In a volatile economic environment, with the developed markets struggling to recover, spending on IT services has not really picked up.

Companies that deliver BPO/KPO services are less susceptible to changes in technology spends. Such services are related to cost-cutting in customer organisations and help maintain business efficiency.

eClerx Services, a mid-sized BPO and KPO player, has continued to penetrate deeper into its important segments of operation — financial services and e-commerce.

Again, the retail segment has been growing strongly for many of the large software players such as Infosys, HCL Technologies and TCS. The company is thus likely to benefit as it operates in these segments where there are substantial outsourcing opportunities.

A desirable geographic-mix, reducing client concentration and sustained customer addition are key positives for the company. Also, the acquisition of Agilyst, a back office and analytics company, has helped eClerx penetrate key markets and gain customers. Key operating parameters too have improved over the past one year.

At Rs 734, the share trades at 11 times its likely FY13 per share earnings, making it a reasonable bet for investors with a two-year horizon.

In FY12, the company's revenues increased by 38.2 per cent to Rs 472.9 crore compared with the same period in 2010-11, while net profits rose 30.5 per cent to Rs 159.8 crore.

eClerx Services’ net margins, at 31 per cent, are among the highest in the industry and certainly better than most mid- and small-tier IT and BPO companies.

Client additions on track

The company has seen revenue from its top five clients grow steadily from 2009; they now account for 80 per cent of its overall revenues. This indicates that the company has been able to mine its existing large-clients effectively.

Also, revenue concentration among a few clients has reduced for eClerx.

Its top five clients used to account for 87 per cent of revenues a year ago. So the focus has also been on adding new customers rather depending too much on a few clients.

Many small offshore players were taken off the radar when large customers reduced the number of vendors they interacted with. But eClerx has bucked this and has not seen client attrition.

In fact, the company had added 10 new customers in FY12, taking its base to 55.

Even as eClerx derives more growth from new customers, the selling and distribution costs for the company have been largely under control in the range of 12-14 per cent of revenues over the past several quarters.

It also has a healthy geographic-mix, with the US contributing 71 per cent of revenues and Europe about 20 per cent. This is a healthy blend as the US is still the largest market for outsourcing of BPO and KPO services.

Inorganic expansion

eClerx acquired Agilyst, an US-based KPO player, in April this year. In addition to helping it penetrate the US market, this acquisition gives the company more clients to work with.

Agilyst does business servicing of several US-based cable companies and is expected to deliver about $14 million in revenues for the current fiscal.

eClerx would thus be enabled to broad-base its clientele by getting into the US media industry.

Also, most of Agilyst’s workforce is based out of India, which makes for good offshore presence and, thus, optimises costs for the company.

eClerx has been able to increase its utilisation rates over the past few years. From low to mid-60 per cent levels in 2009-10, the company has been able to increase utilisation to 68 per cent now.

This suggests that volume (man-hours billed) growth has been robust for the company.

Though pricing discounts have been offered in the recent June quarter, they have not been high enough to erode margins.

eClerx has also improved its billing mix with the proportion of full-time equivalents (FTE) increasing 20 percentage points over the last couple of years to 93-94 per cent currently. This should help the company with more steady billing and annuity revenues.

Attrition, though it has declined somewhat over the past year, is still quite high at around 23 per cent. Sharp wage hikes to stem this may affect margins.

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