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eClerx Services: A flat end to a strong year - Views on News from Equitymaster

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eClerx Services: A flat end to a strong year
May 29, 2014

We present herewith the March 2014 quarterly result analysis of eClerx Services.

Performance summary
  • Consolidated net sales fell by 1.2% quarter-on-quarter (QoQ) during the fourth quarter of the financial year 2013-2014 (4QFY14). For the full year sales were up 27.3% YoY.
  • In US dollar terms, sales were flat sequentially but for the full year were up by 14% YoY.
  • The operating i.e. EBITDA (Earnings before Interest, Tax, Depreciation & Amortization) margin improved sequentially to 42.8% during the quarter as against the 40.5% seen during the previous quarter (3QFY14). This was due to a significant 9% QoQ reduction in employee costs.
  • Largely due to the good operating performance, the profit before tax (PBT) increased by 2.9% QoQ.
  • The company's tax rate at 22.8% was marginally lower on a QoQ basis. The net profit came in at Rs 645 m, up 3.4% on a QoQ basis.

Consolidated financial snapshot
(Rs m) 3QFY14 4QFY14 Change FY13 FY14 Change
Net sales 2,195 2,169 -1.2% 6,605 8,410 27.3%
Expenditure 1,307 1,240 -5.1% 4,038 4,874 20.7%
Operating profit (EBIDTA) 888 929 4.6% 2,568 3,536 37.7%
Operating profit margin (%) 40.5% 42.8%   38.9% 42.0%  
Other income 6 (10)   (182) 110  
Depreciation 83 84 0.8% 255 330 29.3%
Exceptional items - -   21 -  
Profit before tax 811 835 2.9% 2,109 3,316 57.2%
Tax 188 191 1.3% 393 759 93.0%
Profit after tax/(loss) 623 645 3.4% 1,716 2,557 49.0%
Net profit margin (%) 28.4% 29.7%   26.0% 30.4%  
No. of shares (m)         30.2  
Diluted earnings per share (Rs)*         84.7  
P/E ratio (x)*            12.7   

What has driven performance in 4QFY14?
  • Region-wise, revenue growth came from Europe in 4QFY14 but due to the sluggish performance from North America, the overall revenues of the company fell 1.2% QoQ.

    Revenue break-up
    Rs m 3QFY14 4QFY14 Change
    By geography
    North America 1,624 1,605  -1.2%
    Europe 461 477  3.5%
    Rest of world 110   87  -20.9%
    Total revenues 2,195 2,169  -1.2%

  • At the operating level, the company had a good quarter. The operating margin improved by 2.3% on a QoQ basis while the operating profit itself grew by 4.6% QoQ. This was largely due to the fall in employee costs by 9% on a sequential basis. It must be pointed out that this was not due to a reduction in number of employees; rather it was due to a change in the provisioning for bonus payout to deserving employees.

  • At the net level, the bottom line increased by 3.4% QoQ. This was largely a result of the sequential improvement in the operating profit as well as a marginal decrease in the company's tax rate in 4QFY14.
What to expect?

At the current price of Rs 1,080 the stock of eClerx Services trades at a P/E ratio of 12.7 times its trailing twelve months (TTM) earnings.

eClerx has had a good FY14. In US dollar terms, sales were up 14% and only 1% of this growth was contributed by the Agilyst acquisition. This implies that the company was able to sustain double digit organic growth. The 4QFY14 performance was a little disappointing. This was due to three factors; revenues from one of the largest clients remained subdued, some of the work scheduled for the quarter had been preponed and the company's cable business division was impacted by the industry consolidation currently underway in the US.

The company completed the share buyback on 26th Feb 2014. A total of 37,623 shares were purchased at an average price of Rs 814.66 (excluding expenses).

eClerx has added 16 new clients in FY14 and the total clients billed for FY14 was 75, up from 73 last year. The company continues to reduce its dependence on its top five clients. This concentration reduced from 79% in FY13 to 74% in FY14. The company has been successfully reducing this dependence for the last three years. It is heartening to note that the company has been growing revenues from its new clients at a very fast rate (exceeding 35% YoY) for the last four quarters. This will help eClerx reduce its dependence on its top five clients even further going forward.

The company has proposed a dividend of Rs 35 per share for the full year which is approximately 48% of the bottomline. This is in line with the company's policy of paying out about half of the net profit as dividend.

eClerx continues to deliver good performance and the fundamentals of the company remain strong. However considering the risks faced by the company as well as the valuations we maintain our 'hold' view on the stock from a long term perspective.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single small cap stock comprises more than 2-3% of your portfolio.

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