Analysis Report - eClerx

eClerx

About The Company

eClerx Services Limited founded in 2000 is a leading knowledge process outsourcing company providing operational support, data management and analytics solutions to over 30 Fortune 500 companies. Its Headquarter is in Mumbai and has five delivery centers across India to support a diverse global client base. The company was founded by Anjan Malik and PD Mundhra who identified significant opportunity in the outsourcing marketplace for a “virtual” outsourced services model for large global organizations going through rapid business and technology transformation. Its India’s first publicly listed KPO company and since 2007 the company is publicly listed on both the National and Bombay Stock Exchanges in India.

In April 2012, eClerx acquired Agilyst Inc to grow its footprint in the U.S. cable and telecom industry. In March 31, 2015, eClerx acquired Creative Services Agency CLX Europe a global media content creation, and delivery solutions company for a total purchase consideration of up to EUR 25 million to form Industry Leading Provider of Creative & Digital Services.

Shareholding Pattern

S. No.	Category of Shareholder	No. of Shares	% Shareholding
(A)	Shareholding of Promoter and Promoter Group
1	Indian	7,964,436	26.24
2	Foreign	7,946,683	26.18
	Total Promoters Shareholding (A)	15,911,119	52.42
(B)	Public Shareholding
1	Institutions
(a)	Mutual Funds/UTI	3,465,433	11.42
(b)	Financial Institutions/Banks/Insurance Companies	61,022	0.2
(c)	Foreign Institutional Investor	8,253,548	27.19
2	Non-Institutional Investor
(a)	Body Corporate/Clearing Member/HUF/Trust	685,746	2.26
(b)	Individuals	1,815,438	5.98
3	Others
(a)	Non Resident Indian	136,722	0.45
(b)	Clearing Members	19,757	0.07
(c)	Trust	2,100	0.01
4	Qualified Foreign Investors	0	0
	Total Public Shareholding (B)	14,439,766	47.58
	TOTAL (A)+(B)	30,350,885	100

Business

The company’s business is critically dependent on the quality of the workforce. Their business is a people business, and commercial success is predicated to quite some degree on the quality of the team. The company’s philosophy is to invest in staff, and enable them to develop new skills and abilities which benefit both them and the organization. The company provides a wide range of services in the below sectors.

During Financial Year 2014- 15 the company derived 96% of its revenues from US and Europe and 80% of its total revenues from its top five clients. The company derived 83% of the revenues in US Dollars, 12% in Euros, and 5% in Sterling and other currencies. The financial performance is negatively impacted by adverse changes in foreign exchange rates.

Industry Overview

India has a large number of post-graduates, PhDs and MBAs who are involved in KPO. Taking advantage of this ability, it grants overseas organizations to increase better quality services at practical costs. In Financial Year 2015-16, NASSCOM expects the industry to add revenues of USD 20 billion to the existing industry revenues of USD 146 billion. Export revenues for Financial Year 2015-16 is projected to grow by 12 to 14% and reach USD 110-112 billion. Domestic revenues (including ecommerce) for the same period will grow at a rate of 15-17% percent and is expected to reach USD 55-57 billion during the year. The industry has shifted from a cost-based to a value based proposition with service providers concentrating on providing more business benefit to the client than simply reducing cost of delivery. The industry was a net hirer, adding about 2.3 lakhs employees in FY15. India is one of the top destinations for the KPO industry because of its enormous pool of talented professionals and according to ASSOCHAM, the Indian KPO sector accounts for about 70% of the global KPO industry and is expected to grow at a CAGR of 30% to reach $30Bn in 2015, with financial services being the largest contributor.

Capacity of the Company to provide service

In India, the company has 3 main delivery centers viz. Mumbai, Pune and Chandigarh with a total capacity of approximately 7,500 seats operating at approximately 90% utilization. The company has 4 sales offices across 3 countries. During the year, the company received approval for six additional new facilities in at Airoli, Navi Mumbai, Pune and Chandigarh. Once all the new additional facilities go operational this will take the total seat count to about 8900.

