KPO is targetted as 16-18 Billion US opportunity and approx 60-70% is going to be an outsource business to mainly india and other poor nations like China, Romania, Hungary etc. But here again India will have an edge due to following reasosn:

 

1) Proven model for IT,ITES or BPO - historical leverage

2) English speaking abundant manpower supply

3) Again there is no shortage of skilled manpower in diverse areas like

    medical, Legal, Marketing, analytics etc.

4) eClerx has 100% focus on KPO only, not tempting to enter into IT,ITES

    or BPO

 

Risks:

 

In KPO sector confidentiality and skill retention is the key. In IT,ITES or BPO secotr skill issues are mitigated to large extent by processes and tools but in KPO one needs a good doctor to analyse X-Rays , a sound legal knowldge for legal tasks and so on. So in one way such diversity of skill base is an issue.

 

eClerx is having following statistics:

 

CMP: 300

RoE: 36

Profit Margin: 30%

Div:  100%

Mkt Cap: 565Cr

Debt : Zero

PE: 9+

 

MCap/Sales FY09 : approx 2.5 - 3

Growth rate for last 2 yrs: 50%

 

If you have the horizone of 2-3 yrs then i expect eClerx to grow by 1000Cr.

Why you are waiting?

 

Presently company is in nascent stage and bulk of its revenue comes from top 5 customers so client concetration is another risk.

 

Evalueserve, WNS, Exl, Genpact are not listed. Infosys, TCS, Wipro do not have full focus on KPO.

 - The business model is similar to Software Services companies - linear relationship between staff strength and sales; with limited margin expansion possibilities

- Large part of KPO revenues are driven by short terms project work (5-50 days), which results in big pressure on Utilisation. In software services companies most of the the project duration 1+ year and so this is not a big issue

May not be always, suppose a KPO unit tie up with a say some hospital then work flow will be continuous....

 

 - Biggest cost component is salaries, which once the economy recovers, will increase at 10-15%, while the billing rates will decline due to intense competition

 - Given the confidentiality issue, several companies plan to setup their own captive units rather than outsourcing. Though they don't mind testing the concept through third party service providers

Yes but still the size of opportunity is huge.

 

Business and risk always come togather. Thats why we look at mgmt, their sole purpose is to mitigate the risk and generate revenue even in adverse circumstances.

 

 

All three are listed in the US and are much larger players compared to eClerx. Genpact ofcourse is the leader in this space.

 

 

I love to invest in indian scrips only. Let me know if you see better competitor for eClerx in India. In fact this is the moat or investment theme. There is no single player in KPO exclusively .

 

Points to ponder....

 

1. I assume most of the big boys (i.e. institutions), who generally drive the P/E expansion would rather invest with Genpact/WNS/EXL. It doesn't matter if these are listed in US, because for all practical purposes all the three are Indian companies.

 

2. Just a thought - Would you invest in a company listed on BSE just because none of the better industry players in terms of size/management quality/better pedigree are listed on BSE but rather NSE.

 

3. Well BPO and KPO are not discreet sets. Its more of a continuum and players like Genpact have a strong presence in the entire value chain. Also there is no moat as such for eClerx given the fact that for every worthwile project it has to compete against the likes of Genpact.

 

See, in India there is no company which has no competitor. No idea is unique as long as it's in service sector. There is no moat in service in terms of offering as services are again now considered as commodities, IT, ITES,BPO,KPO are commodities just like banking sector.

 

What we need to see whether all players have enough money to mint, its there in the case of eClerx as is evident from its annual growth rate. 250 Cr revenue is nothing considering the size of opportunity.

 

But hey, when there is space for everyone to grow for some time....so why complain........

 

Superior management will offcourse create superior returns.......

 

Even on the BPO front....most Indian players will show up on these cheap locations to reap the benefits of cheaper labor.....like most MNCs are here. Already, most BPOs have offices in these places.

 

Even on the BPO front....most Indian players will show up on these cheap locations to reap the benefits of cheaper labor.....like most MNCs are here. Already, most BPOs have offices in these places.

