Anjan Malik and PD Mundhra first met at Wharton, where both had gone to do their MBA in finance. While they graduated in 1996 and Malik took up a job with Lehman Brothers in New York and Mundhra with Citibank in Mumbai, they always knew they would set up their own company one day. A few years later, they did, starting eClerx with just five people and five computers in Mumbai. Today, the same company has morphed into one of the leading KPO players from India. eClerx offers middle- and back-office operations support to over 30 Fortune 500 companies. It has over 6,500 employees with offices across the US, the UK and Singapore and delivery centres in India offering services such as data management, analytics, content and digital asset management to companies in banking and financial services, retail, e-commerce, media and cable and telecom.
Over the past five years, eClerx’s revenue and profits have grown at an average 33%. In the first nine months of FY14, the company’s revenue and profit have grown 28% to ₹624 crore and 55% to ₹191 crore, respectively. Now, the goal is to build on this growth momentum and extend services to new verticals and customer while grabbing a large wallet share from existing customers.
eClerx can trace its origins to a business magazine article in the late 1990s about GE setting up its BPO arm in India. It got Malik and Mundhra thinking that perhaps outsourcing was the opportunity on which they could build their business. Their first pitch was to Malik’s employer, Lehman Brothers. He had noticed innumerable powerpoint presentations being made by associates at the New York office and the two felt this was something they could do from an offshore location at more cost-effective prices, freeing up the associates’ time for more productive work. When they pitched the idea, though, Lehman didn’t bite. “But while preparing for the pitch, we realised the enormous potential that outsourcing offers and the various processes that can be outsourced.” says PD Mundhra, co-founder and executive director, eClerx.
It was still the late 1990s, the heydays of the internet boom, and Mundhra and Malik saw several firms looking for cost-effective web development. They decided to form a company that would build websites for dotcom firms and in 2000, eClerx was in business. But as the internet boom unravelled almost immediately, most dotcom companies were left strapped for cash, leaving the founders often chasing clients for payments. That’s when the duo decided to do a pivot and offer similar services, but to larger companies. They also offered data management on websites, managing product catalogues, maximising search engine operations, providing content and managing online traffic — services that were stickier and helped the company build longer-term relationships with its clients. This formed the genesis for the sales and marketing services (SMS) business, which manages the digital assets of its clients, from content development and online demand generation to providing marketing insights.
In 2002, Malik joined the company full-time after having limited his involvement to being a shareholder and director providing strategic guidance. eClerx naturally leveraged his expertise in financial services and the relationships he had built in the industry over the years. As a result, the company also started offering data offshoring, report writing and analytics to clients in the financial services space. But rather than just going for run-of-the-mill back-office operations, eClerx opted for going after niche areas. For one, it was the first to offer post-trade settlement services in financial derivatives, a complex subject with limited competition.
How does it build its expertise? eClerx hires people who have years of prior experience in that particular field as account managers who not only lead the sales but also can transfer the domain expertise to the team. Just as importantly, the company learns from its clients as it executes. “Once we execute a new process for a client, we quickly look to turn it into a product or service and offer it to other clients in the same industry,” says Mundhra.
It is this expertise that has brought on board eight of the top 20 investment banks as eClerx’s clients, where the company provides middle and back office support, mainly for their capital market operations. “We like the company’s differentiated business model. The company has a marquee clientele. eClerx has managed to create a niche for itself by assimilating complex processes and leveraging its relationship with its clients,” says Hitesh Shah, director, equity research, IDFC Securities. Incidentally, Vikram Limaye, the CEO of IDFC, is a non-executive director on the board of eClerx.
Currently, the BFSI sector contributes nearly 40% to overall revenue, the SMS business brings in an equal share while the newly-added cable and wireless division brings in the rest. The last is the result of the 2012 acquisition by eClerx for around $21 million of the US-based Agilyst, which provides back-office services and analytics to media firms in North America. With 1,000 people mostly working out of India, Agilyst provides critical error identification services, customer experience analysis and user-end support services, helping eClerx get a strong foothold in the media market in North America. eClerx now offers its services to 70 clients in financial services, technology, retail, cable and telecom industries, predominantly in the US (which accounts for 74% of revenue) and Europe (21%).
Dealing with crisis
Soon after its listing in 2007, the company faced its biggest crisis when its largest client, Lehman Brothers, went belly up. While Lehman had shown no enthusiasm for outsourcing its presentations, the company had come on board as a customer in 2002 and by 2007, accounted for 14% of eClerx’s revenue. “We had to make some tough decisions at the time,” recalls Mundhra. One decision, though, was easily taken — eClerx would not let go of even one employee. “We knew their skills sets and it was only a matter of time before they were redeployed in other projects.”
The other projects happened as Barclays and Nomura acquired Lehman’s business and saw value in continuing with eClerx as a vendor. In the meantime, other investment banks started to increase their offshoring in a bid to rein in costs.
