Description
Investment summary
eClerx Services is a mid-cap ($220mm market cap) Indian company that evokes a "ick" reaction from investors in India. It is a hated stock, falling nearly 60%+ this year and over 74% over the last 3 years.
At current stock price of INR 425, the stock is at nearly 10 year lows, although both revenues and profits have grown since then.
As of March 2019 AR, cash & eq + investments was INR 7.4 billion (US$105mm), which means EV of roughly $115mm or net cash represents nearly 50% of market cap. The company has had a consistently net cash balance sheet (and a growing cash pile), which today represents about 50% of market cap.
Over the last 5 years, FCF has been an average of $32mm, with the low being $22mm last year. This means the FCF yield is between 20% - 30%. For every $1 in free cash eClerx has generated, it has paid out 2/3rds in dividends and repurchases. In the latest quarter, the company completed aINR 2,620mm buyback.
At a headline, eClerx has generated positive operating and free cash for 16 years, while growing revenue each year in local currency terms. The company has paid dividends for 15 years typically a payout of 30-40% although this % has reduced in recent years as eClerx has increased its share buybacks meaningfully.
The pessimism in eClerx stems from several reasons:
i) Mr. Market is sceptical of the reinvestment opportunity for its excess cash into growth opportunities, given India is a growth market. For instance, in the last quarter, revenue growth was 4.5% with onshore growing 14% and offshore at 2% YoY,
ii) annual revenue growth has decelerated to low single digits from the heydays of double digit growth and in some quarters, negative. Investors have extrapolated the tepid revenue growth into perpetuity.
iii) operating margins as a result have declined to high teens from nearly 30%
To be clear, this is not a great company at a great price that is likely to be a high probability of compounding for several years. Yet, at current prices, eClerx presents opportunity to investors to delve further into a business trading at attractive free cash yields.
From its filings, there are a few points that investors should consider:
eClerx completed FY 2019 with USD 201mm in revenue – its highest ever
The company's top ten client concentration decreased for the first time below 70% in the last 2 quarters. This means that the firm's risk profile has improved as the stock price has declined, revenues have gone up.
The company's over $1mm and $5mm client list as of the recent quarter is 21 and 6
a fifth of the firm’s revenue now derives from outside India delivery
eClerx has been focusing on more advanced technology projects during the year, including machine learning and robotics process automation services to new clients
Notwithstanding the above cheap valuation and the points listed above, it is difficult to call the bottom on eClerx and it is possible that the stock could remain a value trap, if revenue growth does not materialize. However, the free cash generation, dividends + buybacks and a strong balance sheet provide downside protection for value investors
Business Description
eClerx is a specialist KPO / BPO (Knowledge and Business Process Outsourcing) company providing business operations services to industries including financial services firms, online retail, interactive media, luxury brands and entertainment, high tech and industrial manufacturing, travel and leisure and software vendors, through operational support, data management and analytics solutions. The company was founded in 2000 and employs more than 9,500 people globally.
The company's 4 core business segments are:
Financial markets: Services include: trade processing support, reconciliation and controls, expense management, reference data maintenance, margin/exposure management, accounting and finance, contract risk review, metrics/reporting, etc. This segment has witnessed slowing growth due to automation and efficiency, and the company has been investing here.
Customer Operations: services include customer interaction monitoring, chat end-user services, 3rd party vendor monitoring and analysis, etc.
Digital: key industry verticals in Tech, Retail, Fashion/Luxury and Travel. services include: online content management, data management and reporting, conversion rate optimization, marketing campaign, digital and marketing analytics
Research and development : This Centre does research using technologies that include Big-data, Analytics, Machine Learning & Robotics Process Automations and has commercialised products including flagship Robotics platform Roboworx®, Fleetstar, DocIntel and Compliance Manager
Financials (in INR)
Below are the last 10 years of net income, operating and free cash flow figures. As can be seen, eClerx is a profitable business and cash flows are inline with accounting earnings. The company's free cash has been consistently positive, even though declining in the most recent year.
| Year |
Net income |
Operating Cash flow |
Free cash flow |
| 2019 |
32.9 |
30 |
22 |
| 2018 |
44 |
47 |
40.5 |
| 2017 |
55 |
48 |
43.6 |
| 2016 |
52 |
63 |
39 |
| 2015 |
37 |
39 |
29 |
| 2014 |
43 |
32.5 |
25 |
| 2013 |
32 |
28 |
8.3 |
| 2012 |
31 |
33.8 |
28.9 |
| 2011 |
27.5 |
22.9 |
17.5 |
| 2010 |
16 |
13.5 |
11.5 |
| 2009 |
12.2 |
8.2 |
5.6 |
Management
PD Mundhra, 47 years, co-founder, Wharton MBA grad owns 25.1%
Anjan Malik, co-founder, previously worked at Accenture and Lehman, owns 25.1%
Other family members/associated parties own another 5%
Risks to thesis
Value trap although downside risk given free cash and valuations seems low unless there is a further significant decline in earnings
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
Increase in revenue growth in the next 2 years to high single digits
Take over candidate
Share repurchases
Value is its own catalyst