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EClerx - High Quality Midcap IT


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  • BSE and NSE listed Intrasoft technologies is another e-commerce company with low base($13-million market cap) and unknown look interesting but making some losses like flipkart and snapdeal in online shopping division. It is good only for long term and patience investor.Venture Capitalist Intel Capital is investor of Snapdeal . They have also invested (around 12% holding) in Intrasoft technologies and sees good future of their fast growing online retail shopping 123stores dot com in USA and likely to launch first in Canada then in India. Very soon like Intel some of the other Venture Capitalist investor of FlipKart and Snapdeal like Yuri Milner’s DST Global , Tiger Global, Naspers , Iconiq Capital , Accel Partners, Morgan Stanley Investment Management ,Singapore sovereign-wealth , Nexus Venture Partners , Indo-US Venture Partners ,Bessemer Venture Partners , Kalaari Capita and Qatar Investment Authority will have eye on Intrasoft technologies
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EClerx - High Quality Midcap IT

  1. 1. EClerx Limited - Huge Opportunity in a Well managed Company
  2. 2. Content Index • Redington India – Investment Snapshot :- Slide #3 • Industry Opportunity – An Overview:- Slide #6 • Redington India – Business Overview :- Slide #11 • Investment Rationale :- Slide #19 • Redington India – Financials:- Slide #28 • Concerns & Reasoning :- Slide #30 • Conclusion :- Slide #33 “ Specialists in discovering Multibagger stocks “
  3. 3. EClerx Ltd – Investment Snapshot (as on January 26, 2012) Recommendation :- BUY Maximum Portfolio Allocation :- 5-7 % Investment Phases & Buying Strategy 1st Phase (Now) of Accumulation :- 70% Current Market Price – Rs. 640 Current Dividend Yield – 2.67 % Bloomberg / Reuters Code –ECLX IN/ ECLE.NS Current Accumulation Range :- 630-680 Rs EClerx is a Long Term Investment Opportunity. We are completely convinced about the quality of its Management and its Business Model. We advice Investors to take a 70% Exposure to the Stock at current levels and Add more later. This Stocks has the Potential to be a Core Portfolio Stock. Core Investment Thesis : EClerx’s biggest strength has been its Management and their Track record. While future is difficult to predict, we can take snippets from past to judge Future better. Past record of EClerx says that the stock is a Wonderful Investment opportunity and Intelligent Investors should not miss this. BSE / NSE Code – 532927 / ECLERX Market Cap (INR BN / USD Mn) – 20.25 /376.6 [1 USD – Rs. 53.77] Total Equity Shares [Mn]– 29 Face Value – Rs. 10 52 Week High / Low – Rs. 910 / Rs. 571 Promoter’s Holding – 53.78 % Institutional Holding – 35.02 % “ Specialists in discovering Multibagger stocks “
  4. 4. Key Investment Highlights 1.) Growth Rate :- The company has been growing at over 40% over the last many years. While this Revenue Growth is difficult to sustain, it can certainly grow at decent levels. 2.) Quality of Management :- The promoters of this company are Well educated and connected. People who are in touch with these guys, vouch for their impeccable Quality. 3.) Track Record :- The company's track record in Scaling up its business has been tremendous. There have been very few players who have scaled up their Business so fast and Efficiently. 4.) Dream Financial Parameters :- Company in spite of growing in size, has been consistently improving its Return Ratios. Currently its Return on Equity is > 50% and ROIC > 100% which is very rare in an Investee company. 5.) Size of the Opportunity :- The company is operating in a space where Indian companies have significant Moats and they are Globally competitive. The Size of the opportunity is Huge and companies which can scale their Operations well will become Billion $ Organizations. 6.) Differentiation (or) Moat :- The biggest problem in this sector has been the differentiating Factor between various vendors and we believe that this company through its Efficient Operations/ Technology backbone/ Processes has been able to carve out a Niche for itself. 7.) Cash Generation :- Company with Operating Margins in excess of 40% and low CAPEX needs, generates significant amounts of Cash flow every year. We believe that company with Stable margins will churn out huge Cash flows consistently. 8.) Capital Allocation :- The Management has been very good capital allocators. Company has a dividend payout ratio of over 45% and even in Inorganic growth has been rational to deploy cash. 9.) Robust Clientele :- The company has a very Robust Clientele and best part is that, most of it are Repeat Clientele which speaks volumes about Service quality. Account Mining and New Accounts are significant opportunities for expanding the company's Business. 10.) Future Potential :- With the Rupee at 55 to a $, the company's competitiveness in the Global Markets is huge and is now seen as a Sun-Rise sector. We expect this Mega Trend to continue and benefit this company in a Huge Way. “ Specialists in discovering Multibagger stocks “
