RESULTS REVIEW 1QFY17

30 AUG 2016

eClerx Services
NEUTRAL
INDUSTRY
IT
CMP (as on 29 Aug 2016) Rs 1,630
Target Price
Rs 1,465
Nifty

8,607

Sensex

27,903

KEY STOCK DATA

Bloomberg

ECLX IN

No. of Shares (mn)

41

MCap (Rs bn) / ($ mn)

68/990

6m avg traded value (Rs mn)

51

STOCK PERFORMANCE (%)

52 Week high / low
Absolute (%)
Relative (%)

Rs 1,661 / 1,105

3M
20.3
15.7

6M
23.2
1.9

12M
26.6
20.9

SHAREHOLDING PATTERN (%)

Promoters

50.32

FIs & Local MFs

28.78

FIIs

13.09

Public & Others

Source : BSE

Apurva Prasad
apurva.prasad@hdfcsec.com
+91-22-6171-7327
Amit Chandra
amit.chandra@hdfcsec.com
+91-22-6171-7345

7.81

Subdued growth
eClerx growth metrics will continue to be skewed
towards cable business (lower margin) and digital
business (smaller-sized projects) as the financial
vertical is expected to constrict growth, impacted by
higher in-sourcing and automation.
High revenue concentration in the financial business
(top-10 contributes 74% of 1Q total revenue) and
volatility in project cycles is expected to be offset by
higher mix of shorter duration projects and faster
growth in the emerging accounts (26% YoY growth in
1Q).
With mid-single digit revenue growth (vs 19% organic
growth in FY16) and decelerating margin in FY17E
leading to protracted recovery, we believe that
valuations (almost 16x FY18e EPS) are ample. We
expect US$ revenue/EPS to grow at 9/8% CAGR over
FY16-18E. Maintain NEUTRAL with a TP of Rs 1,465
based on 14x FY18E earnings.

Highlights of the quarter

Subdued growth: US$ revenue was in-line at

US$50.2mn, -0.6% QoQ CC (US$ 50.9mn est); flat

growth in 2Q is expected to be compounded by
cross-currency impact (GBP revenue share at
9.4%). EBIT% came at 33.5%, -250bps QoQ above
our estimate of 31.9% on lower S&M expense
(+130bps QoQ margin impact) in 1Q; wage hike in
1Q (offshore 10% and onsite 4%) led to margin
impact of -320 QoQ.
Key call takeaways: (1) 2Q growth expected to be
flat, similar to 1Q (2) FY17E EBIT% expected at
~30% (3) Impact of legacy business and in-sourcing
in financial division leading to lower growth (4) 1Q
growth led by cable division continuity of trend.
Near term outlook: eClerx share buyback
announcement of Rs Rs2.34bn at maximum Rs
2,200 per share (1.06mn shares or 2.6% of paid-up
equity capital) may limit near-term downside.
However, we do not see merit for an upside
either, based on limited growth levers.

Financial Summary
(Rs mn)
Net Sales
EBIT
APAT
Diluted adj. EPS (Rs)
P/E (x)
EV / EBITDA (x)
RoE (%)

1QFY17
3,403
1,140
959
23.5

1QFY16
2,983
891
732
18.1

YoY (%)
14.1
28.0
31.0
30.0

4QFY16
3,432
1,269
1,084
26.6

QoQ (%)
(0.8)
(10.2)
(11.5)
(11.6)

FY15
9,421
2,656
2,297
56.8
28.9
19.7
35.2

FY16
13,143
4,361
3,630
89.0
18.3
12.5
40.3

FY17E
13,983
4,557
3,831
96.3
16.9
11.6
31.1

FY18E
15,917
5,025
4,157
104.5
15.6
10.3
28.4

Source: Company, HDFC sec Inst Research

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters

ECLERX SERVICES: RESULTS REVIEW 1QFY17

Quarterly Consolidated Financials Snapshot

Revenue declined 0.6% QoQ in
CC as compared to 2.5%
decline in the prior quarter

EBIT% impacted by wage hike

(-320bps impact) and stood at
33.5%; management guided
to ~30% EBIT% for FY17E

Particulars
Net Revenues (US $mn)
Net Revenues
Employee Costs
SG&A and Other Operating Expenses
EBITDA
Depreciation
EBIT
Interest Cost
Other Income
PBT
Tax
Minority Interest
APAT
E/o (adj for tax)
RPAT

