Result Update

October 25, 2013

Rating matrix
Rating Target Target Period Potential Upside : : : : Buy | 1020 12 months 10%

eClerx Services (ECLSER)

WHATS CHANGED

| 927

PRICE TARGET ..................................................................... Changed from | 880 to | 1020 EPS (FY14E) ......................................................................... Changed from | 76.5 to | 83.8
FY14E 850 356 41.9 253 83.8 FY15E 978 405 41.5 308 102.0

Key Financials
(| Crore) Net Sales EBITDA EBITDA (%) Net profit EPS (|) FY12 473 190 40.2 160 53.0 FY13 661 257 38.9 172 56.9

EPS (FY15E)....................................................................... Changed from | 91.8 to | 102.0 RATING ............................................................................................................... Unchanged

Chugging along...
eClerx reported Q2FY14 earnings, which were in line with our estimates. Dollar revenues grew 3.4% QoQ to $34.1 million predominantly led by the cable business while EBITDA margins were up 162 bps QoQ led by currency tailwinds. Growth was driven by Agilyst (now $20 million+ business) while core business continues to be soft. The management commentary suggests that the deal pipeline is healthy in sales & marketing business (where deal sizes tend to be smaller) while opportunities in banking are fewer but larger in size. We are adjusting our estimates to account for the change in rupee assumption and continue to maintain our BUY rating. Revenues, margins in line with estimates US$ revenues came in at $34.1 million (3.4% QoQ growth), in line with our $34.2 million estimate while constant currency revenues grew 3.1% QoQ. Rupee revenues grew 13% QoQ to | 214.6 crore. EBIT margins rose 286 bps sequentially to 39.8%, modestly below our 40.6% estimate and 36.9% in Q1. Margin tailwinds as well as headwinds were increase in onsite headcount & sales bonuses (-1.8%), increase in legal & recruitment fees (-1.3%), employee cost (-0.8%), depreciation (+0.9%) and currency (+5.8%). At | 67.2 crore, reported net profit grew 8.9% QoQ led by margin beat and lower tax rate (21.9% vs. 23.7% in Q1). Operating metric analysis: High attrition and low utilisation, a concern Growth was broad based across key geographies including the US, Europe, RoW, which grew 3.4% each. Utilisation came in at 65% (declined 100 bps QoQ), lowest in last 10 quarters. Top 5 clients revenues grew 1.9% QoQ while concentration continues its healthy decline (75% in Q2 vs. 76% in Q1). Five clients were added during Q2 taking the active client base to 65. India headcount grew by 154 during Q2 while attrition rose higher than anticipated 620 bps YoY to 36.4%. Adjusting estimates modestly, raising target price We are adjusting our estimates to account for higher rupee rate. We now expect revenues, PAT to grow 29%, 48% and 15%, 21%, in FY14E, FY15E, respectively, translating to 22%, 34% CAGR, respectively, during FY13-15E. We continue to value eClerx at 10x FY15E EPS of | 102 to arrive at our target price of | 1020. We maintain BUY recommendation.
Exhibit 1: Financial Performance
(| crore) Net Sales EBITDA EBITDA Margin (%) Depreciation Interest Other Income Reported PAT EPS (|) Q2FY14 214.6 92.8 43.2 7.4 0 0.6 67.2 22.1 Q2FY14E 212.1 92.9 43.8 6.9 0 (1.7) 64.5 21.3 Q1FY13 189.9 79.0 41.6 9.0 0 10.8 61.7 20.4 Q2FY13 161.7 60.1 37.1 7.7 0 (18.7) 25.1 8.4 QoQ(Ch %) 13.0 17.4 162 bps up (17.0) NM NM 8.9 8.4 YoY(Ch%) 32.7 54.5 448 bps up (3.6) NM NM 167.7 165.0

