eClerx Buy As Long Term Story Intact

eClerx’s Q1FY13 results were ahead of estimates as revenue of USD28.1mn was up 10.1% QoQ (incl. Agilyst) vs our estimate of USD27.7mn. On organic basis, revenue grew 1% versus our estimate of flat revenue. EBITDA margin, at 39.8%, surged 320bps due to favourable currency. Agilyst consolidation fuelled growth though expansion in the organic business came as a positive surprise as the management had earlier hinted at delays in decision making to impact growth H1FY13. Although, uncertainty in BFSI remains an overhang on revenue growth, we believe the long term story remains intact for eClerx as clients continue to focus on increased offshoring. At P/E of 10.9x/9.6x FY13E/14E, maintain ‘BUY’.

Revenue growth, margin expansion surprise

eClerx posted a robust USD revenue growth of 10.2% on a consolidated basis (incl. Agilyst ~9.2%) and 1% on an organic basis (1.5% in CC). EBITDA margin saw an increase of 320bps QoQ largely owing to currency benefit. PAT at INR493mn was significantly higher than our and street estimates of INR423mn due to increased other income and lower tax rate of 17.6% (19% in Q4). North America saw a major traction as it grew 11.8% (incl. Agilyst) while Europe continued the downtrend as it declined for the fourth consecutive quarter by 4.2% in Q1FY13.

Agilyst, higher offshoring to drive growth in FY13

In Q1, Agilyst contributed revenue of USD2.3mn (two months’ revenue). On a full year basis, we expect Agilyst to contribute ~15% to the revenue growth while organic business to post a YoY growth of 9% which implies a CQGR of 2% for the remaining quarters of FY13. Also, Agilyst results reduce dependence on top five clients (contribution of top five is down to 80% in Q1FY13 vs 87% in Q4FY12)

Outlook and valuations: On growth path; maintain ‘BUY’

Even as the macro uncertainty, especially in BFSI, remains an overhang on revenue growth, we believe the long term story is well intact for eClerx as clients continue to focus on cost reduction, leading to increased offshoring. We are revising our FY13 USD revenue growth to 24% versus 20% earlier, leading to 2.3% upgrade in FY13 EPS estimate to INR64.5. At CMP of INR703, the stock is trading at P/E of 10.9x and 9.6x FY13E and FY14E earnings, respectively. We maintain ‘BUY/SO’ rating.