Income

The Company’s Income from operations consists of revenue from data process solutions which comprises of both time/unit price and fixed fee based service contracts. Income from operations increased to Rs. 8,183.35 million in the financial year 2014-15 from Rs. 7,133.84 million in the previous year registering a growth of 14.71%.Other income primarily comprises of foreign exchange gains / (loss), interest on bank deposits and dividend from debt oriented mutual funds. The total other income increased to Rs. 318.14 million in the financial year 2014-15 from Rs.157.63 million in the previous year.

Market Analysis

eClerx Services Limited (eClerx) being a niche player in the KPO industry is well positioned to benefit from the growth in the Indian KPO industry. eClerx helps clients to solve business problems through a cost-effective combination of people, process and technology. The combination of domain knowledge and technology driven process gives the company an edge over other BPO/KPO peers. eClerx has reported robust organic growth and supported by couple of acquisitions. Over the last five years, eClerx has consistently delivered industry leading growth, beating its global rivals like Genpact, WNS Holdings and ExlService. The uncertainties plaguing the US and European economies can lead to volatility  in earnings in the short term. Any sharp appreciation in INR will negatively impact the company’s revenues.

Financial Analysis

Balance Sheet of Last 5 Years

(Rupee in crores)	2010-11	2011-12	2012-13	2013-14	2014-15
EQUITY AND LIABILITIES
Share capital	28.85	29.06	29.88	30.18	30.35
Reserves and surplus	209.47	313.86	408.45	558.78	684.52
Share Application Money	0.06	0.28	0.00	0.00	0.14
Non-current liabilities	2.51	4.68	7.21	18.48	23.27
Trade payables	10.30	16.09	25.75	1.09	1.72
Other current liabilities	4.76	5.06	6.06	23.60	35.40
Short-term Provisions	96.86	92.57	110.53	159.26	183.78
TOTAL	352.81	461.60	559.31	791.38	959.17
ASSETS
Tangible Assets	27.52	41.57	42.66	55.80	69.51
Intangible Assets	2.95	2.81	2.59	98.96	97.53
Capital work in Progress	6.53	4.50	0.32	1.08	1.15
Non-current Investments	0.03	0.03	126.58	0.00	0.00
Deferred Tax Assets (Net)	0.68	0.93	1.34	3.71	6.97
Long-term Loans and Advances	6.32	7.89	7.89	63.71	65.02
Long term assets	44.04	57.72	181.38	223.26	240.18
Current Investments	27.83	99.88	35.16	115.48	155.29
Trade Receivables	65.94	42.18	56.49	98.73	126.14
Cash & Bank Balances	151.53	168.66	169.50	240.56	286.58
Short-term Loans and Advances	22.32	29.59	45.83	8.05	15.12
Other Current Assets	41.16	63.56	70.95	105.30	135.87
Current Assets	308.77	403.88	377.93	568.12	718.99
Total	352.81	461.60	559.31	791.38	959.17

eClerx has shown good growth in the past 5 years. Its Reserves and Surplus increased almost three times during the last five years. Its total assets increased by 21.20% from Rs. 791.38 crores in the previous year to Rs. 959.17 crores in 2014-15. eClerx has reduced its Trade Payables from Rs. 10.30 Crore to Rs. 1.72 Crore in the last 5 years. Fixed Asset also increased from Rs. 30.47 Crore to Rs. 167.04 Crores which is in line with the company’s plan for capacity expansion. Cash & Bank Balances and other current assets also increased in the last 5 years by 119% which shows the strong position of eClerx.

