eClerx Services Ltd. share price target

Lower our revenue assumption due to near term concerns We believe the company is facing client specific issues that have impacted its growth in top 10 clients (declined 3.5% QoQ). Further, higher short-term projects (~15-20% of revenues), pressure in legacy business and inability of new deals to replace de-growth in legacy business are further hampering revenue growth. In addition, we believe automation, delay in client spending in the UK and pricing pressure in onshore projects may have also impacted revenue growth. Going forward, we expect a similar trend in revenues to...

eClerx has witnessed USD revenue stagnation (+0.1% 12-qtr-CQGR) coupled with a structural swing in operating model (shift to onshore) resulting in EBIT margin plummet from 33.5% to 13.8% in the past 12 qtrs. We reckon that the shift to onshore will continue given the on-site heavy digital projects coupled with low demand for traditional KPO services. We remain cautious on high concentration and stagnation of T-10 accounts, shorter duration projects providing limited visibility and lower quality of revenue mix. We factor USD rev/EPS CAGR of 5.5/-2.3% over FY19-22E. High cash (~25% of Mcap) and dividend yield (4%) will provide some cushion. Company will maintain payout of ~50% of PAT but recent tax on buybacks has curbed the value arbitrage. Risks to our thesis include traction in digital portfolio and increased off shoring. We downgrade eClerx to SELL following margin washout and limited growth visibility. eClerx has lost the plot, we cut EPS est. by ~16% and P/E to 9x (vs. 11x) Jun-21E EPS to arrive at TP of Rs 505.

eClerx (ECLX) underperformed sharply in the Jun'19 quarter as operating margins continued to sink well below estimates.

India's consumption demand remained subdued with continued decline in auto sales and non-oil-non-gold imports. Monsoon rains have improved lately. But the sowing activity is behind last year's levels and will impact rural incomes and demand. Services sector too has slowed down as government spending has moderated. Manufacturing activity remains muted as well. With fiscal prudence being the underlying theme of the Budget and government looking at overseas issuances, Indian yields are expected to come down further. A benign inflation...

Our interaction with the eClerx Services (ECLX) management suggests emerging margin stability post-Q1FY20 and easing operational stress, but we continue to see risks from poor offshore growth, low revenue productivity, structurally weaker margins and dim business visibility. Amid softer profit and return ratios, we now find ECLX's business aligned closer to that of BPOs we thus reset our multiple to 9x Jun'21E EPS (vs. 11.5x), in line with consensus valuations for BPO peer...

eClerx has witnessed three consecutive years of USD revenue stagnation with declining profitability & cash generation. Return ratios have stumbled, RoE is at 18% (vs. >30% in FY17). The structural change in eClerx' operating model (shift to onshore) has resulted in EBIT margin contraction from 31% to 18.5% with onshore rev% increasing from 13% to 22% in the last two years. We reckon that the shift to onshore will continue given the on-site heavy (North Carolina center expansion) digital projects coupled with low demand for traditional KPO services which are at risk of getting automated. We remain cautious on high concentration (68% of rev from T-10 accounts), shorter duration projects providing limited visibility, lower quality of revenue mix and growth lag to onsite investments. We factor USD rev growth of 7.9/8.6% with stable EBIT% at 18.8/19.2% for FY20/21E. We believe revenue growth assumptions are optimistic given the limited visibility and challenging macro environment. Risks to our thesis include traction in digital portfolio and increased offshoring. We maintain SELL on eClerx post an in-line 4Q on revenues and better operating performance. We cut P/E multiple to 11x (vs. 13x) amid near term headwind to margins and lesser visibility on revenue growth.

The BJP led NDA is set for a resounding win with an even bigger majority (344 seats) and a higher vote share (up 9% versus 2014). In its election manifesto, BJP aims to increase the size of the economy to US$ 5tn by 2025 led by Rs 100tn of infra investment. Rural India will get 25% of the above allocation. Roads, housing, and water will get priority. Further, farmer income and rural demand will get a boost with wider coverage under PM-KISAN. Continuity of...

eClerx (ECLX) reported an above-expected operating performance in the Mar'19 quarter on the back of in-line revenues and an operating margin beat. A combination of offshore revenue growth and onsite revenue decline aided margins, though this trend is unlikely to continue, in our view. Management was noncommittal on FY20 revenue growth and margins, citing uncertainty led by short-tenured contracts and a changing business mix. We maintain...

In FY19, dollar revenues grew a mere 1% YoY due to client specific issues and lower growth in new projects. Taking into consideration, though moderated but continued impact from concern in certain client buckets, shorter duration projects and pressure in legacy revenues (50% of revenues), it seems an uphill task to reach industry growth rates in FY20E. Considering the above mentioned headwinds, we expect the company to register mere mid-single digit revenue growth in FY20E. The key drivers of FY20E revenue growth are a healthy deal pipeline (higher than FY18 YoY),...

India's US$ 160bn logistics industry is amidst a much-needed transformation led by (1) structural reforms (GST, e-way bill) and the government's infrastructure thrust (DFC, Sagarmala), (2) the emergence of new-age, service-oriented businesses versus asset-heavy models, and (3) growing formalisation of the sector, propelling organised players to the fore. We prefer the emerging 3PL and express segments for long-term value creation. Among...