1QFY17*
50.2
3,403
1,325
818
1,260
119
1,140
0
100
1,240
281
(0)
959
0
959

1QFY16
46.4
2,983
1,191
798
993
103
891
0
159
1,050
316
1
732
0
732

YoY (%)
8.2
14.1
11.2
2.5
26.8
16.6
28.0
(37.1)
18.1
(11.1)

QoQ (%)
(1.2)
(0.8)
11.5
(2.0)
(10.5)
(13.4)
(10.2)
11.6
(8.8)
1.8

31.0

4QFY16
50.8
3,432
1,189
835
1,408
138
1,269
0
90
1,359
276
(1)
1,084
0
1,084

1QFY17*
38.9
24.0
37.0
33.5
22.6
28.2

1QFY16
39.9
26.8
33.3
29.9
30.1
24.6

YoY (%)
(100)
(272)
372
364
(745)
363

4QFY16
34.6
24.3
41.0
37.0
20.3
31.6

QoQ (%)
430
(29)
(400)
(349)
235
(339)

31.0

(11.5)
(11.5)

Source: Company, HDFC sec Inst Research ; * as per IND-AS

Margin Analysis

ESOP cost and higher G&A

(higher CSR spend) to
adversely impact 2Q margin

Particulars
Employee Cost % Net Revenues
SG&A and Other Expenses % Net Revenues
EBITDA Margin (%)
EBIT Margin (%)
Tax Rate (%)
APAT Margin (%)
Source: Company, HDFC sec Inst Research; * as per IND-AS

Page | 2

ECLERX SERVICES: RESULTS REVIEW 1QFY17

Revenue trend
Particulars
Revenue (US$ mn)
Revenue growth (US$ QoQ%)
Revenue growth (US$ CC QoQ%)

3QFY15
38.9
2.1
3.1

4QFY15
40.7
4.6
6.3

1QFY16
46.4
14.2
4.0

2QFY16
50.2
8.1
7.7

3QFY16
51.8
3.2
4.2

4QFY16
50.8
(2.0)
(2.5)

1QFY17
50.2
(1.1)
(0.6)

3QFY15
78.0
18.0
4.0
100.0

4QFY15
77.8
18.5
3.7
100.0

1QFY16
71.7
25.0
3.2
100.0

2QFY16
66.9
29.0
4.0
100.0

3QFY16
67.2
29.0
3.7
100.0

4QFY16
66.6
30.2
3.2
100.0

1QFY17
66.2
30.3
3.5
100.0

3QFY15
8.3
(18.5)
16.8
2.5

4QFY15
4.3
7.2
(1.9)
4.6

1QFY16
5.3
55.0
(2.5)
14.2

2QFY16
0.8
25.3
36.7
8.1

3QFY16
3.7
3.1
(4.7)
3.2

4QFY16
(2.9)
2.1
(15.3)
(1.9)

1QFY17
(1.7)
(0.9)
6.6
(1.2)

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

Top-10 clients

86.8

86.4

78.0

75.0

77.2

75.7

74.4

Non-top 10 clients

13.2

13.6

22.0

25.0

22.8

24.3

25.6

100.0

100.0

100.0

100.0

100.0

100.0

100.0

Source: Company, HDFC Sec Inst Research

Cable business offers scope

for geographical expansion;
RoW grew as compared to
decline in NorthAm and
Europe

Geographic revenue split

(% of revenue)
North America
Europe
Rest of the World
Total
Source: Company, HDFC Sec Inst Research

Geogrpahic revenue growth

(QoQ, %)
North America
Europe
Rest of the World
Total

Non top-10 accounts will

continue to drive growth;
Top-10 grew 3% YoY CC and
Non top-10 grew 28% YoY CC

Source: Company, HDFC Sec Inst Research

Client data
(QoQ, %)

Total
Source: Company, HDFC Sec Inst Research

Page | 3

ECLERX SERVICES: RESULTS REVIEW 1QFY17

Client growth

Client metrics continued its

trajectory of higher additions
in US$0.5-1mn bucket led by
shorter-duration contracts;
>US$5mn bucket remained
static

