Stock Review: eCLERX Services

 

eCLERX Services, a Mumbai-based data analytics and process outsourcing company, has outperformed the broader market over the past one year. While the benchmark Sensex returned just 13% during the period, the stock has more than doubled on the back of the company's consistent growth over the past few quarters.

   In the December 2010 quarter, the company's topline grew 6% to . 87 crore against the previous quarter on a consolidated basis. While America contributed 58% to the topline, Europe formed 34% of the company's total business. The remaining revenue came from the Asia-Pacific region. The company has witnessed a pick-up in business demand in the European region and expects the momentum to continue in coming quarters.

   The operating margin grew by 780 basis points (bps) to 46.6% on a sequential basis due to two reasons. First, electricity refunds and lower provisions for employee bonuses led to a one-time cost benefit to the company. Without this, the operating margin would have been about 200 bps lower. Second, attrition at the lower end of the pyramid significantly brought down employee expenses relative to net sales by 300 bps to 42% against the previous quarter.

   The company expects to maintain similar margins in coming quarters due to higher employee utilisation. Its facility at Airoli near New Mumbai reported better utilisation during the quarter. The second phase of the facility is expected to become operationalinthenext2-3quarters,whichwouldfurther support margins. On account of the reduced costs and improved operational performance, the bottomline surged 30% to nearly . 36 crore against the previous quarter. The company added 200 employees during the December 2010 quarter, reflecting a buoyant demand scenario.

   During the quarter, the company entered into new engagements, including financial and digital media services, with existing clients. Moreover, the company witnessed a faster growth in the non-top 5 clients vis-à-vis the top-5 clients. This should reduce its dependence on just a few customers. The company intends to expand its service offering by entering into newer business lines. Over 12-18 months, it plans to acquire companies with a revenue size of $20-40 million.

   Anticipating the growth in the KPO segment, eClerx aims to acquire companies operating in related domains.

   At current market price of 686, the stock trades at nearly16.5 times its earnings for the trailing 12 months. Its valuation seems to factor in its future growth expectations.