Near-term pressure, but long-term outlook positive

INDUSTRY IT CMP (as on 2 Nov 2015) Rs 1,812 Target Price Rs 2,050 Nifty 8,051 Sensex 26,559 KEY STOCK DATA Bloomberg ECLX IN No. of Shares (mn) 30 MCap (Rs bn) / ($ mn) 55/843 6m avg traded value (Rs mn) 41 STOCK PERFORMANCE (%) 52 Week high / low Rs 1,989 / 1,170 3M 6M 12M Absolute (%) 22.1 13.7 39.6 Relative (%) 27.7 15.4 44.3 SHAREHOLDING PATTERN (%) Promoters 52.24 FIs & Local MFs 12.14 FIIs 26.98 Public & Others 8.64 Source : BSE Harit Shah haritj.shah@hdfcsec.com +91-22-6171-7325 RESULTS REVIEW 2QFY16 2 NOV 2015 eclerx Services Near-term pressure, but long-term outlook positive eclerx reported its third successive quarter of solid organic USD revenue growth (6.3% QoQ, 6.3% in 4QFY15, 4% in 1QFY16). The company s top-5 client revenue rose 4.9% QoQ, highest in four years, while YoY growth was highest in two years (8.5%). Non-top-5 clients also recorded strong growth (12.7% QoQ, 80.5% YoY). EBIT margin rose 367bps QoQ, the highest since 4QFY14, aided by INR depreciation and lower S&M cost. The management expects flattish revenue over 2HFY16 as short-term projects with large clients in banking and digital sectors are coming to an end. Margins will decline 100-150bps, which may further lead to near-term weakness in share prices. However, we like eclerx s niche business, good use of cash through acquisitions to drive non-top-5 client growth, along with clean a balance sheet and healthy return ratios. We retain our BUY rating, but reduce our TP to Rs 2,050 (Rs 2,190), assigning a lower multiple of 16x BUY 1-year forward rolling EPS (18x) given subdued near-term outlook. Non-top-5 clients again drive revenue: eclerx posted healthy revenue growth of 8.2% QoQ (6.3% organic), aided by non-top-5 client revenues. A significantly positive sign was the growth in the top-5 clients. However, we do not expect this to sustain given the roll offs of some short-term projects in banking and digital. Typically, 10-15% of work done by eclerx is short term (less than 1- year). Cable continues to see strong demand. ConCall takeaways: (1) The management continues to downplay street expectations, mentioning that 2HFY16 revenue will be flattish owing to ending of short-term projects, (2) EBIT margin band in the low 30s likely in 2HFY16 on higher G&A and S&D costs, (3) OCF at Rs 1.7bn in 1HFY16, nearly 2x that of 1HFY15 levels, (4) Roll offs are mainly in the top-5 clients, (5) FY16 has seen bunching up of short-term projects, driving healthy 1H growth, and (5) Cable continues to see strong demand. Financial Summary (Rsmn) 2QFY16 2QFY15 YoY (%) 1QFY16 QoQ (%) FY15 FY16E FY17E FY18E Net Sales 3,285 2,318 41.7 2,983 10.1 9,421 12,994 15,074 17,540 EBIT 1,094 693 57.9 884 23.8 2,656 4,117 4,740 5,464 APAT 927 623 48.8 732 26.6 2,297 3,344 3,724 4,188 Diluted adj. EPS (Rs) 29.9 20.1 48.5 23.7 26.1 74.1 107.9 120.2 135.2 P/E (x) 24.4 16.8 15.1 13.4 EV / EBITDA (x) 16.5 11.5 9.7 8.2 RoE (%) 35.2 41.7 38.0 36.0 # Consolidated HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters

A combination of volume growth of 3% and pricing growth of 9.6% QoQ drove a solid 8.2% QoQ USD revenue growth (6.3% organic) Rupee depreciation boosted INR revenue growth to 10.1% QoQ EBIT margin rose 367bps QoQ on INR depreciation and lower S&M cost Quarterly Consolidated Financials Snapshot Particulars 2QFY16 2QFY15 YoY (%) 1QFY16 QoQ (%) Net Sales 3,285 2,318 41.7 2,983 10.1 Employee Costs 1,562 1,113 40.4 1,488 5.0 SG&A and Other Operating Expenses 502 390 28.6 508 (1.3) EBITDA 1,221 815 49.8 986 23.8 Depreciation 127 122 4.1 102 24.1 EBIT 1,094 693 57.9 884 23.8 Interest Cost 0 0-0 - Other Income 114 104 9.0 166 (31.4) PBT 1,208 797 51.5 1,050 15.0 Tax 279 174 59.8 316 (11.8) Minority Interest 2 0 1 18,629.3 APAT 927 623 48.8 732 26.6 E/o (adj for tax) 0 0 0 RPAT 927 623 48.8 732 26.6 Margin Analysis Particulars 2QFY16 2QFY15 YoY (bps) 1QFY16 QoQ (bps) Employee Expenses % Net Sales 47.6 48.0 (45) 49.9 (233) SG&A and Other Expenses % Net Sales 15.3 16.8 (156) 17.0 (177) EBITDA Margin (%) 37.2 35.2 201 33.1 411 EBIT Margin (%) 33.3 29.9 341 29.6 367 Tax Rate (%) 23.1 21.9 120 30.1 (703) APAT Margin (%) 28.2 26.9 135 24.6 367 Page 2

