Eclerx Services' Q1FY18 results (Neutral) - Near term drag, demand recovery in sight
Q1FY18 results highlights
- Soft operating performance: USD revenues grew 1.9% qoq to US$48.8m (IDFCe/ Cons: US$49.1m/US$47.5m) led by 2.8% qoq growth in Top10 clients. In INR terms revenues were up 0.5% qoq to Rs3.33bn (IDFCe/ Cons: Rs3.34bn/Rs3.23bn). EBITDA margins decreased 353bp qoq to 30.1% (IDFCe/Cons.: 32.4%/34.1%) due to wage hike/ hiring (240bps) and stronger INR (150bp). PAT grew ~6% qoq to Rs794m (IDFCe/Cons: Rs810m/Rs826m) led by positive swing in forex adjustments (Rs17m gain vs loss of Rs134m in Q4).
- FY18 outlook remains anaemic: Management reiterated softness in Q2FY18 due to project roll—offs wit top accounts. Despite acquisition of TwoFour Holdings (full year expected revenue of US$4m) in US which would add ~1% to FY18 revenue, we expect revenue growth to remain in low-single digit. Management indicated that deal size that witnessed a dip in FY17 has started seeing reversal in trend. We believe a healthy exit rate in FY18 could possibly lead to a high single digit revenue growth in FY19 after a muted show in FY17/18.
- Margin to improve steadily in FY18: Company has delivered 26.9% EBIT margin in Q1FY18 (FY17 31.4%) with a sequential decline of ~350bp primarily due to wage hike and hiring. We believe sub-optimal revenue growth, strong INR and investment on onsite capability are near term margin headwinds. However, strong hedge book (US$83m inflow to be converted at Rs71/ USD in FY18) would drive hedging gains to protect margins. However, management now expects FY18 margins to be at ~29% lowered from 30% earlier.
Key Positives: Revenue growth
Key Negatives: Soft FY18 outlook; weak margins
Impact on financials: FY18-19E EPS cut by ~2% on lower margins.
Valuations & view
eClerx revenue growth is expected to stay muted in FY18 due to client specific issues and structural challenges from automation in legacy business. However, management commentary around pipeline in emerging accounts and key verticals (Digital/ Banking) indicate early signs of demand recovery. At 14x FY19E EPS, there is limited margin of safety given 2-4% Revenue/ EPS CAGR over FY17-19E. Maintain Neutral with a target price of Rs1,285 (14x FY19E EPS).
Eclerx Services Limited. eClerx Services Limited is an India-based knowledge and business process outsourcing company. The Company provides operational support, data management and analytics solutions to companies, including financial services firms, online retail and distributors, interactive media, luxury brands and entertainment, high tech and industrial manufacturing, travel and leisure and software vendors. The Company provides financial solutions, such as middle office services, back office services, finance and accounting, ancillary services and asset class coverage. Its digital services include creative production, computer generated images, digital production, analytics and insights, and FLUiiD4. Its cable and telecom services and solutions include technical operations and dispatch, customer interaction monitoring and analytics, end user chat support, support services and reporting and analytics. The Company has operations in the United States, the United Kingdom, Europe and Asia Pacific.
IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions, both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.
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