A league apart

IPO REVIEW/ eClerx

The age of information has not just flooded us with a vast amount data but also brought along a number of ways in which one could use data meaningfully to one's advantage. While large corporations realised the importance of data, the outsourcing and consulting players caught hold of the idea to turn it into profitable business models.

eClerx Services is one such knowledge process outsourcing (KPO) business from India, which jumped on to the bandwagon early on, to provide data analytics and customised process solutions to global enterprises. eClerx was established in 2000, and has grown by leaps and bounds to have over 15 Fortune 500 clients and achieve a critical mass in the industry.

eClerx now plans to raise Rs 101 crore via an initial public offering, which constitutes an offer for sale from its promoters P D Mundhra, Anjan Malik and Burwood Ventures of 8.9 lakh shares, as well as a fresh issue of shares priced between Rs 270-315 a share. The company aims to use the issue proceeds to carry out acquisitions, make infrastructure investments and set up additional facilities.

Analyse it

eClerx's service portfolio comprises of data analytics, operations management, data audits, metrics management and reporting services. It analyses competitive data from the day-to-day operations of large corporations by mining clients' transactions and designing process solutions for clients' specific business needs.

These processes lead to increased revenues and reduced operating costs for its clients across a variety of business functions, which include marketing, pricing, manufacturing and supply chain management. Its clientele is largely derived from industries such as financial services, manufacturing, retail, travel and hospitality.

The nature of its operations requires eClerx to have a high level of management involvement across all the functions of its clients' businesses over a multi-year time frame. The result is strong client relationships which are ongoing in nature.

However, there are two important implications of this. The company depends heavily on its few clients for a significantly large proportion of its revenues "� over 86 per cent of its revenues come from the top five clients.

On the flipside, the deep involvement of eClerx across various functions of its clients' businesses makes it difficult for its clients to exit the relationship, "That's because the nature of services provided is 'business as usual' and non-discretionary," claims Anjan Malik, promoter and director of eClerx Services.

Growth concern

As the services provided by eClerx are more complex than mere transaction processing, the company is required to employ a workforce with specialised skill-sets. On the one hand, such workforce is scarce and on the other, attrition is steep.

This is probably the reason behind the company's rising wage bill as a percentage to sales, which has gone up from 26 per cent in FY06 to over 33 per cent in H1 FY08. Selling and administrative expenses too are on a rise, as the company dabbles its feet into new industry verticals in order to expand its footprint.

This coupled with a steep appreciation in rupee against the dollar has eroded the company's operating profit margin by almost 1500 basis points from 54 per cent in FY06 to 40 per cent in H1 FY08. 
 

NUMBER CRUNCH
Rs crore	FY06	FY07	FY08E*
Revenues	47.2	86.1	100.4
Operating profit	26.1	43.4	40.8
OPM (%)	54.7	50.6	40.6
Net profit	24.0	40.5	32.1
NPM (%)	50.3	47	32
EPS (Rs)	14.5	24.4	NA
EPS (Rs) @ Rs 270	NA	NA	16.5
EPS (Rs) @ Rs 315	NA	NA	17.0
P/E (x) @ Rs 270	18.6	11.1	16.4
P/E (x) @ Rs 315	21.7	12.9	19.1
* annualised

The net profit margin too has narrowed consistently from 50 per cent in FY06 to 32 per cent in H1 FY08. This is likely to go down further with the introduction of minimum applicable tax of 12.5 per cent from FY09 onwards. Again, eClerx is at a higher risk from the depreciating dollar as over 70 per cent of its revenues come from the US, while about 25 per cent from the UK and Europe.

The company has, however, not disclosed information about the onsite and offshore proportion of its work. Further, other operating metrics such as utilisation and attrition rates too are not available.

Valuation

eClerx will be the first pure KPO outfit to list on the bourses, and hence, there are no strictly comparable peers. However, from the broader IT enabled services spectrum, it could be pitted against BPO companies such as Firstsource Solutions. At about 16-19 times its estimated FY08 earnings, eClerx appears to be reasonably priced, compared to its BPO peers. Crisil has rated this IPO three on five indicating average fundamentals.

However, the relatively new business model and the lack of information on a number of operating metrics make it difficult for analysts to estimate the company's cash flows. While high dependence on the US leaves the company vulnerable to a slower top line and bottom line growth in the event of a slowdown in the US and IT budget cuts, the rising rupee too is not likely to spare the company's margins. The key to the prosperity of eClerx remains in sustaining its profitability. Investors with a slight appetite for risk may want to place their bets.

Issue opens: December 4, 2007
Issue closes: December 7, 2007