With a change in technology and the way we communicate each other, the power to access any information is very easy. But as every coin has two sides, with easily accessible information we are also exposed to immaterial and unattractive information.

Today, we have 24 hours business channels which keep us up to date with the happenings around the business community and the world. But have you realised on how little quality information is shared compared to their 24 hours commitment.

They always talk about like, what should you buy before Budget? Company XYZ has closed down to lower circuit, will it slide further? , ABC company has hit to 10% upper circuit today on the news of buyback of shares etc.

Have you realised that most of the information they report is related to price!

I am writing this blog to point on opportunity available with Eclerx as previously have shared on Fag Bearings. This company is rated as ‘A2’ by Value Operations and is trading at discount to its March 13 values. E-clerx is a small computer software company which is growing very fast.

Let’s look at the table below that explains about what money was put on the table and what was taken out of the business.

E – clerx

 

2009

2010

2011

Reported Profits

61.78 Crore

73.54 Crore

122.43 Crore

Dividends Paid

23.67 Crore

33.37 Crore

64.92

Retained Earnings

32.83 Crore

34.12

28.68

Capital Employed

132.77 Crore (2008)

165.66 Crore

199.88 Crore

238.38 Crore

Capital Raised

0.06 Crore

0.10 Crore

9.82 Crore

Normalised Return on Equity

41.40%

40.24%

55.87%

Net operating Cash Flow

41.59 Crore

60.54 Crore

102.02 Crore

What really attracts me to this business is that they are growing their business revenues at healthy rates and also have improved their profit before tax margin for current year. They also pay healthy dividends from their profits and have managed to grow healthy earnings on their retained profits.

For every one rupee reinvested in this business last year generated Rs 1.27 extra profits. In 2010 on every one rupee extra invested in this business generated Rs 0.34 of extra profits.

Many research reports on this business forecast EPS for 2013 in range of Rs 68 – 75. This translates ROE in range of 52 – 57%. If their estimates for earnings are right then intrinsic value for this business falls in range of Rs 860 – Rs 920.

Eclerx was able to grow its value by 28% in 2012 in compare to its value in 2011. And if 2013 expectations are right then it reflects a growth of 15% -23% in value for future year.

The flip side of this opportunity is to find out a swift spike in its return on equity and also will the company will be able to sustain its high returns. I know majority of you all are working in IT sector and maybe few working for E-clerx. We want you to share with us what do you think is the competitive advantage of this company and can they sustain them in the future.

The other concern I have is with regards to cash flow. They have improved their net operating cash flow but will they maintain their operating cash flow this year too? Well, will get the answer soon when they
reveal their full year financial statements next month.

Lastly, coming to the valuations, we expect intrinsic value of this business for March 2012 will be Rs 751. Currently it is trading at premium to its March 2012 Value. We also expect its intrinsic value for March 2013 to be Rs 920.

If we are right with our expectations then the business value of this company will double in next three years. But let’s not go that far; we need to recognize competitive advantage that will sustain its high
returns. Once we find that then the future looks very predictable.

Looking forward to hear from you in regards to Eclerx.