While the recession that followed the financial crisis saw firms putting a lock on discretionary spend and IT budgets, the need to cut costs forced clients to look at outsourcing seriously, boding well for firms such as eClerx. What also helped win over clients was the BFSI domain expertise the company had built over the years, helping it tide over what was probably the most difficult couple of years for Indian outsourcing. Over FY09-10, eClerx’s revenue grew by an average of 45%.
Spreading the risk
A major risk that came to the fore when the Lehman crisis imploded was eClerx’s dependence on a few clients — at the time, its top five clients contributed more than 80% of revenue. As it happened, in the next couple of years, the proportion went up even higher, as share of businesses was re-organised — in 2011, eClerx’s top five customers accounted for a staggering 87% of revenue. But ever since, the company has been consciously working on bringing that number down. “We have always been cognisant of the fact that high client concentration poses a significant risk for a smaller firm such as ours,” says Anjan Malik, co-founder and director, eClerx. With the result that the share of the top five clients was down to 74% by December 2013. Where revenue growth for the top five is around 8%, emerging clients, who account for about 25% of business, have been growing at a much faster clip of 35%.
Growing income from new clients helped beat dependence on a few
There have been some concerns that the moderation in growth over the past couple of quarters from the company’s top five clients has led to an overall dip in revenue growth (see: Derisking growth). This is primarily due to some restructuring at eClerx’s top SMS client. The company, however, is not worried about the moderation of revenue growth. “Our revenue tends to be lumpy, so it is difficult for us to project growth even on a quarterly basis. We expect to grow revenue at around 10-15% in dollar terms in FY14 and continue to do so in the next couple of years,” says Mundhra.
What’s more important is eClerx’s ability to mine these accounts deeper, something that the company currently has limited success with and is looking to improve. “While eClerx has been able to generate a revenue run-rate of $20-25 million from its large accounts, its ability to mine them deeper has been limited,” confirms IDFC’s Shah. Now, it is looking to do just that by increasing its sales and marketing spend not only to grab more wallet share of its larger clients but also to increase the share of business from emerging clients and acquire new customers. Sales and distribution (S&D) costs have increased by 27% to ₹33.78 crore during the December 2013 quarter compared with a year ago due to increased headcount and a higher provision for bonuses.
Then, eClerx is also looking to acquire companies to expand its portfolio of services. The debt-free company has around ₹315 crore of cash on its books as of December 2013, which can be used for its shopping spree. “We don’t have too many unique assets that are up for sale. We are looking for assets that will give us that additional alpha so acquisitions will be more to add more verticals to our portfolio, like Agilyst did, rather than deepen our services in our existing verticals,” says Malik.
Full steam ahead
While these moves could put the company on a faster growth path, it could also put on a dent on the industry-best margins of 40% it currently enjoys, driven by its operating efficiency and helped by a weaker currency. “There will be a trade-off between growth and margins. If the firm is likely to generate a 5% growth by sacrificing 100 basis points of its margins, it is a good trade-off,” says Sashi Bhushan, analyst at Prabhudas Lilladher. “It is a well-run firm and I’m sure the management, which has always been conservative, will take the right calls.”
The bigger challenge, eClerx acknowledges, is the fight to stay ahead of the curve in terms of what customers want. “Our biggest challenge is to ensure our offerings stay relevant to customer needs,” confirms Malik. That can be daunting in the fast-changing world of the internet and capital markets, where new regulations are being constantly introduced. “What used to wow the customer just two or three years ago is standard requirement now,” points out Mundhra.
Still, years of working with the best in the industry has helped eClerx not only execute better, but also move up the learning curve pretty fast.
Healthy cash flows
eClerx has been consistently able to generate strong cash flows leading to healthy dividend payout for investors
As for growth opportunities, there will be enough and more for a company such as this in an industry that was estimated to be worth around $20 billion in 2013 and tipped to grow to $30 billion by 2015. While the revenue growth of the company may not as be as high as previous years, it is still estimated to grow around 16% on an average over the next two years on a higher base. What also works in its favour is the business’ ability to generate healthy cash flows and return metrics. At 44% and 57%, respectively, eClerx enjoys one of the best returns on equity and capital employed, and, coupled with a high dividend payout ratio over the past couple of years, investors have been a happy lot. What’s more, the stock has nearly doubled in the past one year and, at ₹1,245, currently trades around 11X its 12-month forward earnings. IDFC’s Shah
believes eClerx’s consistent performance should be rewarded with a higher valuation. “Given its ability to generate strong cash flows and superior return ratios, the stock deserves a valuation of 13-14X its 12-month forward earnings,” he says.
A company with such strong credentials could be a prized target for larger players as well. So, are eClerx’s founders open to selling out if a tempting offer comes by? “We would always base our decisions on what’s best for our shareholders. Having said that, we enjoy what we are doing and believe that there is so much more that we can do with the business,” says Malik. For him and Mundhra, the longed-for entrepreneurial journey has been a dream come true and right now, at least, trading it isn’t on the cards.