Stock Review: eClerx

 

 

At 544, Valuation Seems To Fully Capture Co's Future Growth Prospects

 

THE Mumbai-headquartered knowledge process outsourcing (KPO) company, eClerx, has performed well on bourses in the past one year. Its stock price has more than doubled during the period as against a 15% gain in the benchmark Sensex. The impressive show underpins the company's robust financial performance in the past two quarters. Its newly-expanded seating capacity reflects that the company is optimistic about future demand.

   In the June 2010 quarter, the company's sales grew by a sharp 42% to 77 crore while net profit more than doubled to 29 crore on a year-on-year basis. Its operating margin surged 19 percentage points to 43.6% on account of the foreign exchange gains due to the favourable hedge rates in FY10. Moreover, during the period, the company's staff costs and other expenditures remained more or less stagnant as a percentage of the net revenue.

   In the near term, retaining employees would be a challenge for the company, given its smaller size and the fact that bigger players are on a hiring spree. In the June quarter, its attrition rate shot up to 39% from a 5-year range of 30-35%. As part of its strategy to retain talent, it plans to issue mid-term salary hikes in October to select employees. This is over and above the 12% hike issued in April this year. This may put some pressure on margins.

   eClerx has lined up a capex of around 22 crore for acquisitions over the next 2-3 years. It has chalked out plans to consider acquiring skill sets through inorganic route with a deal size of $10-40 million. On the organic front, the new capacity with 1,300 seats at Airoli has become operational in July and is expected to add to the company's topline in coming quarters. eClerx has also witnessed higher outsourcing from its existing clients as part of cost reduction and focus on automation.

   At the current price level of around 544, the stock trades at nearly 17 times its earnings per share for the trailing 12 months. Its valuations seem to fully capture its future growth prospects, given that most other mid-sized IT players (eCelrx does not have a peer in stricter sense) have P/Es of 8-12.