relatively new business model and the lack of information on a number of operating metrics make it difficult for analysts to estimate the company’s cash flows. While high dependence on the US leaves the company vulnerable to a slower top line and bottom line growth in the event of a slowdown in the US and IT budget cuts, the rising rupee too is not likely to spare the company’s margins. The key to the prosperity of eClerx remains in sustaining its profitability. Investors with a slight appetite for risk may want to place their bets.

Issue opens: December 4, 2007 Issue closes: December 7, 2007

eClerx Services: Avoid

Investors can give the initial public offering of eClerx Services a miss, considering uncertainties surrounding the macro environment for this business and key business risks. eClerx is a knowledge process outsourcing (KPO) company that provides services to clients in the manufacturing, retail and financial services space. At Rs 315 (upper end of price band) the offer price values the company at over 18 times its annualised current year earnings on the post-offer equity base. This appears a bit stiff, especially in the IT/ITES space, where most players command low double-digit valuations.
Client and service spread

For retail and manufacturing clients, eClerx offers product price benchmarking, analysis of customer feedback on products and catalogue analysis under the data analytics services umbrella. It also develops technical content for clients’ Web sites, Web stores and product brochures.

For financial services clients, eClerx has a more elaborate portfolio of services catering to the investment banking, capital markets and asset management divisions of financial companies.

sThis includes portfolio matching, reconciliation of financial data, analysis of price fluctuation of asset classes, and so on.

In terms of service offerings, the major portion of the company’s offerings (except certain data analytics services) cannot be termed as high-end back-office services. But the company works predominantly on multi-year deals which may provide more stable long-term revenue streams.
Financials

Not being a voice-based player has been a plus for the company and it has managed to capitalise on a strong wave of outsourcing from the US over the last five years. The company’s revenues have grown at a compounded annual growth rate of 58 per cent between 2004 and 2007 and its profits after tax at 131 per cent during the same period.

But operating profit and net profit margins have been falling steadily over the past couple of years, with an actual decline in net profit in the first six months of this fiscal. This decline may be explained by steep increases in employee costs and a spike in general administrative expenses for its US and UK subsidiaries.
Risks and Concerns

Competition risks: Increasingly, outsourcing deals from the US and elsewhere are awarded on a multi-service basis which includes a KPO/BPO component. Top-tier and even some second-tier players are able to cater to multiple requirements.

This takes away a chunk of business from pure KPO or BPO players. This apart, in the segments where eClerx operates, players such as Office Tiger, Genpact, WNS and Firstsource are more integrated, with strong parental backing and deep pockets. This may not be the case with eClerx.

US slowdown concerns: eClerx has significant presence in the financial services apace. Also, it derives over 73 per cent of its revenues from clients in the US. With the sub-prime lending issue affecting top financial services players such as Citibank, Merrill Lynch, and HSBC, a clear picture on the enormity or otherwise of the sub-prime problem is awaited. Concerns about whether outsourcing contracts to IT/ITES will continue, and at what levels, may be clear only over the next several months.

The possibility of a US slowdown, which has been reinforced by recent economic data, is also a concern. The company is trying to diversify geographically, but may take time to broad-base its revenues from the current levels. The appreciating rupee may also affect margins.

The company derives over 85 per cent of its revenues from its top five clients, making for a fairly concentrated profile. The employee expenses are going up steadily and, if sustained, could hurt margins in the long run. Employee costs stood at 34 per cent of the revenues for the half year. Attrition at 37 per cent, though not unusual for ITES players, is also an execution risk.

Offer details: The company plans to raise Rs 101 crore from this issue, in the price band Rs 270-315.

Grey Market - Burnpur, BGR Energy, eClerx, Edelweiss, Jyothy Labs

Jyothy Lab. 620 to 690 220 to 225


Burnpur Cement Ltd. 12 8 to 9


eClerx Services 270 to 315 80 to 90


BGR Energy 425 to 480 240 to 250


Edelweiss 725 to 825 750 to 775

Renaissance Jewellery 125 to 150 20 to 25


Kolte Patil 125 to 145 75 to 80


Kaushalya Infra 50 to 60 12 to 15


SVPCL 42 - 3 to -5

eClerx Services IPO opens Dec 4

eClerx Services is eyeing a mop-up of Rs 101 crore from its initial public offering which opens on December 4. The company has priced its Rs 10 share at Rs 270-315 per share in the 100 per cent book building offering. The issue closes on December 7.

eClerx Services proposes to utilise the net proceeds to fund acquisitions, infrastructure investments and for setting up additional facilities.

CRISIL has rated eClerx Services “IPO Grade 3/5”, indicating average fundamentals.

The issue comprises fresh issue of equity shares and an offer for sale by PD Mundhra, Anjan Malik and Burwood Ventures of 890,000 equity shares.

Book running lead managers to the issue are JM Financial Consultants and Edelweiss Capital.

The shares will be listed on the National Stock Exchange and Bombay Stock Exchange.

eClerx Services’ portfolio of services comprises data analytics, operations management, data audits, metrics management and reporting services. It provides service solutions using a mix of custom designed data processes with the assistance of delivery teams comprising generalists and domain specialists, and in-house software to automate processes.

The company’s unconsolidated revenues grew to Rs 86.23 crore in 2006-07 (Apr-Mar) from Rs 47.75 crore in FY06 and Rs 26.64 crore in FY05 at compound annual growth rate of 79.9 per cent. Profit after tax grew to Rs 40.52 crore in FY07 from Rs 24.04 crore in FY06 and Rs 11.22 crore FY05.

For the six months ended September 30, 2007, eClerx’s unconsolidated revenues were Rs 51.44 crore while net profit was Rs 16.47 crore.

Grey Market - Jyothy, BGR Energy, Edelweiss

Jyothy Lab. 620 to 690 250 to 270


Burnpur Cement Ltd. 12 8 to10


eClerx Services 270 to 315 75 to 85


BGR Energy 425 to 480 225 to 250


Edelweiss 725 to 825 800 to 825


Renaissance Jewellery 125 to 150 30 to 35


Kolte Patil 125 to 145 95 to 100


Kaushalya Infra 50 to 60 15 to 18


SVPCL 42 - 3 to -5