Emkay Global Financial Services Ltd has initiated a buy rating on the shares of Aditya Birla Fashion & Retail and eClerx Services Ltd. The brokerage has set a target price of Rs 340 for the shares of Aditya Birla Fashion & Retail and expects a gain of 20.0 percent in 12 months from the current market price, while the brokerage has set a target price of Rs 2,700 for eClerx Services and expects an increase of 21.3 percent in 12 months from the current market price.
Buy Aditya Birla Fashion & Retail (ABFRL) With A Target Price of Rs 340
In its latest research analysis, the brokerage has reported that "ABFRL has entered into an agreement to acquire the exclusive online and offline distribution rights for the global brand 'Reebok' for the Indian/ASEAN markets. The transaction also involves the purchase of certain inventory and other net current assets of 'Reebok India Company' to the tune of Rs0.8-1.0bn. The foray into the fast-growing sports segment increases the addressable market and is a key positive (industry size: USD10/14bn in FY22/24E; ~14% CAGR). However, the brand has struggled with lower growth, probably due to a lack of proper expansion/positioning in the market. ABFRL will need to invest in the brand for growth, but its strong online and physical retail presence through Pantaloons/MBOs should help expand the brand's distribution significantly, in our view."
As per the research of Emkay Global "Reebok is the fourth-largest brand in the Indian sports/active-wear market, with Rs4.3bn in revenues in FY20, after Puma/Adidas/Nike whose topline stood at Rs14bn/12bn/8bn in FY20. Reebok has seen a ~5% CAGR in FY15-20 vs. -1%/9%/16% CAGR for Nike/Adidas/Puma in India. Reebok's EBITDA margins have been on an improving trajectory at ~17% in FY20 vs. -11% in FY15. The transaction is effective upon the completed transfer of global ownership of 'Reebok' brand from Adidas to Authentic Brand Group, USA, and is expected to close by Q4FY22. We see the transaction as EBITDA/EPS accretive, which can add 5-7% to our EBITDA/EPS estimates in the forecast period. We believe that better margins will offset the impact of slightly higher capital employed on ABFRL's RoIC."
The brokerage claims that "We await the finalization of the contract before factoring the transaction into our estimates. Faster recovery trends, an aggressive expansion outlook and potential margin gains should drive healthy revenue/EBITDA CAGRs of 11%/25% in FY20-24E for ABFRL (exReebok transaction). We maintain our Buy rating with a TP of Rs340 on 30x Dec'23E preIndAS116 EBITDA."
Why Emkay Global Is Bullish On The Shares of eClerx Services?
From the brokerage's point of view "eClerx reported a very poor financial performance through FY16-20, with revenues remaining stagnant at ~USD200mn. Management's strategy of 1) acquiring new clients and widening client portfolio, 2) acquiring new capabilities and managed services, and 3) development of new platforms and products has yielded the desired results, as eClerx has witnessed broad-based growth in the last few quarters. While eClerx faced revenue growth challenges in its top-10 clients over FY16-20, the company was able to grow its presence outside of the top-10 clients (9.6% CAGR in emerging clients), and add and ramp up new clients to the USD1mn+ levels."
According to the research analysis "Revenues from emerging clients have increased at a 9% CAGR over FY16-21. Additionally, revenues from the top-10 clients also grew (4.3% YoY in FY21 and 28% in H1FY22) for the first time since FY16. Management expects stability in revenues from the top-10 clients going forward. The performance revival and strong industry tailwinds should augur well for revenue growth in the coming years. We expect the company to deliver a revenue growth CAGR of ~15% over FY21-24E."
Emkay Global has further reported that "eClerx's EBITM slipped 1560bps over FY16-20. The margin deterioration was a result of initial teething issues around stabilizing the onshore customer operations business even as the offshore business declined due to factors like insourcing and increasing automation. eClerx's EBITM expanded ~690bps YoY in FY21 and 340bps in H1FY22 due to an acceleration in revenue growth, WFH savings and other operating efficiencies. While H1FY22 saw healthy margin expansion, we expect EBITM to decline partially from the Q2FY22 level but still remain higher than the FY20 levels."
Buy eClerx Services With A Target Price of Rs 2,700
The brokerage has said that "After a muted revenue growth performance over FY16-20, eClerx's revenue recovered strongly, and the recovery seems to be sustainable amid a healthy demand environment, deal momentum, lower roll-offs and stability at top clients, and continued growth in emerging clients. We build in a 15% revenue CAGR (organic ~11.4%) over FY21-24E. eClerx's EBITM expanded 690bps YoY in FY21 and 340bps YoY in H1FY22 due to the acceleration in revenue growth, WFH savings and other operating efficiencies. While H1FY22 saw a healthy margin expansion, we expect EBITM to decline partially from the Q2FY22 level but still remain higher than FY20 levels."
Emkay Global has stated that "We initiate on eClerx with Buy and a TP of Rs2,700 at 20x on Dec'23E EPS, considering near-term demand tailwinds, overall execution capabilities, steady cash generation, healthy payout/capital allocation (~67% over FY17-FY21) and prospects of a 16.6% profit CAGR over FY21-24."
The stock has been picked from the brokerage report of Emkay Global Financial Services Ltd. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.