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.

My Rules for Investing

I have been investing for a long time now. After reading a lot on the subject of investing, speculating and trying my hand at all forms like day-trading, swing trading, technical analysis, derivative trading and investing for the long term, I have come to realize that the last one suits my temperament the most and one in which I have actually made good returns.

I have also come to realize that investment discipline is critical for success. And for discipline, a strict set of rules to be followed is critical. These rules should help in deciding when and what to put your money in.  The rules would continue to evolve along with my personal and vicarious experience in the markets.

Here are my set of rules:

Rule 1: Focus your investments. Do not diversify unnecessarily.

Do not invest in more than 15 stocks in your portfolio. It is difficult to follow and track more than 15-20 stocks at a time. It is important to keep yourself focussed on your best investments.  To add a new stock to the portfolio, judge the relative ranking of current holdings and remove one. There may be slight temporary anomalies to this rule to protect paying taxes while selling. So, if a stock is to be held on for a few months more to save on capital gains tax, then the total stocks can go up for that period.

Rule 2: Be sure of the story and check back frequently to see if it is intact.

Be very clear as to why you are buying a stock. You should be able to explain your investment thesis to your mother/wife (I mean someone who is not very clued into stocks) in simple language. The more you understand the story, the greater your conviction.

Rule 3: Plan your sale.

Sell when the story is over, or
Sell when you reach your target price ahead of plan, or
Sell when the fundamentals deteriorate, or
Overall market prices are very high

Rule 4: Never buy or sell in one go.

It is important to stagger you buy and sell to average out price spikes. Also, rarely will you have the money to buy your required quantity in one go. Also, staggering while helps in most cases to get a better overall price. Similarly, while selling, specially, when your target price is reached, it is better to sell in stages.

Rule 5: Plan beforehand what you would do if the price goes down by 10-20% after you buy.

There are two options. 1) Buy more and 2) Stop loss. Make up your mind at the time of your initial investment what you want to do if the price goes down. If your conviction is high, buy more. If this was a dip-stick buy, then maybe cover your losses.

Q2FY12 Result Update: Sintex Industries

• Sintex Industries has reported around 25.3% growth in sales. Net profits are down by 61.2%.
• Growth was driven by both the plastics (25.9%) and textiles (20.2%) business divisions.
• Operating margins have reduced from 18.6% to 17.7% due to higher raw material prices
• Increase of 56.4% in interest costs
• Net profits (without taking into account forex losses on outstanding FCCBs) increased by 23.3%
• Current order book of the monolithic segment is 3,000 cr
• The company commissioned a new plant in Chennai for custom moulding during this quarter. This is likely to help in revenue growth in the future.
• Consolidated EPS for H1FY11 is Rs 4.9.

At the CMP of around Rs. 120, the stock is available at an attractive PE of about 7 (TTM EPS is about 17). The fundamentals of the company is robust with decent growth and a healthy order book. The major risk is the outstanding FCCB, which however seems to be priced into the stock at this time. Looks good for buying from a long term perspective.

FCCB
Sintex has $225mn of FCCBs outstanding having a conversion price of Rs. 246. These are due for conversion in March 2013. the FCCB money was raised to finance acquisitions and as there was no major acquisition by the company in FY10-11, only $60mn of the FCCB proceeds were utilised and the remaining $165mn lies in an escrow account at an overseas branch of State Bank of India, yielding a very low return and thus depressing the  return ratios.

If the FCCBs are redeemed, it would reduce the capital base,  leading to an improvement in
RoCE in FY13.
If the FCCBs are converted into equity, the company would have a better control on utilising  this money, including repayment of debt, and thereby reducing the capital base and improving the  return ratios.

The FCCB loss shown in the quarterly results are notional losses and does not have any negative cash flow implications.

Note: I am an investor and have a vested interest in Sintex. Please do your own due diligence before making a buy/sell decision.

Business Standard agrees with me!!

Business Standard seems to agree with me on my previous post. Today morning's cover story in the paper is regarding the Crisis of Confidence!!

Crisis of Confidence

It is so interesting to see investors oscillating between optimism and pessimism within a span of a few months. A few months ago, everything was fine. US was getting out of recession, although slowly. And small insignificant countries like Greece had some issues with their debt. Now, the reverse seems to be true. US is already in a recession (double dip, with ketchup, if I may add!!), as commented by George Soros and Euro is near disintegration!!

I, as a Munger devotee, think that a "Lollapalooza Effect" is happening here. There are too many negative external stimuli happening together. This is probably making it difficult for people make sense of the market. The major negative external stimuli at this point in time are:

• US recession (single dip, double dip, who knows!!)
• S&P downgrade of US debt
• Eurozone crisis and possible default by Greece
• Slowdown in emerging markets (India, China, Brazil the whole lot)
• Policy paralysis in India
• Rise in interest rates in the India
• Continued inflation

People are not able to understand the implications of all these individual events are are running scared of possible worst case scenarios for all of them.


