Thirst for business knowledge will fuel growth

eClerx Services Ltd (eClerx) is a Mumbai-based knowledge process outsourcing (KPO) service provider with domestic and global clients. It provides data analytics and customised process solutions through cost-effective combination of people and technology. eClerx specialises in financial services and retail & manufacturing verticals and has added a new travel & hospitality vertical. It also provides readymade process outsourcing and management services, along with a multitude of data aggregation, mining and maintenance services. It enjoys multi-year contracts and is in the Forbes magazine’s list of best ‘under a billion’ companies in Asia-Pacific.

Business: Information and knowledge are a business’ key needs. Compilation of market, product, competitor and other data and its analysis to gain knowledge and utilise it well is essential. KPO refers to such activities and process solutions related to information assimilation, analysis and interpretations.

eClerx devises solutions addressing common problems faced by industry. It services various parts of the same organisation by understanding the client’s business as a whole. Working from its own facility, it services customers on their processes, systems and database. This model helps provide multiple services related to one service for the same customer. The number of customers it services has more than doubled from 22 at the end of FY07 to 50 at the end of FY08. eClerx operates from its three offices in Mumbai. Its 380-seat Ghatkopar office was added in FY08. It took possession of its Pune SEZ facility in December 2007 and started operations in April 2008 with a seating capacity of 1,000. It also has marketing offices in Austin, London and New York. Its total headcount stands at 1,800. North America and European Union dominate its revenues from various geographies. In FY08, North America contributed 66.9% to total revenues and Europe 29.8%, while 3.3% came from Asia-Pacific. Billing is done mainly in dollars.

Investment rationale: The global KPO industry is expected to grow to $17 billion by 2010. India has large number of English-speaking professionals. It has the world’s second largest pool of engineers, scientists and IT professionals. Every year, India adds 3 million graduates and professional degree and diploma holders. With this and cost arbitrages, 70% of KPO work will be outsourced to India. This opens doors for eClerx.

To grow in the European market, eClerx acquired UK-based Igentica Travel Solutions Ltd in FY08 and added 28 large customers through the acquisition. It also added a new vertical, travel & tourism. Igentica had a sales figure of £800,000 at the time of acquisition. This subsequently grew to £1.2 million. The Pune SEZ started operations with 400 people and is eyeing a headcount of 1,200. This unit will strongly aid eClerx’s growth. The company’s customer count has grown from 50 in the beginning of the fiscal to 57 at the end of the first half. Three customers were added in the second quarter and this kind of client addition is expected to sustain.

From its IPO in December 2007, it has Rs 22 crore for acquisitions, Rs 10 crore for new facilities and Rs 16 crore for other purposes. Of the Rs 180 crore it marked for infrastructure, it has used 80% for the Pune SEZ. It has Rs 87.88 crore as cash on its books and has no debts.

eClerx is eyeing inorganic growth opportunities to add new verticals, facilities and clients. Executive director P D Mundra said in the next 6-12 months, with valuations becoming attractive, any good opportunity would be utilised.

Concerns: Unprecedented liquidity crisis is seen across the globe, leading many financial, banking and other corporates to undergo consolidation. Capacity reductions will lead to demand reduction. The coming months are crucial for European and US companies. eClerx has major stakes in financial, retail and manufacturing verticals. Its revenue exposure to North American and Europe is massive. But it has multi-year deals with customers and many contracts don’t even have exit clause for customers or successors. So eClerx will be impacted only in terms of growth which may be subdued. Demand growth will return in medium to long term.

Valuations: eClerx posted an impressive topline of Rs 49.09 crore, which grew a robust 44.4% year-on-year in the September quarter. Net profit at Rs 14.08 crore also surged 94.41% y-o-y. It would have grown more if not for the write-off of $1 million of receivables due to bankruptcy filed by a client in the financial space. But eClerx was identified as a critical vendor and the contract was assigned to one of the purchasers. eClerx received a cure amount of $0.52 million against outstanding receivables, which will reflect in Q3 results. Write-offs also affected margins.

Going forward, demand and growth slowdown are expected in near term. But the new Pune SEZ, expansion plans, Igentica integration, addition of a new vertical and new clients and opportunities in compliance-related services will all boost growth eventually. These will help eClerx beat the estimated growth of 20-25% by IT-ITeS firms. Despite near-term concerns, it’s a good long-term bet for investors.

Disclosure: The author does not hold any share in the company