eClerx - Good Company to watch out for

I have been looking at eClerx for sometime. The first thing to understand is that eclerx is not an IT company, so you cannot compare it with one. It is more of a BPO/KPO company. Let me explain briefly here:-

BPO is more or less synonymous with call-centers nowadays, but they may be involved in other areas like medical transcription, data entry operators, loan processing, claim processing etc.

KPO is higher up the value chain. They do more sophisticated work. Like patent processing, six sigma implemenations, process re-engineering, workflow redesign, market survey/research, data analytics, market intelligence, legal outsourcing and accounting.

The kind of people employed in these types of organizations are also different, as you can probably understand from the nature of work.

eClerx is somewhere in between the BPO-KPO continuum today and trying to move towards KPO. It is essentially a easy business and the only moat you have is your brand name and client list. eClerx is perhaps the only large listed KPO player in India. The others are Genpact & WNS. Margins are good and better than lower-end BPO business. Business is not as fickle or cost sensitive as pure call-centers. And the opportunity size is HUGE. For example, in US, every large law firm has 100s of para-legals or law clerks, people who are employed to look up references of past cases and provide supporting documents for an ongoing case. Now, that person need not sit in the US and the work can be done from India at maybe 1/5th the cost. This is just an example. same goes for technical analysis in equity markets.

The company has good numbers, good growth, good dividend payout. If they get their act together and can scale up, it can be a 25,000-50,000 cr company in 10-15 years from the current 2100 odd crores.

They have large clients but their top 5 concentration is pretty large, somewhere close to 85% for top 5 clients. For the IT/BPO industry that is very high risk. Companies like Patni actually got into trouble due to their over-reliance on a single customer. Here eClerx is a relatively new company so I think it would need some time to get more customers. This is one area of major risk. however, the management realizes this and is working to add new customers. Five new clients were added in this quarter. Total number of active clients
has increased to 50 currently.

FINANCIALS

	FY11	FY10	FY09	FY08	FY07
Sales	341.91	257.02	197.09	116.98	79.54
Other Income	-5.13	-10.59	-4.23	6.48	5.79
Op Profit	148.8	98.79	79.04	47.75	37.9
EBDIT	143.67	88.2	74.81	54.23	43.89
PBT	134.77	81.35	67.54	49.53	39.86
PAT	118.56	72.59	60.64	43.91	39.67
EPS	41.09	38.14	32.04	23.27	391.83
Depreciation	8.9	6.85	7.23	4.44	3.21
Interest	0	0	0.04	0.26	0.62
Effective Interest Rate(%)	0.00%	0.00%	0.00%	0.00%	0.00%
Tax	16.21	8.76	6.91	5.62	0.27
Effective Tax rate (%)	12.03%	10.77%	10.23%	11.35%	0.68%
Dividend Yield	3.06%	2.38%	1.70%	1.15%	27.17%

Dupont Analysis
OPM(%)	43.52%	38.44%	40.10%	40.82%	47.65%
NPM(%) -- (A)	34.68%	28.24%	30.77%	37.54%	49.87%
Asset turnover(avg) -- (B)	1.46	1.29	1.19	0.86	2.71
RoA(%)	50.69%	36.38%	36.70%	32.22%	135.16%
Financial Leverage -- ( C)	1.00	1.00	1.00	1.00	1.00
RoE(%) -- (=A*B*C)	50.69%	36.38%	36.70%	32.22%	135.16%
RoA(%)	50.69%	36.38%	36.70%	32.22%	135.16%
RoCE(%)	68.27%	45.99%	47.65%	40.63%	150.44%

VALUATIONS
I have used PE ratio for valuing eClerx.

So, expecting Rs 49.3 as FY12 EPS and a PE band of 16 - 22, FY12 (Mar 2012) valuation is likely to be about Rs. 790 - 1090.

Similarly, with Rs. 59.17 as FY13 EPS and a PE band of 16 - 22, FY12 (Mar 2013) valuation is likely to be about Rs. 950 - 1300.

CONCLUSION
This is a good company but looks more or less fully valued at this time. Keep this in your watch list and accumulate for the long term whenever you find the market giving you an opportunity to buy it cheap.