Capitaline

Analyst Meet / AGM 21-May-12

Conference Call

e-Clerx

The growth in FY13 is expected to be substantially lower than in FY12, pricing to decline, but margins to be maintained

e-Clerx held a conference call to discuss the results of quarter and year ended March 2012 addressed by Mr. V.K. Mundhra, Executive Director, Mr. Anjan Malik, Director and other members of the senior management.

The topline in INR terms was affected by revaluation of FX assets; Rs 5.2 crore loss in Q4 against Rs 9.2 crore gain in Q3.

Total outstanding hedges stand at $94.3 million at average of Rs 49.1/$. Hedging program has been reduced towards end of Q4 due to anticipation of large USD outflow on account of acquisition and RBI changes has led to uncertainty, the impact of which is being analyzed to determine future hedging policy.

Total cash and cash equivalents stand at Rs 268.6 crore but payment of $24.75 million towards Agylist acquisition in April 2012 has reduced cash balance by Rs 127.9 crore.

The total payment of $24.75 million includes $15.75 million of upfront payment and $9 million in escrow towards future earn out. Payout range can range from $0 to 13 million subject to business performance to H1FY13.

The company had signed a definitive agreement to acquire Agilyst on 12^th April 2012 and the transaction was closed on 4^th May 2012. Agilyst Inc and Agilyst Consulting Pvt Ltd are now fully owned subsidiaries of e-Clerx.

Agilyst reported USD 14 million in revenues on a quarterly run rate basis and the financials will be consolidated from Q1FY13 onwards. Margins are lower as compared to that of e-Clerx since realizations are lower.

FY11 G&A costs includes non recurring goodwill write off.

There was sharp drop in EBIT margins in Q4 on q-o-q basis due to increase in onsite salary costs on account of ramp up of team included in S&M of 330bps, Rs 1.5 crore of one time expenses related to decommissioning of old facility and M&A transaction costs included in G&A of 190bps and exchange rate impact of 250bps.

There was significant improvement in DSO due to some one-off accelerated realizations but is expected to stabilize within 50-70 range.

The growth in FY13 is expected to be substantially lower than in FY12 with momentum in H2FY13.

There is smallest difference in three years between quarterly run rate and 12 months of accrual which indicates softer growth. There is uncertainty in client organizations through budget cuts, consolidation and elongated decision cycles. Clients are showing conservatism regarding outsourcing due to regulatory and political uncertainty.

Pricing is expected to decline in INR terms and may remain flat or decline in $ terms in the next couple of quarters. There would be combination of volume linked rebates as well as reduction on the back of currency movements.

However, the management expects to maintain operating margins as higher INR revenue realization will offset cost inflation.

Short term outlook is not optimistic but Medium term outlook is positive due to high focus on cost reduction, shift to low cost location in next three years, continued substantial demand for its services portfolio and large opportunity conversion with clients including those new to offshoring.

Wage hike of 12% has been offered with effect from April 1, 2012 and 3-4% to overseas employees.

Tax rate is expected to be 20% in FY13.

Other income includes Rs 3.8 crore of interest and investment income against Rs 3.2 crore in Q3.

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