EClerx - High Quality Midcap IT

EClerx Limited
- Huge Opportunity in a Well managed Company

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 “

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 %


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.


Industry Opportunity & Potential
- An Overview


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.


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.


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.


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.


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.


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


EClerx India – Business Overview


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.


EClerx – Service Offerings

• Use contents of Page 3 of
Investor Presentation “Industry
Specialized Complex and Core
services here”


A Brief History


EClerx’s Sweet Niche


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.


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


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.


Investment Rationale


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


Overcoming the Challenges

• Redington’s historical performance has
been a healthy rate on a 4bn $ base.


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.


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.


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.


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


Financials


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 “

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.


Conclusion


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.


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.


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EClerx - High Quality Midcap IT

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