 

Hi FutureBull,

 

Can you plz comment on eClerx on its potential based on your close knowledge of KPO sector?

The biggest difference between BPO and KPO is -  BPO operation is basically a 'cost center' for the company doing the outsourcing. However, KPO company like eClerx can actually increase the profits of the company doing the outsourcing. So eClerx is more like a 'partner' or a 'consulting firm'.

 

Example of how KPO can increase profits:

 

Let's say Amazon.com is a client of eClerx. Let's say, out of every 100 visits to amazon.com, there are an average of 5 purchases (sales). Now eClerx will analyze the visitor data and make suggestions. Eg: They could recommend that Amazon.com reduce the number of clicks required for checking out and making the credit card payment.

 

Once eclerx's suggestion is implemented, there could be 6 sales for every 100 visitors, thereby increasing the revenues of the company by 20%. This type of KPO operation is called "data analytics" or "web analytics".

 

No BPO can or will do this kind of stuff.

 

 

 

 

That's why eClerx's tagline is "Precise Processes, Passionate People"

 

I don't think India will have a shortage of people with logical and analytical skills anytime soon!

Thanks Future Bull,

 

So its like more of mundane job with bit lower intelligence which big consultants like Mackinse, BCG refuce to do. If one believes in the talent of India the it looks this is the plce to grow in future.

 

So now i am more convinced that to buy something which is growing with 40-50% rate and PE of < 10, Even if pace slows down still Koi Nuksaan Nahi....Strong profit margin indicates that there is no billing pressure plus zero debt and high RoE and expansion plans afoot loike 2 deve centers and 2000+ manpower....Yummy.

 

 

Let’s look at it a little more closely...

 

An absolute simple/repetitive business process which can be done with very low application of intelligence when outsourced is called BPO (handling say costumer care process). And by the very definition a person doing that job won't be paid as much.

 

As and when you move up the complexity chain it becomes a KPO (i.e. outsourcing of a more critical process which requires more intelligence to do) and the pay-out for the company as well as its employees would improve. And at the top end of outsourcing curve best and brightest of people are recruited (IIT, IIM) and paid top salaries. BFSI examples of KPO would include.... equity research, Investment banking pitch books, Credit analysis, Mortgage processing etc..

 

Similarly KPO's would include things like manufacturing design outsourcing, Legal processes outsourcing, etc.

 

In fact in pharma industry the CR part of what we know as CRAM today is nothing but essentially a KPO

 

So each vertical in itself is quite niche whose growth is linked to the fortunes of that industry globally.

 

For a KPO to do well consistently it should be well diversified across 4-5 unrelated verticals, each having its own diverse set of clients. 

 

Some of the ones I remember which have recruited from IIMs in the past are Inductis (taken over by EXL), Irevna (bought over by CRISIL)

There are hundreds of other small ones out there not counting the large captive units.

 

It’s not surprising to see that most of these are privately held given the fact these are highly profitable businesses for now with low/no capital raising needs....

 

This brings me to questions which each one of eClerx investors need to ask

 

1. What was promoter's motive for the IPO? Was it a tilted towards primary issuance (new shares were created) or secondary issuance (management sold stake)?

 

2. Does eClerx have the management bandwidth to withstand the competition? (Genpact and EXL certainly has)

 

3. Does it have a sustainable leadership in a particular vertical? If yes why is it sustainable?  (On a overall size basis this is mid-tier company at best)

 

Note: - I have not studied eClerx in any detail just had a cursory glance at the financials. I have no particular bias for or against it.

 

Will the mgmt of eClerx be able to grow it?

 

Apparantly the leadership is new and there is no way one can get any solid comfort here. When INFY was started at that time same apprehensions were raised about their leadership.

 

I am not telling that these concerns are not genuine but there is no way to find any supporting data. As a retail investor we can only glean through the websites and Ann Rep and it says leadership is educated enough.

 

eClerx is still in its nascent stage and road ahead is full of challenges but don't you see all these are getting reflected in the share price!

 

But I don't know what you know about EXL, WNS and Genpact - but these are truly crappy companies, to put it mildly. Poor margins, poor RoE's and poor wealth creators they have been for their shareholders.