I think that the whole issue can be boiled down to a small phrase - "Crisis of Confidence". There is a lack of confidence in the political leaders throughout the world. Americans don't have confidence in their leaders to get to a solution without printing dollars or crippling the economy. Europeans don't have confidence that their leaders can sit together and thrash out an agreement to really do something. Indians have never really had confidence in their leaders post-independence, so nothing really has changed. But, this current UPA-II is fighting hard to be the worst government of all time - a government which does not govern!!


I think what will happen now is that the political class will start to get their act together. They have their back to their respective walls right now. In India, I am hopeful that some policy reforms may be announced along with some market friendly announcements to boost investor confidence. 

Till then, buckle up. The ride is going to get rougher.

Guru Speak: Seth Klarman interviewed by Jason Zweig

I have been a great admirer of Seth Klarman since the time I read his book "Margin of Safety". recently, I came across a transcript of an interview that Jason Zweig of the Wall Street Journal conducted in May 2010. Here are some of the important snippets from the interview.

JZ: What went wrong in 2008, and how did so many Value Investors get hammered?
SK: Value investing doesn’t work all the time, you need to expect periods of underperformance.  In the Pre 08 period, the world was valued on an invisible LBO Model.  Stocks were not allowed to get cheap because of an underlying expected LBO bid.  But when the model got fragmented, the template no longer made sense.  So in order to do well, equity minded investors needed to be more agile in 07/08 and have an opinion on subprime mortgages and the ripple effect.  Bank stocks looked cheap unless you thought their capital would be destroyed.  Also the modern day pressure to be fully invested and on short term performance didn’t help.


JZ: In 1932, Benjamin Graham wrote in Forbes, “Those with the enterprise lack the money and those with the money lack the enterprise to buy stocks when they are cheap.” How did you have the courage, was it easy to step up and buy in the fall of 2008?
SK: “Yes, it was easy.” The critical thing to understand is that securities are not pieces of paper that fluctuate in price tick by tick, instead they are in fact claims on earnings or assets of businesses. If you have conviction in your analysis, you will hold and buy more.  So what do we do to give us conviction? 

1.) Find compelling bargains, not slight bargains. 

2.) Test everything with sensitivity analysis.  

3.) Prepare to be wrong.  

It’s not courage, it’s arrogance, when you buy something, you’re saying you’re smarter than everyone else.  We realize we have lots of smart competition and temper our arrogance with
humility to realize that many things could go wrong.  Our own confidence matters, and we’re highly disciplined buyers and sellers to avoid round trips and take advantage of short term sell offs. Courage is a function of process.

JZ: In Margin of Safety, you were critical of Indexing, is that still the case?
SK: There is no perfect answer.  Yes, I still believe indexing is a horrible idea.  Stocks trade up when they’re added to the index so the index investor is paying up.  I’m more likely to buy the companies kicked out of the index.  For the average person, however, they don’t do enough research to own individual stocks.  The idea of owning stocks for the long run is a disservice to investors, because many of the people are not there for the long run.  Many got out in 2008 when they should have been buying, because the entry point matters most.

JZ: In Margin of Safety, you said commodities were not investments since they do not
produce cash flows, one possible exception being gold.  Do you still feel this way?
SK: I haven’t changed my mind, but that statement was in reference to rare stamps, or fine art, etc.   Valuing collectibles based on a future sale to a greater fool is speculating.  There is no way to analyze what it will be worth in the future.  Land is complicated because it will be valuable to future buyers and it can have cash flows. Gold has been thought of as a store of value but it is just a commodity and therefore it is a speculation.  I own gold because I want exposure to a devaluation of all paper monies.

JZ: Everyone says it’s never the analyst’s fault, but often they don’t stick to this when something goes wrong. How do you screen for Intellectual Honesty in your hiring process?
SK: We ask about their biggest mistake, which doesn’t have to be investing related. But if you say your biggest mistake is wearing mis-matched socks one day, then that’s likely not being intellectually honest.  We ask ethical questions, ask them how they’d respond in morally ambiguous situations, we want to see that they realize conflicts can exist.  We want people who fit in.  One key thing is idea fluency, if I present a thesis I want people to immediately come up with 10 places to look to exploit it, I don’t want them sitting at their desk thinking, “hmm, where should I look?"

JZ: What about the individual investors whose sell orders went off at $0.01? {This question was in relation to computer-based short selling.}
SK: Never use market orders. You’re not a seller at the market, the market changes
too fast.

