eClerx Services Ltd. share price target

Ex-Bonus Price Target Rs.1617; Initiating Coverage Report Price Target Rs. 2156 (Pre-Bonus) We had Initiated Research Coverage on eClerx services Ltd on 03rd Dec, 2015 with a BUY Rating and a Price Target of Rs. 2156. Post the Ex-date of Bonus issue of 1:3 (One share for every three shares held), the target stands adjusted accordingly to Rs. 1617 per share (from the earlier target of Rs. 2156).

eClerx consolidated revenue grew at a CAGR of 28.8% during FY11-FY15 and we expect the revenue would grow by CAGR of 24.7% during FY15-FY17E supported by the inorganic growth (CLX acquisition). In H1FY16 (including CLX revenue), the company has posted the strong revenue growth of 39.5% comparing to H1FY15, on the back of significant increase in the short term projects.

eClerx reported its third successive quarter of solid organic USD revenue growth (6.3% QoQ, 6.3% in 4QFY15, 4% in 1QFY16). The companys top-5 client revenue rose 4.9% QoQ, highest in four years, while YoY growth was highest in two years (8.5%). Non-top-5 clients also recorded strong growth (12.7% QoQ, 80.5% YoY). EBIT margin rose 367bps QoQ, the highest since 4QFY14, aided by INR depreciation and lower S&M; cost.

eClerx posted a strong quarter buoyed by billing of large number of shorter duration projects in 2Q and on operational improvement (S&D; decline on lower bonus provision & travel). While 2HFY16E is expected to be weaker than 1H, we believe that the margin proficiency of eClerx is likely to be maintained at ~30%. We expect FY15-18E EPS CAGR of 19% based on 1) emerging accounts-led growth,...

We are optimistic about the growth prospects of eClerx Services after interacting with CFO Mr Rohitash Gupta. We believe the companys niche business ? catering to financial services and cable industries, digital content, commerce, and data and analytics services for hi-tech and retail verticals ? specialised skills and proven track record of scaling up revenue with top-5 clients, will drive traction in its non-top 5 clients (42.5% of revenue).

Operating margins improved to 29.9%, +661bp qoq (eClerx operating margin at 31% and CLX operating margin at 19%), which mitigated the impact of wage hike during the quarter (10% domestic and 4% onsite). PAT stood at Rs734mn, supported by higher forex gains, favourable currency (+220bp margin impact), margin improvement on lower SG&A; and change in amortization policy (+100bp impact on EBIT margin). With CLX's G&A; as % of revenue similar to organic levels and most of the investments in sales & accounts management in place, we've factored G&A; expense at 12.7%/12.6% of revenue for FY16E/17E and S&D; expense at 15.3%/15% of revenue for FY16E/17E,...

eClerx has announced 100% acquisition of CLX Europe SPA (CLX) for Euro25mn in an all-cash deal, at a valuation of 1.3x EV/Sales and 5.5x EV/EBITDA and it is expected to be EPS accretive. CLX creates, manages and delivers creative assets globally to the multi-channel market for luxury brands and major retailers. eClerx will fund the deal from internal accruals with balance sheet cash at Rs4.17bn. We believe that the deal provides sectoral diversification & digital augmentation opportunity along with an enhanced foothold in Europe. We revise our FY16E/FY17E earnings estimate by...

eClerxs 3QFY15 USD revenues were inline. However, EBIDTA margin was below estimates. PAT was 3.5% below our estimates led by lower margins. eClerx continues to show higher growth in Emerging accounts (34% of revenues).