(% of revenue)
Top-5 clients
Non-top 5 clients
Total

3QFY15
1.6
5.3
2.1

4QFY15
4.2
7.4
4.6

1QFY16
3.0
84.8
14.2

2QFY16
4.0
22.9
8.1

3QFY16
6.3
(6.0)
3.2

4QFY16
(3.9)
4.7
(1.9)

1QFY17
(2.9)
4.1
(1.2)

3QFY15
6
7
7

4QFY15
7
7
7

1QFY16
9
10
7

2QFY16
9
12
7

3QFY16
16
13
7

4QFY16
16
17
7

1QFY17
18
18
7

3QFY15
7,839
7,751
6,818
933
88
280

4QFY15
8,189
8,100
7,095
1,005
89
350

1QFY16
8,829
8,747
7,622
1,125
82
640

2QFY16
8,824
8,743
7,594
1,149
81
(5)

3QFY16
8,670
8,590
7,456
1,134
80
(154)

4QFY16
8,942
8,862
7,709
1,153
80
272

1QFY17
8,904
8,827
7,663
1,164
77
(38)

7,439
65.0

7,640
65.0

7,806
65.0

8,601
66.5

8,522
68.7

8,574
68.0

8,626
68.7

Source: Company, HDFC Sec Inst Research

Client metrics
(No.s)
Clients US$0.5mn-US$1mn
Clients US$1mn-US$5mn
Clients >US$5mn
Source: Company, HDFC Sec Inst Research

Headcount, Utilisation Data

Net additions have decline
substantially reflecting the
impact of slowdown as well
as higher automation with
RPA technologies

(Nos.)
Total headcount
India employees
- Technical staff
- Support staff
Onsite employees
Net additions
Seat count
Gross staff utilisation (%)
Source: Company, HDFC Sec Inst Research

Page | 4

ECLERX SERVICES: RESULTS REVIEW 1QFY17

Key Assumptions

Share buyback of Rs2.34bn at

maximum Rs 2,200 per share
(1.06mn shares or 2.6% of
paid-up equity capital)
expected to be completed by
3QFY17; Cash at Rs5.98bn

Particulars
Volume growth (%)
Pricing change (%)
USD revenue growth (%)
USD/INR rate
EBIT margin (%)

FY14
8.7
4.6
13.8
60.82
38.1

FY15
13.5
(2.0)
11.3
61.24
28.2

FY16
17.4
10.3
29.5
65.47
33.2

FY17E
8.4
(3.6)
4.5
67.19
32.6

FY18E
9.3
4.4
14.2
67.00
31.6

Source: Company, HDFC Sec Inst Research

Change in Estimates
Particulars

Earlier estimates

Revised estimates

% change

208.1
13,983
5,040
36.0
3,831

(0.9)
(0.6)
0.8
49bps
1.9

237.6
15,917
5,559
34.9
4,157

(0.0)
(0.0)
2.5
86bps
4.5

FY17E
Revenue (US$ mn)
Revenue (Rs mn)
EBITDA (Rs mn)
EBITDA margin (%)
APAT (Rs mn)

210.0
14,069
5,003
35.6
3,761

Revenue (US$ mn)

Revenue (Rs mn)
EBITDA (Rs mn)
EBITDA margin (%)
APAT (Rs mn)

237.7
15,924
5,425
34.1
3,980

FY18E

Source: Company, HDFC Sec Inst Research

Peer Valuations
Company
Mindtree
eClerx
Hexaware*
Cyient
Zensar Tech
Persistent
KPIT Tech.