  5. 5. Industry Opportunity & Potential - An Overview “ Specialists in discovering Multibagger stocks “
  6. 6. What is a KPO ? Type of activity Illustration - Investment research Equity and financial research and analytics - Financial modeling · Credit risk management · Valuation of companies - Market analysis Business and market research and analytics - Data mining · Report preparation · Customer analytics Engineering and design services Pharmaceuticals research outsourcing - Very large scale integration (VLSI) design · Simulation · Chip design · Vehicle design support · Prototype development - Offshore drug discovery - Clinical research Functions of a KPO • Indian IT sector is a major contributor to the growth of the country with revenues of USD 98 Bn and is all set to cross the milestone of USD 100 Bn in FY12. There is a strong Growth potential for the Sector. • Within the global outsourcing industry India was able to increase its market share from 51% in 2009 to about 58% in 2011 highlighting the country’s competitiveness. • As a proportion of national GDP the sector revenues have grown from 1.2% in FY1998 to about 7.5% in FY2012. Still India continues to be a marginal player with Potential for increasing its Global share considering the inherent advantages which India has in IT. “ Specialists in discovering Multibagger stocks “
  7. 7. Outsourcing Market • The domestic hardware market comprises of Desktops, Laptops, Printers , Storage, Networking Peripherals. The Indian IT hardware market is estimated at USD 13 Bn in FY2012. • Growing Infrastructure requirement in public sector , capital intensive nature of manufacturing firms and increasing need for modernization have propelled hardware industry growth in India. Sectors such as communications and media , Financial services and healthcare are expected to drive the next set of growth in IT hardware market. • Growing disposable income , increased corporate spend on IT and transformation of IT hardware from an aspiration to an utilitarian need has resulted in increased penetration of hardware products. • Low cost products like Aakash Tablet along with other State subsidized Computers are also driving demand for hardware products. “ Specialists in discovering Multibagger stocks “
  8. 8. Huge India Advantage • Rupee @ 54. • These structural growth opportunities coupled with Huge spend on Technologies across Globe enables strong Business opportunities for distributors of these products. “ Specialists in discovering Multibagger stocks “
  9. 9. Strong Growth Drivers – Demand Side Skills/ capabilities Language Business continuity Responsiveness Risks Regulatory constraints KPO is all about knowledge arbitrage. India, the dominant KPO destination, is facing a shortage of skilled professionals. Financial institutions should explore countries with an adequate pool of skilled finance resources. Countries that possess the depth and quality of KPO skill sets and nonEnglish linguistic capabilities, are well positioned to commence offerings. High systems and applications availability are a critical requirement of the financial services Industry. KPO providers may need geographical spread to provide adequate business continuity. KPO providers having near-shoring and on-shoring capabilities for their clients are deemed more responsive. Competitive pressures are expected to drive KPO providers to set-up delivery centers closer to client-locations. Financial institutions are normally wary of using one provider for all services unless part of an internal captive operation. The nature of KPO work lends itself to a multi-sourcing strategy, using multiple vendors to deliver specific activities. Clients cannot abdicate their regulatory and legal compliance responsibility. Some regulatory constraints prohibit the transfer of certain work offshore. This is expected to force the leading KPO providers to expand their geographical footprint to become more local to clients, and become more intimate with their clients’ regulatory and legal constraints. “ Specialists in discovering Multibagger stocks “
  10. 10. Strong Growth Drivers – Supply Side Skills shortage The KPO industry appears to be driven by access to the breadth and depth of talent. The demand-supply gap for qualified resources in India, currently the dominant KPO destination, is expected to force KPO providers to find new delivery locations with depth and quality of talent required for KPO activities. Risk diversification (hedging) Service providers cannot provide services solely from one single location or country. In order to maintain business continuity during adverse circumstances, KPO providers have to diversify globally to reduce their risk exposure. Language KPO providers are expected to expand to non-English speaking locations globally, to support non-English speaking clients. Global delivery model KPO providers having near-shoring and on-shoring capabilities are deemed more responsive. Competitive pressures are expected to drive KPO providers to set-up delivery centers closer to the client-locations. Some regulatory requirements prohibit the transfer of certain work Regulatory requirements overseas. In order to tap into this extra business, KPO providers are expected to set up new global delivery centers. “ Specialists in discovering Multibagger stocks “