Valuation summary
FY12 PE (x) Target PE Price to book (x) EV to EBITDA(x) RONW (%) ROCE (%) 17.5 19.3 8.2 13.5 46.5 57.5 FY13 16.3 17.9 6.4 10.0 39.1 60.9 FY14E 11.1 12.2 4.9 7.2 43.8 63.0 FY15E 9.1 10.0 3.9 6.3 42.3 56.0

Stock data
Market cap (| crore) Debt (Sep-13) Cash (Sep-13) EV 52 week H/L (|) Equity capital Face value FII Holding (%) DII Holding (%) | 2802 crore | 0 crore | 231 crore | 2571 crore 1070 / 597 | 30 crore 10 22.4 14.7

Price movement
300 200 100 0 Feb-12 Aug-11 Aug-12 Feb-13 May-12 May-13 Aug-13 Nov-11 Nov-12

Nifty

eCLerx

Analysts name
Abhishek Shindadkar abhishek.shindadkar@icicisecurities.com Hardik Varma Hardik.varma@icicisecurities.com

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Exhibit 2: Broad based growth across geographies after nine quarters

$ million North America Q2FY13 22.4 Q3FY13 23.5 Q4FY13 23.8 Q1FY14 24.4 Q2FY14 25.2

QoQ growth
Europe

12.0
5.7

5.0
5.6

1.3
6.8

2.7
6.9

3.4
7.2

QoQ growth
ROW

0.7
1.8

(0.5)
2.2

20.7
1.7

1.9
1.7

3.4
1.7

QoQ growth

(29.3)

22.5

(21.6)

(3.9)

3.4

Source: Company, ICICIdirect.com Research

Utilisation, at 65%, was lowest in the last 10 quarters

Exhibit 3: As anticipated, attrition spikes to 36.4% vs. 25.2% in Q1 and 30.2% in Q2FY13
Indian headcount Attrition (YTD) Utilisation(%) Q2FY13 5760 30.2 68.0 Q3FY13 5837 26.5 69.0 Q4FY13 5954 27.3 68.9 Q1FY14 6389 25.2 66.0 Q2FY14 6543 36.4 65.0

Source: Company, ICICIdirect.com Research

Top 5 clients continue to grow below company average for a second consecutive quarter

Exhibit 4: Top 5 revenue contribution declines a healthy100 bps sequentially

Additions Active agreement billed Top 5 clients (%) Top 5 clients ($ million) Q2FY13 4 54 79 24 Q3FY13 7 60 78 24 Q4FY13 6 73 78 25 Q1FY14 5 61 76 25 Q2FY14 5 65 75 26

QoQ growth
FT 500 (% as of revenue)

4.7
96

3.7
98

3.2
NA

(0.5)
NA

1.9
NA

Source: Company, ICICIdirect.com Research

Risks and concern

The macro continues to be a challenge. Cross currency volatility could impact revenue growth in FY14E. However, significant rupee depreciation continues to be a key margin tailwind.
Exhibit 5: One year forward (PE) chart
1500 1200 900 600 300 0 Apr-08 Feb-09 Apr-13
2

Sep-08

Aug-11

Dec-09

May-10

Price

16

12

Mar-11

Source: Company, ICICIdirect.com Research

Exhibit 6: Assumptions
Total Employee base Additions Attrition (LTM) Average $/ |
[

FY12 4,405 747 31.3% 48.4

FY13 5,954 1,549 26.8% 54.1

Nov-12

FY14E 6,654 700 27.0% 61.0

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

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Sep-13
FY15E 7,404 750 25.0% 60.5

Oct-10

Jul-09

Jan-12

Jun-12

Financial Summary
Profit & Loss Account
(|crore) Total Revenues Growth (%) Total Operating Expenditure EBITDA Growth (%) Depreciation Other Income Exchange difference Interest PBT before Exceptional Items Growth (%) Tax PAT before Exceptional Items Exeptional items PAT before MI Minority Int & Pft. from associates PAT Growth (%) EPS EPS (Growth %) FY12 473 38.0 283 190 40.7 12.9 5 -17 0 199 42.5 39 160 0 160 0 160 29.9 53 31.7 FY13 661 39.7 406 257 35.1 23.4 -18 0 0 211 5.9 39 172 0 172 0 172 7.4 57 7.4 FY14E 850 28.7 494 356 38.7 33.1 8 0 0 331 56.9 78 253 0 253 0 253 47.5 84 47.1 FY15E 978 15.1 572 405 13.9 39.1 34 0 0 400 21.0 92 308 0 308 0 308 21.8 102 21.8

