eClerx Services IPO Analysis

Promoted by P D Mundhra and Anjan Malik, both with master's degree in business administration from Wharton School, University of Pennsylvania, in 2002, eClerx Services provides data analytics and customised process solutions to global enterprise clients from its offshore delivery centers in India. Data analytics, operations management, data audits, metrics management and reporting services are offered to clients in the financial services, retail and manufacturing industries. This process is also termed as knowledge process outsourcing (KPO).

Employing about 1,300 people with operations in India, the UK, the US and Ireland, eClerx Services has three delivery centers in Mumbai: one at Sewri and two at Ghatkopar. The three have an aggregate capacity of about 1,035 workstations. Clients include more than 15 `Fortune 500' companies including leading personal-computer (PC) component manufacturers, one of America's largest cable companies, a number of global investment banks and some of the world's largest commercial banks.

The present public issue of Rs 101 crore in the price band of Rs 270 to Rs 315 per share comprises 8.90 lakh equity shares of Rs 10 each offered for sale and fresh issue of 23 lakh (at the higher price band) to 28.5 lakh shares (at the lower price band), depending on price discovery. Expansion and acquisitions will require Rs 50 crore and the balance will be used for the general expenditure.

Strengths

• Has been enjoying multi-year partnership with the some of its largest clients including leading global corporations. Gets a high percentage of new work through reverse enquiry from existing clients. Has shown strong growth in its revenue and net profit over the last few years. Over the period beginning from financial year ending March 2004 (FY 2004) to FY 2007, revenue grew at CAGR of 58% and profit after tax (PAT) at CAGR of 113%. The Indian business process outsourcing (BPO) / KPO industry has also shown an annual growth of more than 50% over the last five years.

• Has three delivery centers in Mumbai with aggregate capacity of about 1,035 workstations. Entered into a memorandum of understanding with DLF Akruti Info Parks (Pune) for 75,000 square feet and a seating facility of 900 workstations as part of expansion. The first phase is expected to be operational in the March 2008 quarter (Q4) of FY 2008, with the remaining capacity to be made available in FY 2009. Intends to set up additional facilities in Chennai, National Captial Region (NCR), Pune and Mumbai. Explores options for acquisitions and strategic investment opportunities in companies with specific domain expertise operating in the US and Western Europe to expand the scope of existing services and add new clients/ geographic markets.

Weaknesses

• A substantial portion of the revenue comes from a small number of clients. The five largest clients accounted for more than 86% of the total income in the six months ended September 2007.

• Operates in an industry with very high attrition rate. The attrition rate was 37% in FY 2007. As a customised solution provider with high complexity of programs, has to incur high cost on specialised and critical training of employees.

Valuation

The rupee appreciation has impacted performance in recent past. Financial performance was good in FY 2007: revenue was up Rs 86.12 crore over FY 2006, with operating profit margin (OPM) 400 basis points (bps) down to 50.2% over FY 2006) and profit after tax (PAT) 69% higher to Rs 40.52 crore . However, the top line increased 16% on an annualised basis to Rs 50.15 crore, OPM dipped 1,100 bps to 39.2% and PAT down about 19% to Rs 16.47 crore in the six months ended September 2007 (H1) over the same period in 2006. The main reasons for such adverse performance was the significant appreciation of the rupee against the US dollar and increase in employee and personnel cost to 34.4% of revenue in H1 of FY 2008 from 28.50% of revenue in FY 2007.

At the lower band of Rs 270 per share, P/E works out to 15.9 times the annualised EPS of Rs 17.0 for the six months ended September 2007 on post-issue equity of Rs 19.40 crore. At the upper band of Rs 315 per share, P/E would be 18 times the annualised EPS of Rs 17.5 on post-issue equity of Rs 18.87 crore for the six months ended September 2007. There is no listed comparable peer KPO company. However, Firstsource Solutions, a major player (almost 10 times the size of eClerx Services and growing at a face pace) in the BPO industry, is trading at P/E of 15 times its annualised consolidated EPS.