  11. 11. Strengths KPO – A SWOT Analysis Weakness Large talented Pool Immoral and unethical practices n handling client data Quality of IT training Low cost Labor Rising wages Uneven development in infrastructure requirements due to raising realty prices Success of BPO's Inadequate IPR protection in India Good Knowledge of Project management Skills Billing rates are higher as compared to BPO's Supportive Government Policies Many new areas of specialization are covered Consideration to ISO standards like ISO 900x & Six sigma Billing rates are lower compared to other countries Opportunities Threats Increasing domain expertise Non retention of talent More areas of specialization can be added Expected labor supply growth as jobs grow faster than the workforce Ample opportunities for SME's “ Specialists in discovering Multibagger stocks “
  12. 12. EClerx India – Business Overview “ Specialists in discovering Multibagger stocks “
  13. 13. Key Highlights Huge Growth Opportunity Clean Balance Sheet EClerx has a huge Growth opportunity in the form of a Large Global trend of Labor shifting from Developed economies to Low Cost locations, especially to large pool of Trained manpower countries like India. EClerx has a robust Balance sheet with Zero Debt and Healthy Cash balance of over 185 Cr Rs which will be utilized for growing the business. Company’s Working Capital cycle is also moderate with faster Cash Conversion enabling higher PAT. Addition of New Services EClerx Ltd EClerx has been consistently adding new Services to its Portfolio enabling it to grow. Also company has been doing Acquisitions to enter new segments where there is potential. Leveraging Technology Strong Clientele EClerx has been able to leverage technology and automate several processes which helps it to generate higher margins when compared with its Peers. Also the company has been more Efficient in terms of costs which has helped it to grow without sacrificing Margins. EClerx has a strong line-up of satisfied Clients who have been consistently giving more work to the company. Client Mining has been one of the best things of EClerx. Also new Services helps the company to target new clients. “ Specialists in discovering Multibagger stocks “
  14. 14. EClerx – Service Offerings • Use contents of Page 3 of Investor Presentation “Industry Specialized Complex and Core services here” “ Specialists in discovering Multibagger stocks “
  15. 15. A Brief History “ Specialists in discovering Multibagger stocks “
  16. 16. EClerx’s Sweet Niche “ Specialists in discovering Multibagger stocks “
  17. 17. Robust Clientele • Redington had acquired a NBFC Easyaccess which provides financial support to partners as well as enabling them to earn other income. It has capitalized the NBFC well for future growth. • Redington also provides post sales service for IT products with owned as well as partner service centers in domestic and overseas market. • All these have not only opened new Revenue sources for Redington, but also to satisfy its existing Clients and add new Clients through differentiation. “ Specialists in discovering Multibagger stocks “
  18. 18. Strong Performance Track Record • Redington India has been able to replicate its Indian success story across the Globe by entering several Emerging markets. • Its success across various Markets, just proves the strong Systems and Process which the company follows. • More than 50% of its Revenues come from Overseas and around 46% of its revenues come from the Fast growing “ Specialists in discovering Multibagger stocks “
  19. 19. Inorganic Growth • Redington’s Customer profile is quite robust with almost all biggies in the Industry. Still the company’s largest customer continues to be HP with a substantial Revenue share of over 30%. • But the best thing has been the fact that HP share of revenues has been consistently decreasing from over 50% just 5 years back. This reduces Client Concentration risk and this trend is expected to continue. • Redington with its size and scale is now in a position to accept Vendors on its will. Also its size enables it to mitigate negatives of any Vendor moving out. This can be seen from the fact that, Redington which used to distribute Nokia’s products in Africa had recently left and moved on to Samsung. More importantly this has also resulted in Market Share of Nokia going down and Samsung moving up. This kind of strength brings in new Vendors which contribute to both growth and reducing dependency on existing clients. “ Specialists in discovering Multibagger stocks “
  20. 20. Investment Rationale “ Specialists in discovering Multibagger stocks “