Cash flow statement

FY12 Net profit before Tax Depreciation (inc)/dec in Current Assets (inc)/dec in current Liabilities CF from operations Other Investments Other income (Purchase)/Sale of Fixed Assets CF from investing Activities Inc / (Dec) in Equity Capital Dividend & Divendend tax Interest Paid on Loans CF from Financial Activities Exchange rate differences Opening cash balance Closing cash 199 13 22 (38) 172 (72) 5 (25) (83) 3 (76) 0 (72) 1 152 169 FY13 211 23 (25) (40) 153 65 (18) (27) (35) 7 (60) 0 (53) 0 169 235 FY14E 331 33 (42) (78) 238 0 8 (40) (32) 0 (123) 0 (123) 0 235 317 FY15E 400 39 (11) (92) 309 0 34 (42) (8) 0 (158) 0 (158) 0 317 460

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

Balance sheet
FY12 Equity Reserves & Surplus Networth Minority Interest Loans Source of funds Gross Block Acc.dep Net Block CWIP Investments Debtors Cash & Cash equivalents Loans and advances Current liabilities Provisions Application of funds 30 314 343 0 0 348 88 44 44 5 0 42 169 30 5 93 348 FY13 30 408 438 0 0 447 124 69 55 1 0 65 235 47 7 126 447 FY14E 30 539 569 0 0 578 164 102 62 1 0 109 317 53 9 166 578 FY15E 30 689 719 0 0 729 206 141 65 1 0 119 460 61 10 191 729

Ratio Analysis
(Year-end March) Per share data (|) EPS Cash EPS BV DPS Cash Per Share Operating Ratios (%) EBITDA Margin PBT / Total Operating income PAT Margin Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio 0.0 0.0 2.5 2.5 0.0 0.0 2.6 2.6 0.0 0.0 2.7 2.7 0.0 0.0 3.2 3.2 17.5 13.5 5.4 5.9 8.2 16.3 10.0 3.9 4.2 6.4 11.1 7.2 3.0 3.3 4.9 9.1 6.3 2.6 2.9 3.9 46.5 57.5 133.1 39.1 60.9 119.3 43.8 63.0 136.7 42.3 56.0 138.4 40.2 42.1 33.8 33 4 38.9 31.9 26.0 36 4 41.9 38.9 29.8 38 3 41.5 40.9 31.5 43 4 53.0 70.1 113.6 17.5 55.8 56.9 77.5 145.0 25.0 77.7 83.8 120.4 188.1 35.0 105.0 102.0 145.4 237.7 45.0 152.3 FY12 FY13 FY14E FY15E

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Page 3

Company Description
eClerx Services (ESL) provides knowledge process outsourcing (KPO) services. Incorporated in 2000, ESL optimises core day-to-day processes of its clients. With more than 7,000 employees, the company provides services using a mix of data analytics and customised process solutions from its offshore delivery centres in India. ESLs services portfolio comprises data analytics, operations management, data audits, metrics management and reporting services. Also, delivery teams consist of generalists, domain specialists and in-house software professionals who automate and streamline existing clients processes.
Exhibit 7: Recommendation History
1,200

1,000

800

600 Jun-13 Jul-13 Jul-13 Oct-13 Aug-13 Sep-13 Oct-13

Rating BUY BUY BUY BUY BUY BUY

Price
[

Target Price

Source: Company, ICICIdirect.com Research

Exhibit 8: Recent Releases

Date 27-May-13 5-Jul-13 22-Jul-13 13-Aug-13 7-Oct-13 24-Oct-13 Event Q4FY13 Result Update Q1FY14 Preview Q1FY14 Result Update Quick Comment Q2FY14 Preview Q2FY14 Result Update CMP 664 740 798 784 903 927 Target Price 810 810 880 880 880 1020