Profit & Loss Statement for Last Five Years

	2010-11	2011-12	2012-13	2013-14	2014-15
INCOME
Revenue from Sale of Services	342.10	472.89	570.92	840.99	942.12
Other Income	24.02	22.30	-20.68	11.02	32.35
Total Income	366.12	495.19	550.24	852.01	974.47
EXPENSE
Employee benefit Expenses	147.65	203.87	182.10	346.64	439.81
Other Expenses	59.87	79.28	161.77	140.78	186.71
Depreciation & Amortization	9.13	12.89	15.73	33.03	50.02
Total Expenditure	216.65	296.04	359.61	520.44	676.54
Profit before Exceptional Items & Taxes	149.47	199.15	190.63	331.57	297.93
Diminution in value of Long-Term Investment	10.27	0.00	0.00	0.00	0.00
EBIT	139.20	199.15	190.63	331.57	297.93
Provision for taxation	16.76	39.38	34.71	75.91	68.26
Profit after tax	122.44	159.77	155.92	255.66	229.68

The total revenue increased from Rs. 366.12 Crore in 2010-11 to Rs. 974.47 Crore which shows the CAGR of 27.73%. This growth rate is almost equal to the industry growth rate which is growing at a compound annual growth rate (CAGR) of about 30% annually. Also the profit after tax is growing from 2010-11 to 2014-15 which shows the healthy financials of the company.

eClerx, like most of the IT companies in India, has maintained a very clean balance sheet with no debt. Moreover, strong top-line growth and consistent impressive EBIT margin has enabled the company to maintain best in class ROE in the industry and has also aided it to increase its free cash flows every year.

Projected Balance Sheet for Next 5 Years

(Rupee in crores)	2016	2017	2018	2019	2020
EQUITY AND LIABILITIES
Share Capital	30.35	30.35	30.35	30.35	30.35
Reserves & Surplus	914.19	1176.19	1492.16	1871.21	2323.85
Deferred Tax Liability (Net)	1.81	1.81	1.81	1.81	1.81
Long-term Provisions	14.76	18.99	24.09	30.20	37.51
Other Non Current Liabilities	11.21	12.07	13.01	14.01	15.09
Total	972.32	1239.42	1561.42	1947.58	2408.61
ASSETS
Tangible Assets	86.21	110.00	142.61	186.51	245.05
Intangible Assets	127.76	128.17	133.89	147.19	171.33
Cash & Bank Balances	435.28	621.40	835.81	1080.28	1355.54
Long-term Loans and Advances	65.02	65.02	65.02	65.02	65.02
Net working Capital	258.05	314.82	384.08	468.58	571.67
Total	972.32	1239.42	1561.42	1947.58	2408.61

Projected Income Statement for Next 5 Years

(Rupee in crores)	2016	2017	2018	2019	2020
INCOME
Revenue from Sale of Services	1149.39	1402.25	1710.75	2087.11	2546.28
Other Income	34.85	37.55	40.45	43.58	46.95
Total Income	1184.24	1439.80	1751.20	2130.69	2593.23
EXPENDITURE
Employee benefit Expenses	536.57	654.61	798.63	974.32	1188.68
Other Expenses	227.78	277.89	339.03	413.62	504.61
Depreciation	38.57	49.21	63.80	83.44	109.63
Amortization	16.30	18.15	20.81	24.60	30.01
Computer Software	4.33	6.19	8.84	12.63	18.04
Goodwill	11.97	11.97	11.97	11.97	11.97
Total Expenditure	835.52	1018.03	1243.08	1520.58	1862.95
EBIT	348.72	421.77	508.12	610.11	730.28
Current Income Tax	86.72	105.80	129.08	157.48	192.12
Profit after tax	262.00	315.97	379.05	452.64	538.16

The future of Knowledge Process Outsourcing (KPO) business presents an encouraging picture as per our analysis and understanding. Looking at the bright future of the industry it seems the company will perform well in the coming future. Using the discounted cash flow method, we project the stock price of eClerx to be around Rs. 1330.

Price performance

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References

• http://www.eclerx.com/Pages/default.aspx
• http://assocham.org/newsdetail.php?id=4113
• http://www.thehindubusinessline.com/info-tech/eclerx-acquires-usbased-agilyst/article3315138.ece
• http://www.moneycontrol.com/financials/eclerxservices/balance-sheet/eS06

About the Author

This report has been prepared by Suyash Rathi published by Aakash Raval who are pursuing MBA from Institute of Management, Nirma University located in Ahmedabad, India.

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The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidelines only.