  21. 21. Differentiation (or) Competitive Advantage People and Knowledge Management Focus on developing tacit institutional knowledge Tacit product + industry knowledge and specific process training development 2,500+ training courses and tests covering products, process, systems, soft skills; instruction checklists Manager training focused on ‘connecting the dots’ PCMM Level 3 processes reduce ‘people-dependence’; improves quality and speed of transitions Reduces time to effectiveness of new employees hence mitigates attrition impact Allows cross-training and reduces reliance on individual superstars; effectively broadens hiring pool At transition, focus on documenting specific process steps, internal training provides critical background Process Design and Automation Quality, Governance and Risk Management Highly Resilient, Secure and Flexible Delivery CMMI Level 3 certified technology development team critical enabler to process improvement Process step simplification + embedding of business logic into tools and checklists; reduces expert need Manifests in applications such as workflow, reconciliation, dashboards tools Team provides business analysis support to client technology teams Help clients systematically improve applications using our metrics as diagnostics Some applications deployed by clients to dramatically streamline processes e.g. reconciliation engines Six Sigma-based quality initiatives BPI –employee generated process improvements, BPI forum / QPI –quality audit (conducted by central team) Governance structure Onshore engagement for relationship governance; MBR / QBR identify process improvement opportunities Risk assessment framework Daily issue logging and management broadcast of program health; FMEA risk assessments ISO 27001 certified for information security IS governance and polices continually benchmarked to industry best practices Operating window spans EMEA, US and Asia-Pacific due to the nature of our clients’ business Flexibility to provide service from India delivery centers, client premises or a combination of both BCP managed by simultaneous delivery across four facilities and two cities “ Specialists in discovering Multibagger stocks “
  22. 22. Overcoming the Challenges • Redington’s historical performance has been a healthy rate on a 4bn $ base. “ Specialists in discovering Multibagger stocks “
  23. 23. Recent Performance Snapshot • Inventory risks can also be identified by looking at the past Historical performance. Never in the last 10 years has write-down due to Inventory been more than 0.4% which is highly critical in SCM. “ Specialists in discovering Multibagger stocks “
  24. 24. Margin + Growth Levers • The company’s revenues during the past 5 years has grown at a CAGR of about 18.17 % driven by presence in emerging economies which recorded strong growth in IT and Non IT segments. • The company has recorded impressive ROE of around 20% during the past five years which provides insights into the fundamentals of the company. • In spite of being in a Cash heavy business, company has been able to distribute decent dividends over the years. Scale will add Margins • Company has been good capital allocator which can be seen from the consistently high ROCE’s of the company. Standalone ROE provide the internal strength of Redington’s Indian distribution arm. “ Specialists in discovering Multibagger stocks “
  25. 25. Healthy Financial Ratios • Write About Debt Free balance sheet and low Debtor days. • Company also has several new Revenue sources which will grow over a period of time like Servicing, Spares, Supply Chain Management etc which are generally ROE accretive. “ Specialists in discovering Multibagger stocks “
  26. 26. Management Quality V. K. Mundhra, Chairman PD Mundhra, Executive Director Anjan Malik, Director Mr. V.K. Mundhra, 68 years, is the Chairman of the Company. He joined the Company in March, 2000. He holds a bachelor’s degree in commerce from St. Xavier’s College, Calcutta. Mr. Mundhra has over 35 years of varied business experience having successfully run and looked after large scale manufacturing units in the field of steel, engineering and chemicals Mr. PD Mundhra, 39 years, is the Executive Director of eClerx Services Limited. Mundhra has over 18 years experience in the manufacturing and financial service industries, ten years in capital market and the KPO / BPO sector. Mundhra brings with him a wealth of experience from his tenures in Lehman Brothers’ investment banking division and the corporate treasury at Citibank Mr. Anjan Malik, 42 years, is a Director of eClerx Services Limited and the Executive Director of its on-shore subsidiaries. He has over 20 years experience in investment banking, global markets sales and trading, consulting and technology consulting. His last 10 years have been devoted to the KPO / BPO sector • Redington’s operating income is expected to be muted in FY13 with an increase of about 10% while FY14 revenues are expected to grow by 14.59% YoY. • Redington’s operating margins were around 3% till FY11 but has scaled to 5.4% in FY12. We expect this With global MNC’s vying with one another to tie up w “ Specialists in discovering Multibagger stocks “
  27. 27. Financials “ Specialists in discovering Multibagger stocks “