JZ: Can you define a Value Stock and what is your average holding period?
SK: As for a Holding Period, we buy expecting to hold a bond to maturity and a stock forever.  Now we may turn over quicker if there’s rapid appreciation and the return from the current price doesn’t seem to compensate for the risks anymore.  There’s no such thing as a Value Company.  Price is all that matters. At some price, an asset is a buy, at another it’s a hold, and at another it’s a sell.

JZ: Any Book Recommendations (besides Margin of Safety and Security Analysis, of
course)?
SK: Read as much as you can about the markets, economy, and financial history. Never stop reading.  Specific book recommendations include "The Intelligent Investor", Greenblatt’s "You Can Be A Stock Market Genius", Whitman’s "Aggressive Conservative Investor", Anything from Jim Grant (he’s a great thinker, even if his predictions may not turn out right), Roger Lowenstein has not written a bad book, anything from him. Also Michael Lewis, who also hasn’t written a bad book either, but specifically "MoneyBall" which will go down as a definitive book on investing.  Also "Too Big to Fail" is good.
JZ: I’ll add "How to Lie with Statistics".

GuruSpeak: George Soros on Euro

The legendary investor George Soroshas some radical views on the Euro and Euro zone.

Angela Merkel then declared that the guarantee should be exercised by each European state individually, not by the European Union or the eurozone acting as a whole. This sowed the seeds of the euro crisis because it revealed and activated a hidden weakness in the construction of the euro: the lack of a common treasury. The crisis itself erupted more than a year later, in 2010.

... at present in the eurozone one of these authorities, the common treasury, has yet to be brought into existence. This requires a political process involving a number of sovereign states. That is what has made the problem so severe.

The outlines of the missing ingredient, namely a common treasury, are beginning to emerge. They are to be found in the European Financial Stability Facility (EFSF)—agreed on by twenty-seven member states of the EU in May 2010—and its successor, after 2013, the European Stability Mechanism (ESM). But the EFSF is not adequately capitalized and its functions are not adequately defined. It is supposed to provide a safety net for the eurozone as a whole, but in practice it has been tailored to finance the rescue packages for three small countries: Greece, Portugal, and Ireland; it is not large enough to support bigger countries like Spain or Italy. Nor was it originally meant to deal with the problems of the banking system, although its scope has subsequently been extended to include banks as well as sovereign states. Its biggest shortcoming is that it is purely a fund-raising mechanism; the authority to spend the money is left with the governments of the member countries. This renders the EFSF useless in responding to a crisis; it has to await instructions from the member countries.

 

The seeds of the next crisis have already been sown by the way the authorities responded to the last crisis. They accepted the principle that countries receiving assistance should not have to pay punitive interest rates and they set up the EFSF as a fund-raising mechanism for this purpose. Had this principle been accepted in the first place, the Greek crisis would not have grown so severe.

These two deficiencies—no concessional rates for Italy or Spain and no preparation for a possible default and defection from the eurozone by Greece—have cast a heavy shadow of doubt both on the government bonds of other deficit countries and on the banking system of the eurozone, which is loaded with those bonds.

In any case the current intervention has to be limited in scope because the capacity of the EFSF to extend help is virtually exhausted by the rescue operations already in progress in Greece, Portugal, and Ireland.

In these circumstances an orderly default and temporary withdrawal from the eurozone may be preferable to a drawn-out agony. But no preparations have been made. A disorderly default could precipitate a meltdown similar to the one that followed the bankruptcy of Lehman Brothers, but this time one of the authorities that would be needed to contain it is missing.

It appears that the authorities have reached the end of the road with their policy of “kicking the can down the road.” Even if a catastrophe can be avoided, one thing is certain: the pressure to reduce deficits will push the eurozone into prolonged recession. This will have incalculable political consequences. The euro crisis could endanger the political cohesion of the European Union.

To resolve a crisis in which the impossible becomes possible it is necessary to think about the unthinkable. To start with, it is imperative to prepare for the possibility of default and defection from the eurozone in the case of Greece, Portugal, and perhaps Ireland. To prevent a financial meltdown, four sets of measures would have to be taken. First, bank deposits have to be protected. If a euro deposited in a Greek bank would be lost to the depositor, a euro deposited in an Italian bank would then be worth less than one in a German or Dutch bank and there would be a run on the banks of other deficit countries. Second, some banks in the defaulting countries have to be kept functioning in order to keep the economy from breaking down. Third, the European banking system would have to be recapitalized and put under European, as distinct from national, supervision. Fourth, the government bonds of the other deficit countries would have to be protected from contagion. The last two requirements would apply even if no country defaults.

You can read the full article here:
http://www.nybooks.com/articles/archives/2011/oct/13/does-euro-have-future/