eClerx Services – KPO Niche Player – A Buy

HDFC Insitutional Research has initiated coverage on eClerx Services – a niche player in the Knowledge Process Outsourcing market. The company survived through the bankruptcy of its key client and utilising the downturn to build up management bandwidth and infrastructure facilities, eClerx is comfortably placed to take advantage of increasing demand for offshoring.

eClerx recorded a growth of 15% in revenues and 36% in earnings in Q2FY10 and won 2 large accounts after competing with established players. Expect a 21% CAGR growth in revenues over the next 3 years till Q4FY12 backed by eClerx’s positioning in the data analytics segment and its ability to win new accounts.

eClerx currently has 4 development centres with a seating capacity of 1,900 people. Anticipating future growth, eClerx will be adding another 1,000-seat capacity in Pune in April 2010. Considering the cost per seat of US$4250, we expect, eClerx to spend close to Rs200m on the new capacity.

Margins are likely to come down from 41% in FY09 to 36.1% in FY12 largely due to salary hikes and currency appreciation that are factored in estimates, net profit growth will still be 19% over FY09 to FY12E.

eClerx is expected to report an EPS of Rs 36 , 49 and 55 for FY10, Fy11 and Fy12 respectively. HDFC REsearch values the stock on 10x FY11 EPS of Rs49.9
translating to a target price of Rs500. Initiate with BUY