  28. 28. Earnings Projection • Redington’s operating income is expected to be muted in FY13 with an increase of about 10% while FY14 revenues are expected to 17,474.80 21,192.99 23,900.00 27,387.00 grow by 14.59% YoY. Financial Parameters(INR Cr) FY11 Operating Income Operating Profit FY12 FY13E 457.37 604.37 Interest 86.09 152.04 Depreciation 24.56 31.03 PBT 351 450.33 Tax 86.23 111.29 PAT 264.77 339.04 FY14E 728.95 835.3035 • Redington’s operating margins were around 3% till FY11 but has scaled to 5.4% in FY12. We expect 179.25 205.4025 this margins to be maintained for FY13 and FY14. 35.85 41.0805 • Redington has been continuously increasing its share of revenues 542.85 617.8205 from Non- IT business and we expect this trend to continue in 135.7125 154.46 the medium term. This will not only enhance its margins but also 407.1375 463.37 de-risk the company’s business. Diluted EPS 6.68 8.51 9.93 Cash EPS 7.26 9.28 11.11 • With global MNC’s vying with 10.78 one another to tie up with Redington the company’s 12.66 positioning will move up. Specialists in discovering Multibagger stocks “
  29. 29. Concerns & Reasoning 1.) Slowdown in the Indian Economy: The growth in the Indian economy is expected to drive the company’s top-line. Any slowdown in the economy will lead to decline in demand of IT & non IT business and will have adverse effects on Redington’s growth prospects. Slowdown in Discretionary spending will also have a strong impact. 2.) Foreign currency Risk : Company has a large market share from foreign territory and hence is largely exposed to Foreign Exchange Rate risk. Any unfavorable fluctuation in the Forex rates will affect the company’s revenues. 3.) Geo-Political Risk: Currently only 2-3% of Redington’s revenues is impacted by the troubled regions (Egypt, Libya) in the Middle East but in future if the problem spreads to other regions (Saudi Arabia, UAE) then it can pose a serious threat to the company’s revenues as it derives approximately 40% of revenues from these regions. 4.) Increased Competitiveness : Considering the Margin structure with which the company operates, Increased competition will lead to strong cash flow problems. Also entry of well funded competition can drive higher cash conversion cycle. 5.) Low Free Cash Flow + Margin Compression : High Working capital needs will continuously lead to Low Free cash flow. Also considering the fact that Electronics price gradually go down, its important for the company to grow its Volumes to protect Margins. “ Specialists in discovering Multibagger stocks “
  30. 30. Conclusion “ Specialists in discovering Multibagger stocks “
  31. 31. Price Chart Share Holding % Sep 2012 June 2012 Feb 2012 Dec 2011 • EClerx after a very strong Run-Up from the depressed Promoters 21.06 21.06 21.06 21.06 FII 37.18 37.33 37.18 37.16 • We believe that the Stock is building up base for a strong Up-Move over the next few years. While the stock might not look as cheap as it was in 2009, we believe that the Risks are also far lower. Also, Earnings have grown at a tremendous pace ensuing a better Valuation. DII 9.01 9.04 9.37 8.84 prices of 2009 has been in a Consolidating range of 600-800 Rs for a long period of time. • There is Strong Institutional Investor backing for this stock. In fact reputed Investors like Sequoia Capital have a strong Share holding in EClerx. “ Specialists in discovering Multibagger stocks “
  32. 32. Conclusion We continue to believe that India has a structural Trade Deficit problem with Imports continuing to outshine Exports in the Medium Term. This will ensure Top Policy focus to incentivize Exporters and this along with a Structural trend of Depreciating rupee increases the Cost competitiveness of Good Quality exporters out of India. Hence, in a Sector like IT/ BPO/ KPO – India has several Structural advantages which along with a long track record of building Quality companies has boosted India’s brand in these sectors. In addition to India’s advantage the whole Globalization theme is improving consistently and scope for outsourced players to grow their Revenues is increasing consistently. From Cost reduction to Increased Business focus, ITES players are getting more integrated with corporate leading to several Cross Selling opportunities. EClerx is one of the few companies which have found their Niche in this huge space and scaled up their business rapidly. The most comforting factor for us in EClerx is its Top Quality management and their track record in Finding new Growth avenues and flawless execution of strategies. We believe that the company will continue to add new Service lines and grow its business consistently. Company generates huge amounts of Cash from its business and deployment has been good with Large Dividends + Meaningful Acquisitions. There are few companies in Markets which give Investors such High Quality Management + Superior Return Ratios + Decent Growth. EClerx Ltd in spite of these advantages, is trading at around 8-9X its FY-14 Earnings estimates which is cheap for a company whose ROE’s are as high as 50%. Company’s Strong Free Cash Flows along with a decent Dividend Yield will limit the downside in the Stock. While the Near Term growth prospects looks dull, the Long Term potential is getting stronger. We believe, Investors who are accumulating this stock at current levels will reap Rich Rewards over the next few years. “ Specialists in discovering Multibagger stocks “
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  34. 34. THANK YOU “ Specialists in discovering Multibagger stocks “