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Healthy organic revenue growth...

eClerx Services reported healthy Q4FY21 revenues, up 19.3% QoQ (in constant currency terms) and 19.7% QoQ in reported terms. Out of this, organic growth was 6.3% QoQ and rest was through acquisition of Personiv. EBIT margins improved 295 bps to 27.6% mainly led by lower S&D expenses and higher gross margins. PAT increased 39% QoQ to | 98.8 crore. The company has proposed a dividend of | 1/share.

Improving demand, pipeline key growth drivers

The company reported healthy growth in the quarter mainly led by lower roll offs, acquisition, healthy demand in analytics in customer & financial operations and improving demand from large clients. eClerx is seeing healthy growth in financial operations and offshore digital care business in top 10 clients. In addition, the company may benefit from cross sell and up sell to Personiv clients.

Hence, 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 would drive long term growth. In addition, healthy deal pipeline, lower roll offs from one-off client specific event, higher exposure to banking, telecom, hi-tech clients (~70% of topline) and revival in growth are expected to further boost revenues in coming years. Hence, we expect eClerx to register 14.6% CAGR dollar revenue growth in FY20-23E.

Margins to taper off in FY23E but expected to be healthy

The company, in the quarter, witnessed healthy EBIT margin expansion due to healthy demand, lower facility & travel cost and lower incentives. eClerx plans to give wage hikes effective April 2021. This, coupled with resumption of travel and increase in facility cost may act as a headwind to margins. However, with revenue growth and full impact of increase in cost to be visible in FY23E, we expect FY22E margins to improve 146 bps YoY to 31.2% and then taper to 29.7% in FY23E.

Valuation & Outlook

The company is witnessing improving growth in customer care, RPA, analytics and content development. In addition, eClerx could benefit from cross sell and up sell to Personiv clients. This, coupled with lower roll offs from one off client specific event, improving deal wins and revival in growth are expected to drive revenues. With this, coupled with higher revenues & margin assumption (compared to our previous estimates), we revise our EPS estimates upwards. This, along with reasonable valuations, healthy balance sheet prompt us to maintain BUY rating on the stock with a revised target price of | 1,640 (15x PE on FY23E EPS, earlier target price | 1,150).

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