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Margins Enthuse, Revenue Acceleration yet to Take Shape
eClerx Services (eClerx) reported an in-line revenue performance in 4QFY19 with USD revenue rising by 2% QoQ to US$51.2mn (exactly in-line with our estimates). Segment-wise, the Data & Compliance practice saw healthy traction. The company won a deal in technical operations, mainly offshore, which will start translating into revenue from 2HFY20. EBIT margin surged by 347bps QoQ to 18.6% (vs. our estimate of 16.9%) owing to lack of any one-time cost like in the previous quarter, lesser impact of higher depreciation charge owing to consolidation of Pune facility, apart from operational efficiency. Aided by higher margin and other income, net profit zoomed by 51.9% QoQ to Rs592mn (15.5% above our estimate).
At a broader level, eClerx continues to see good momentum in newer growth areas such as Robotic Process Automation (RPA). However, the company will need to make continued investments to sustain this growth, which is seeing higher onsite revenue share. While revenue growth headwinds from project roll-offs seem to be tapering, new deal wins necessitate different skills, for which the company will need to keep investing. Thus, sustained growth expansion could take time, with continuous investments and higher onsite revenue ensuring margin trajectory remains muted. Improving hedge realisations and rate hikes are the biggest margin levers for eClerx at this point.
Emerging Client Growth Healthy
With regard to client metrics, revenue from top-10 clients declined by 1.5% QoQ, while emerging client revenue saw a healthy 10.1% QoQ rise. However, on YoY basis, emerging client revenue declined 5.7%. From geographic perspective, revenue from North America and Europe grew by 3.3% QoQ and 0.9% QoQ, respectively. Rest of the World revenue declined by 5.5% QoQ. Offshore attrition rose to 43.7%, its highest level since 2QFY11, which we believe is a key negative.
Outlook & Valuation
eClerx’s business outlook on the revenue front is likely to improve in FY20E led by newer growth areas. However, incremental revenue growth is coming on higher onsite proportion, and upfront investments are required to be made to drive incremental growth. Thus, even as margin seems to have stabilised, there are enough headwinds to ensure no margin upside at least in the nearterm. Offshore attrition, which is at its highest level since 2QFY11, also necessitates continuing investments to reduce employee turnover. Consistent share buy-backs (Rs2.6bn at Rs1,500, a huge 62% premium to the CMP, yield of >7%) are likely to arrest further decline in stock price. Downwardly revising our target PE multiple by 13x (14x) given lack of revenue acceleration, we maintain our HOLD recommendation on the stock with a revised Target Price of Rs990 (from Rs1,015 earlier).
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