[T.S.R:14360] eClerx

 

Company Update (June 07, 2010)

Company Update eClerx Ltd Reco: BUY CMP: Rs558 Target Price: Rs640 Remains on a strong footing, raise TP to Rs640 We spoke to eClerx management recently to update ourselves on co's business prospects going forward. We see no reason to tone down our 28% US$ revenue CAGR estimate over FY10-12E (albeit we see room for a beat here, as company sees growth pick up in the eCommerce side as compared to the financials services driven growth in FY10), however increase our FY11/12 earnings estimates by ~5%/5.6% to Rs 54/64.9 (V/s Rs 51.5/Rs 61.5) as we reset our US$/INR exchange rate assumption at Rs 46/$ ( V/s Rs 45/$ earlier) driving an increase in our DCF based March'11 target price to Rs 640( V/s Rs 540 earlier). We believe that the company's recent steps in the form of (1) continuing to strengthen senior sales and middle management addition ( already bearing fruit in the form of 2 large deals won against much stronger Tier 1 competition during FY10) with an increased focus on greater client mining within existing client accounts, (2) further expansion into SEZ facilities (a 44k sq ft facility to come onstream towards Q1FY11 end, note that co already derived ~42% of revenues from SEZ facilities) and (3) a 45% net hiring during FY10- all point to strong footing ahead. Despite some investor concerns, we believe that the valuations remain attractive for ROE's of 40%+ ( we assume operating margins to decline by ~350 bps over FY10-12E and an increase in cash/share to Rs 124/share in FY12 V/s Rs 65 at FY10 end) and a dividend yield of ~3.5%. Key downside risks to our positive thesis remain in the form of (1) a macro scare (akin late CY08) and (2) further appreciation in US$/INR (every 1% change in US$/INR impacts eClerx's operating margins by ~65 bps). Click here to read report: Company Update

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