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

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ICICIdirect.com Coverage Universe (IT)

CMP Sector / Company Eclerx (ECLSER) HCL Tech* (HCLTEC) Infotech (INFTC) Infosys (INFTEC) KPIT Technologies (KPISYS) Mastek (MASTEK) Mindtree (MINCON) NIIT Ltd. (NIIT) NIIT Technologies (NIITEC) Sasken Com (SASCOM) Persistent (PSYS) TCS (TCS) Tech Mahindra (TECMAH) Wipro (WIPRO) (|) 927 1,055 230 3,309 146 161 1,374 20 275 139 774 2,009 1,537 471 TP(|) Rating 1,020 1,260 265 3,550 150 180 1,450 22 330 135 825 2,450 1,400 550 M Cap (| Cr) Buy 2,790 Buy 73,644 Buy 2,565 Hold 190,000 Hold 2,813 Buy 395 Buy 5,713 Hold 329 Buy 1,662 Hold 295 Buy 3,095 Buy 393,450 Buy 35,726 Buy 116,070 56.9 56.6 20.7 164.9 10.5 14.0 81.8 1.5 35.4 13.1 46.1 71.0 82.4 25.0 EPS (|) FY13 FY14E FY15E 83.8 81.0 24.0 187.5 14.6 24.2 112.0 1.6 42.5 12.1 59.2 97.0 105.0 30.2 102.0 91.0 26.5 208.8 17.1 33.6 131.5 4.4 47.1 13.8 74.8 110.1 116.0 32.9 16.3 18.6 11.1 20.1 13.8 11.5 16.8 13.0 7.8 10.6 16.8 28.3 18.7 18.9 P/E (x) FY13 FY14E FY15E 11.1 13.0 9.6 17.6 10.0 6.6 12.3 12.2 6.5 11.5 13.1 20.7 14.6 15.6 9.1 11.6 8.7 15.8 8.5 4.8 10.4 4.5 5.8 10.1 10.3 18.3 13.2 14.3 EV/EBITDA (x) 10.0 11.9 5.7 14.1 7.8 2.4 11.5 9.9 4.5 3.5 7.7 21.3 10.7 12.9 7.2 8.3 4.7 11.9 6.1 1.3 8.8 6.4 3.6 3.3 6.5 15.2 9.0 11.0 6.3 7.7 4.3 10.6 5.3 0.9 7.9 5.2 3.3 3.0 5.4 13.7 8.4 10.1 60.9 36.7 26.5 28.5 27.8 5.6 29.5 NM 26.7 5.2 27.3 45.8 40.3 23.6 RoCE (%) 63.0 39.1 27.9 28.3 28.0 11.2 30.9 NM 28.3 6.1 27.6 47.8 37.0 26.2 56.0 33.2 26.3 26.8 28.1 15.6 27.5 1.9 27.3 7.3 28.3 40.9 30.6 23.4 39.1 30.6 18.6 25.7 22.8 6.5 25.8 3.8 21.3 7.6 19.8 36.0 33.5 21.6 RoE (%) 43.8 32.0 18.7 24.6 24.8 10.2 27.8 4.1 21.5 7.5 21.4 36.2 31.0 23.2 42.3 27.6 17.8 23.1 23.4 12.7 26.0 10.3 20.5 8.3 22.8 31.8 26.2 23.2 FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E

Source: Company, ICICIdirect.com Research,,*June year end

ICICI Securities Ltd | Retail Equity Research

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RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: > 10%/ 15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey

Head Research ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai 400 093 research@icicidirect.com

pankaj.pandey@icicisecurities.com

ANALYST CERTIFICATION
We /I, Abhishek Shindadkar MBA Hardik Varma MBA research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

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