 

eClerx's IPO money went to the company, not to the management - and it was mostly used to move some operations into a SEZ. There is a big paragraph and table in the latest annual report on this matter.

 

The other questions don't have answers yet - so that's why I would recommend holding only a small percentage of the portfolio in eClerx.

 

Thanks for the compliment

 

 

Originally posted by smartcat But I don't know what you know about EXL, WNS and Genpact - but these are truly crappy companies, to put it mildly. Poor margins, poor RoE's and poor wealth creators they have been for their shareholders.

 

Actually returns for GAP, OAK-H are much higher given that it was a LBO and the acquisition was mostly funded through debt.

 

I won't call Genpact crappy. On the contrary, it is an institution in making. In 5-10 years time it might be counted in the same league as WITCH companies.

 

Its another matter that investors would not make the same amount on money which they made on Wipro/Infy because its already a skimmed milk. GE, GA partners, Oak Hill has already extracted the best returns out of the company. But then same applies to TCS.

 

In one way it's good that they are working silently.

 

This is applicable to MF Mgr too but they never seem to be lynched. Only their successes are documented not failures.

This more or less takes care of management "bandlength" and bandwidth issues, although this is no guarantee that eClerx could become big.

Deveshji - Thanks!

 

Though It's another excellent opportunity to enter!!!

 

Normally big deals happen in a stepped manner to avoid cost escallation due to big purchases in single shot. If my reading is correct then we can expect some more chunks of block purchases in next few days.

There is a bulk deal todat reported in NSE

Some Nambe Investment Holding has bought some 1293857 shares

 

Lehman brothers was major customer of eClerx, its collpased is handled decently by eClerx. Now economy is reviving and Banking sector is a bread and butter of eClerx. FII expects now banks to do well so does eClerx hence this interest is visible.

 

Debt : 1300 Cr Debt/Equity = 1.5

PE ratio	82.91	12/08/09
EPS (Rs)	0.35	Mar, 09
Sales (Rs crore)	156.98	Jun, 09
Face Value (Rs)	10
Net profit margin (%)	2.40	Mar, 09
Return on average equity	1.6	Mar, 09

 

NP is dwindling for past 3 year.

 

eClerx looks definilty ready for much higher evaluation!!!

 

 

See, i gave FirstSource just for peer comparison and relative evaluation purpose. It's just to make the point tht eClerx is undervalued a lot.

 

Growth rate of 50+% and zero debt huge RoE and profit margin still its PE is close to 10 just because investors doubt the future. This is the bet one has to take!

 

Many things are still overlooked, for example eClerx is developing sound strategies to m itigate risks like they are investing in tools to isolate dependancy from specialist work (of course to some extent). They have a huge courseware online ready for a new comer to pick up. At least as of now not tempted to deviate from KPO or diworsifying.

 

I guess on Monday morning at 10AM

 

ICICI Prudential Technology Fund - 9.62% (its next to INFY which is 55%)

ICICI Prudential Discovery Fund - 3.94% (in top 10 holding)

Principal Junior Cap Fund - NA

 

If you believe that eClerx can grow with even moderate 20-25% for next 2-3 yrs then you will be buying at PE of 5 which is anyhow cheap for such growers. Its growing @50% for past few years.

 

You have to take your own call.

 

If you are buying it for trade and not to invest then movement is unpredictable. It has gone up due to block purchase from Sequia Cap. If you ask me then it will move in tendem with market sentiments.

 

On the other hand if you are investing in this stock then you need to give some time to the eClerx. If you feel that eClerx has potential to become 1000Cr in next 2-3 yrs then buy right away! No need of averaging as after 2-3 yrs present prise look ridiculous.

 

I have given the comparison with the peer in this post which is doing quite poor but commanding a very very high evaluation so over a period of time if eClerx continue to grow then it will catch up the fancy of FIIs. Sequia beleives in value investment and they must be finding 330/- cheap and they must have invested with the aim of profiting with huge margin.

