This Small Cap Stock Zoomed 186.89% In 3 Years, Brokerage Recommends Buy For 23% Upside

Bonanza Research has assigned a "Buy" tag on eClerx Services Limited (eClerx) for a target price of Rs 1540 apiece. According to the brokerage, the stock is likely to give 21% return on investments with the given target price. It is an IT Enabled Services Sector Stock with a market capitalisation of ₹ 6,469.30 crore.

Stock Outlook & Returns

The stock of the eClerx on NSE is trading at ₹ 1,275 apiece at the time of writing. The current market price of the stock is near its 52 week low, which it hit last month on 26 December 2022 at ₹ 1,221 apiece. It recorded its 52 week high on 13 January 2022 at ₹ 1,980 apiece.

The stock has fallen 11.37% in 1 month and 8.4% in 3 years, respectively. In a year, the stock fell, giving a 32.01% negative return. However, in 3 years, it gave 186.89% multibagger returns and in 5 years it gave 24.45% positive returns, respectively.

Rapidly growing Indian KPO industry to boost eClerx’s revenue

Indian Business Process Management has a market size of US $41bn, of which exports, is a large part at US $36bn in FY21 (which increased c.8% YoY). According to the Industry reports, the BPM revenue is expected to grow at a CAGR of 11.6% between FY21 and FY26E to reach US $62bn. eClerx Services Limited (eClerx) being a niche player in the KPO industry is well positioned to benefit from the growth in the Indian KPO industry.

Focus on niche services to provide steady growth

eClerx helps clients solve business problems through a cost-effective combination of people, process and technology. Domain expertise along with robust execution is eClerx's unique value proposition - it is present in three verticals - Financial Services (c.40%), Digital (c.40%) and Customer Operations (c.20%).

After few years of stagnant revenue, eClerx’srevenue growth has made a comeback

eClerx reported a flattish revenue growth through FY16-20 due to issues/challenges in top accounts, increased automation and the shift toward captive BPOs/KPOs. Management has started with multiple revenue and profitability levers in the company over the last three years like focusing on developing new platforms, managed services business, new clients wins and plug-in acquisitions. The management believes that the top-10 accounts have stabilized. The pipeline is healthy - ensuring medium to long-term healthy revenue growth for the company.

Strong Balance Sheet, Healthy pay-outs

eClerx's cash generation has been very healthy over the years since CAPEX has been much lower compared to its Cash flow from Operations. Based on its capital allocation policy, eClerx has been declaring healthy pay-outs (lower dividends in the years when it has an intention to do Buybacks) and announcing share buybacks. Since FY17, the company has completed five buybacks, including the ongoing latest buyback in FY22 (size c.₹ 3.6bn including taxes; price ₹ 1,750/share).

Initiate Coverage with Buy - TP of ₹1,540

Bonanza Research commenting on the valuation, said, "We believe business fundamentals are healthy and long-term growth intact. Healthy revenue growth outlook (16.4% over FY22-25E), EBITDA margins (28% in FY24), healthy Return ratios, and strong cash position makes us believe that eClerx warrants a definite re-rating from hereon. "We initiate coverage with a BUY valuing the stock at 14x Dec'24E EPS of ₹ 110.1 to arrive at a Target Price of ₹ 1,540 with a potential upside of 20.7%."

About - eClerx Services Limited

eClerx is a leading KPO player in the high opportunity services segments like business process management, automation and data analytics. The company has many Fortune 500 enterprises as clients, which provides decent revenue visibility over the medium-to-long term. eClerx enjoys healthy financial track record (financials were marred between FY17-20 on account of issues/challenges in top accounts, increased automation and the shift towards captive BPOs/KPOs), industry-leading profitability, decent return ratios (will go higher on account of continuous buybacks), excellent execution and impeccable management. The company has seen growth momentum return over the last two years. We are positive on the stock due to better outlook on growth rate, resilient profitability, undemanding valuation and balance sheet strength.

Disclaimer

The stock has been picked from the brokerage report of Bonanza Research. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to consult with certified experts before making any investment decision.