CMP
(Rs)
565
1,630
198
512
1,094
608
127

Target
(Rs)
620
1,465
220
508
1,180
735
125

Rating
NEU
NEU
NEU
NEU
BUY
BUY
SELL

Mcap
(Rs bn)
95
68
60
58
49
49
25

FY16
32.9
89.0
13.0
29.0
69.3
37.2
14.2

EPS (Rs)
FY17E FY18E
32.8
44.3
96.3 104.5
13.2
15.7
33.3
39.1
76.8
90.5
38.4
49.1
12.3
14.1

FY16
17.2
18.3
15.2
17.6
15.8
16.4
9.0

P/E (x)
FY17E
17.2
16.9
15.0
15.4
14.3
15.9
10.4

FY18E
12.8
15.6
12.6
13.1
12.1
12.4
9.1

FY16
25.0
40.3
28.9
17.0
23.4
19.5
21.0

RoE (%)
FY17E FY18E
21.5
25.2
31.1
28.4
25.0
25.4
18.5
19.5
21.5
21.4
17.3
18.9
16.4
16.6

Source: HDFC sec Inst Research; * Hexaware is Dec Y/E

Page | 5

ECLERX SERVICES: RESULTS REVIEW 1QFY17

Consolidated Income Statement

Year ending March (Rs mn)
Net Revenues (US $mn)
Growth (%)
Net Revenues
Growth (%)
Employee Costs
SG&A and Other Operating Exps.
EBITDA
EBITDA (%)
EBITDA Growth (%)
Depreciation
EBIT
Other Income
Interest
PBT
Tax (incl deferred)
Minority Int. and associate profit
APAT
APAT Growth (%)
EPS
EPS Growth (%)

Consolidated Balance Sheet

FY14
138.3
13.8
8,410
27.3
2,743
2,132
3,535
42.0
38.8
330
3,205
110
0
3,315
759
0
2,556
48.9
63.5
53.8

Source: Company, HDFC sec Inst Research

FY15
153.8
11.3
9,421
12.0
3,464
2,801
3,156
33.5
(10.7)
500
2,656
324
0
2,979
683
0
2,297
(10.1)
56.8
(10.7)

FY16
199.2
29.5
13,143
39.5
5,007
3,268
4,868
37.0
54.3
507
4,361
404
0
4,764
1,132
2
3,630
58.1
89.0
56.8

FY17E
208.1
4.5
13,983
6.4
5,589
3,353
5,040
36.0
3.5
484
4,557
462
0
5,019
1,188
(0)
3,831
5.5
96.3
8.2

FY18E
237.6
14.2
15,917
13.8
6,474
3,884
5,559
34.9
10.3
534
5,025
445
0
5,470
1,313
0
4,157
8.5
104.5
8.5

Year ending March (Rs mn)

SOURCES OF FUNDS
Share Capital - Equity
Reserves
Total Shareholders' Funds
Net Deferred Taxes
Long Term Provisions & Others
TOTAL SOURCES OF FUNDS
APPLICATION OF FUNDS
Net Block
CWIP
Goodwill & Other Intangibles
Investments
LT Loans & Advances, Others
Total Non Current Assets
Debtors
Cash & Equivalents
Other Current Assets
Total Current Assets
Creditors
Other Current Liabilities & Provns
Total Current Liabilities
Net Current Assets
TOTAL APPLICATION OF FUNDS

FY14

FY15

FY16

FY17E

FY18E

302
5,588
5,890
(18)
166
6,037

304
6,847
7,150
(52)
215
7,313

408
10,455
10,863
7
270
11,181

398
13,348
13,745
7
288
14,040

398
15,158
15,556
7
328
15,891

558
11
990
637
2,196
987
3,560
1,134
5,681
11
1,829
1,839
3,842
6,037

695
11
975
650
2,332
1,261
4,419
1,510
7,190
17
2,192
2,209
4,981
7,313

869
2,528
2
560
3,960
1,861
5,459
1,357
8,677
138
1,318
1,456
7,221
11,181

994
14
2,620
2
599
4,228
1,992
8,002
1,454
11,448
238
1,398
1,636
9,812
14,040

1,124
16
2,751
2
642
4,536
2,268
9,294
1,655
13,218
270
1,592
1,862
11,355
15,891

Source: Company, HDFC sec Inst Research

Page | 6

ECLERX SERVICES: RESULTS REVIEW 1QFY17

Consolidated Cash Flow

Year ending March (Rs mn)
Reported PBT
Non-operating & EO items
Interest expenses
Depreciation
Working Capital Change
Tax paid
OPERATING CASH FLOW ( a )
Capex
Free cash flow (FCF)
Investments
Non-operating income
INVESTING CASH FLOW ( b )
Debt Issuance
Interest expenses
FCFE
Share capital Issuance
Dividend
FINANCING CASH FLOW ( c )
NET CASH FLOW (a+b+c)
Non-operating and EO items
Closing Cash & Equivalents