 

Today i read in ET that GE contract is expiring with Genpact for exclusivity ,such trends are opening a door to companies like eClerx. So now i guess i have answered your question.

 

Plz look at their ann rep, they have grown from 185 to 2k in headcount in 3-4 yrs.

 

I repeat again that you look beyond present dull F&A mkt situation, down the line when US fin mkt picks up then it will be a boomer for eClerx.

 

Rgds

Manish

 

You are getting the point. But would like to suggest that right now eClerx have got 5 F500 and total 20-25 customers. Just look at reasonable client acquisition rate of 4-5 more per year then scene changes drastically. In that case growing from 200Cr to 1000Cr should not be a big task.

 

Well time can only prove my hypothesis, ofcourse theres no guarantee.

 

He said growth in FY09 would not be like of prev yr i.e. 40%. I also agree with this as eClerx's future tied with revival of US economy. My guess says that we can expect to see some decison making by year end and greenshoots from Q4FY09-10.

 

If you look beyond FY09 the it seems difficult but possible.

 

http://www.eclerx.com/about_eClerx_in_Forbes.htm - http://www.eclerx.com/about_eClerx_in_Forbes.htm

 

Divident announcement of 7.5/share is bonanza. Last qtr they announced 10/- share already.

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The recent announcement of UBS, a global financial services firm, selling its captive in India to Cognizant Technolgies is the latest in a series of such sell-offs. This only reiterates what Evalueserve had predicted way back in 2007 that the capacity addition by third-party service providers (‘Buy’ option) is likely to surpass additions by captives (‘Make’ option). After a study of about 100 captives of western companies in India, Evalueserve confirmed that a majority of these captives are in serious trouble. 

Sixty-one percent of the captives studied have faced significant issues, with many of them already shut down.  Smaller captives have been the worst hit; many of the larger ones are not in good shape either. 

Captives across all segments—Information Technology (IT), Business Process Outsourcing (BPO) and Knowledge Process Outsourcing (KPO)—have fared somewhat similarly.���Smaller captives ���Captives across all segments—Information Technology (IT), Business Process Outsourcing (BPO)

 

What it means to eClerx operation (good or bad)? Can you plz explain.

 

The article states for the companies(corporates)  its more diffcicult to run captive operations in India - means for companies like eclerx its a positive as more work is likely to be outsourced versus sourced through captive organizations in India.

 

IT Companies are measured on 3 parameters people, process and technology. Any guess how customer evaluates KPOs?

 

What eClerx should have to win new customers?

 

Eventually all depends on demand and i beleive if captive needs are strong golbally then sooner or later eClerx has to gorw. Visibly no listed competitor is available at the moment exclusively focussed on KPO only.

Stockin: Thanks for your comments and welcome to the discussion.

 

1. The fact that they have gone through a challenging period and come out of it is a positive. Is it because few of their other orders were of more longer nature? Since its still a small company they are still going to be exposed to the vagaries of market demand & many times one or two orders will make or break the quarter. Is there high risk of any nature on the customer side?

 

2. They have mentioned that they won 2 large orders against IT majors. Does this hint at better prospects over medium term? Any idea on what would be the terms, time line, average size, etc. of such contracts?

 

3. People: they have mentioned that they have hired on the mid management level (costs have gone up) & have also scaled their operations in Pune. Is this because they see visibility in client demand?

 

4. People: Is high turnover (sometimes reaching 25%) on the employee level an issue or a fact of life in this sector? I cannot imagine the business dynamics with such high turnover. Is this a threat to their business model or not an major issue?

 

5. Processes: How imbeded do they get on the customers business proceesses? how easy is it to extract value? For customers, can these processes get easily insourced again? How important is domain knowledge & experience in adding value in these processes?

 

6. Scaling the company: Can eclerx build on its two domains and move to any new areas/line of business? My guess is that it could take many quarters to build a team with experience in a new segment. How big is the present addressable market? How easy or difficult is it to build a new line/domain of business within KPO?

 

 

 

 How this development is different from BFSI/Insurance sector than KPO? Asking because my initial underastanding is KPO does not need Apps developemnt for customer though they can have their own for optimization of work.