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Healthy growth in revenues continues...

eClerx Services reported healthy Q3FY21 revenues, up 9.5% QoQ (in constant currency terms) and 9.9% QoQ in reported terms mainly led by growth in North America (up 9.9% QoQ) and Europe (up 9.9% QoQ). EBIT margins improved 20 bps to 24.7% mainly led by lower G&A expenses partially offset by higher selling & distribution expenses. Net profit increased 16.5% QoQ to | 71 crore.

Inorganic, organic growth to drive growth

The company reported healthy growth in the current quarter mainly led by improving demand, especially in CLX business, lower roll offs, acquisition and improving demand. eClerx, over the years, has seen roll offs due to client specific issue, insourcing, ramp down of short-term projects and automation. However, with anticipated lower roll offs from one-off client specific event (accounting for one-third of new sales of ~US$40- 50 million) will help the company to boost revenues. Going forward, although we expect certain short-term projects to get ramped down in the near term, we believe improving growth in CLX business, healthy deal wins, acquisition of Personiv and growth in non top 10 clients to drive long term growth. In addition, higher exposure to banking, telecom and hi-tech clients (~70% of topline) and revival in growth are expected to further boost revenues in coming years. Hence, we expect the company to register 9.0% CAGR dollar revenue growth in FY20-23E.

Margins to taper off in FY22E, FY23E but expected to be healthy

The company, in the quarter, witnessed healthy EBIT margin expansion due to healthy demand, lower facility and travel cost partially offset by wage hikes. We expect eClerx to continue to reap the benefits of lower work from home cost benefits leading to 553 bps improvement in EBIT margins to 23.1% in FY21E. However, we expect margins to taper down from FY21E levels due to tapering of work from home cost benefits, increase in attrition, higher depreciation (due to acquisition) and other facility cost. Hence, we expect EBIT margins of 21.5%, 20.4% in FY22E, FY23E, respectively, albeit above FY20 levels and our previous assumptions.

Valuation & Outlook

Anticipated lower roll offs from one off client specific event, improving deal wins, cross sell opportunity with acquired Personiv, traction in digital and CLX revenues are expected to drive revenues. With this, coupled with higher margin assumption (compared to our previous estimates), we revise our EPS estimates upwards. This coupled with reasonable valuation, healthy balance sheet & the company’s aspiration to reach industry level growth prompt us to maintain BUY rating on the stock with a revised target price of | 1150 (13x PE on FY23E EPS) (earlier target price of | 830).

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