Key Ratios
FY14
3,315
0
0
330
(807)
(759)
2,079
(214)
1,865
(1,123)
0
(1,337)
45
0
1,909
3
(880)
(832)
(90)
951
3,560

Source: Company, HDFC sec Inst Research

FY15
2,979
0
0
500
(146)
(683)
2,651
(614)
2,037
(9)
0
(623)
86
0
2,123
2
(1,240)
(1,153)
875
(17)
4,419

FY16
4,764
0
0
507
173
(1,132)
4,313
(531)
3,782
(1,187)
0
(1,718)
596
(0)
4,378
104
(2,246)
(1,546)
1,049
(8)
5,459

FY17E
5,019
0
0
484
(74)
(1,188)
4,240
(699)
3,541
(14)
0
(713)
(45)
(0)
3,496
(10)
(939)
(994)
2,533
9
8,002

FY18E
5,470
0
0
534
(335)
(1,313)
4,357
(796)
3,561
(2)
0
(798)
0
0
3,561
0
(2,347)
(2,347)
1,212
80
9,294

PROFITABILITY (%)
EBITDA Margin
APAT Margin
RoE
RoIC or Core RoCE
RoCE
EFFICIENCY
Tax Rate (%)
Fixed Asset Turnover (x)
Debtors (days)
Payables (days)
Cash Conversion Cycle (days)
Net Debt/EBITDA (x)
Net Debt/Equity (x)
Interest Coverage (x)
PER SHARE DATA
EPS (Rs/sh)
CEPS (Rs/sh)
DPS (Rs/sh)
BV (Rs/sh)
VALUATION
P/E
P/BV
EV/EBITDA
OCF/EV (%)
FCF/EV (%)
FCFE/mkt cap (%)
Dividend Yield (%)

FY14

FY15

FY16

FY17E

FY18E

42.0
30.4
49.8
111.9
48.8

33.5
24.4
35.2
64.2
34.4

37.0
27.6
40.3
67.8
39.3

36.0
27.4
31.1
51.3
30.4

34.9
26.1
28.4
53.4
27.8

22.9
6.6
42.8
0.5
42.4
(1.0)
(0.6)
NA

22.9
5.5
48.9
0.7
48.2
(1.4)
(0.6)
NA

23.8
5.8
51.7
3.8
47.8
(1.1)
(0.5)
10,716

23.7
5.5
52.0
6.2
45.8
(1.6)
(0.6)
NA

24.0
5.5
52.0
6.2
45.8
(1.7)
(0.6)
NA

62.7
70.8
26.3
144.4

56.3
68.6
26.3
175.3

89.0
101.4
46.7
266.3

96.3
108.5
20.0
345.6

104.5
118.0
50.0
391.1

26.0
11.3
17.8
3.3
3.0
2.9
1.6

28.9
9.3
19.7
4.3
3.3
3.2
1.6

18.3
6.1
12.5
7.1
6.2
6.6
2.9

16.9
4.7
11.6
7.3
6.1
5.3
1.2

15.6
4.2
10.3
7.6
6.2
5.4
3.1

Source: Company, HDFC sec Inst Research

Page | 7

ECLERX SERVICES: RESULTS REVIEW 1QFY17

RECOMMENDATION HISTORY
eClerx

Date
22-Sep-15
8-Oct-15
2-Nov-15
6-Jan-16
30-Jan-16
23-May-16
8-Jul-16
30-Aug-16

TP

1,700
1,600
1,500
1,400
1,300
1,200
1,100

CMP
1,238
1,256
1,359
1,399
1,410
1,410
1,410
1,630

Reco
BUY
BUY
BUY
BUY
NEU
NEU
NEU
NEU

Target
1,542
1,643
1,538
1,542
1,383
1,321
1,365
1,465

1,000

Aug-16

Jul-16

Jun-16

May-16

Apr-16

Mar-16

Feb-16

Jan-16

Dec-15

Nov-15

Oct-15

Sep-15

Aug-15

900

Rating Definitions
BUY
: Where the stock is expected to deliver more than 10% returns over the next 12 month period
NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period
SELL
: Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

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ECLERX SERVICES: RESULTS REVIEW 1QFY17

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Any holding in stock No
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