eclerx saw around 3% volume growth in the quarter, along with 5% improvement in pricing owing to CLX consolidation Volumes And Pricing Particulars 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 Volumes (mn) 2.2 2.3 2.4 2.5 2.7 2.8 Pricing (US$/hour) 16.4 16.6 16.1 16.1 17.0 17.9 Total revenue (US$ mn) 36.2 38.1 38.9 40.7 46.4 50.2 Volumes And Pricing Growth (QoQ, %) 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 Volumes (mn) 5.3 3.8 5.4 4.5 8.0 3.0 Pricing (US$/hour) (3.1) 1.4 (3.1) 0.1 5.6 5.0 Total revenue growth 2.0 5.2 2.1 4.6 14.0 8.2 A negative this quarter was slow growth in North America, even as Europe saw over 25% QoQ USD revenue growth, aided by CLX Geographic Revenue Split (% of revenue) 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 North America 73.0 74.0 78.0 78.0 72.0 67.0 Europe 22.0 23.0 18.0 18.0 25.0 29.0 Rest of the World 5.0 3.0 4.0 4.0 3.0 4.0 Total 100.0 100.0 100.0 100.0 100.0 100.0 Geogrpahic Revenue Growth (QoQ, %) 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 North America 0.6 6.7 7.6 4.6 5.2 0.7 Europe 2.0 10.0 (20.1) 4.6 58.3 25.5 Rest of the World 27.5 (36.9) 36.1 4.6 (14.5) 44.3 Total 2.0 5.2 2.1 4.6 14.0 8.2 Page 3

Non-top-5 clients continued to drive growth, with the % contribution at its highest ever. This has been aided by acquisitions made over the past few years and expansion into newer segments such as digital and cable Total headcount was flat; seat count addition was quite healthy. We expect capex to be on the lower side in 2HFY16 (Rs 355mn in 1H) Client Data (% of revenue) 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 Top-5 clients 70.4 67.7 66.1 63.9 57.5 55.8 Non-top-5 clients 29.6 32.3 33.9 36.1 42.5 44.2 Total 100.0 100.0 100.0 100.0 100.0 100.0 Client Growth (QoQ, %) 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 Top-5 clients (0.8) 1.2 (0.4) 1.2 2.7 4.9 Non-top 5 clients 9.2 15.0 7.3 11.4 34.0 12.7 Total 2.0 5.2 2.1 4.6 14.0 8.2 Headcount, Utilisation Data (Nos.) 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 Total headcount 7,631 7,559 7,839 8,193 8,829 8,824 India employees 7,549 7,469 7,751 8,100 8,747 8,743 - Technical staff 6,623 6,521 6,818 7,095 7,622 7,594 - Support staff 926 948 933 1,005 1,125 1,149 Onsite employees 82 90 88 93 82 81 Net additions 719 (72) 280 354 636 (5) Seat count 7,073 7,341 7,439 7,640 7,806 8,601 Gross staff utilisation (%) 61.0 64.0 65.0 65.0 65.0 67.0 Page 4

Key Assumptions Particulars FY14 FY15 FY16E FY17E FY18E Volume growth (%) 8.8 14.4 19.0 13.7 16.4 Pricing change (%) 4.6 (2.7) 8.4 1.2 0.0 USD revenue growth (%) 13.8 11.3 29.0 15.1 16.4 USD/INR rate 60.81 61.22 65.46 66.00 66.00 EBITDA margin (%) 38.1 28.2 31.7 31.4 31.2 Peer Valuations Company CMP Target Mcap EPS (Rs) P/E (x) RoE (%) Rating (Rs) (Rs) (Rs bn) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E eclerx 1,812 2,050 BUY 55 74.1 107.9 120.2 24.4 16.8 15.1 35.2 41.7 38.0 Mindtree 1,501 1,410 BUY 126 63.8 74.1 87.0 23.5 20.2 17.3 29.4 27.8 26.9 Cyient 527 558 SELL 59 31.5 34.6 41.2 16.7 15.2 12.8 20.2 19.0 19.9 Hexaware 234 315 BUY 71 10.6 13.7 17.0 22.1 17.1 13.8 25.7 31.2 36.3 KPIT Tech. 140 200 BUY 28 11.4 13.5 17.2 10.8 9.1 7.2 18.4 19.7 21.0 Source: HDFC sec Inst Research Page 5

Consolidated Income Statement Year ending March (Rs mn) FY14 FY15 FY16E FY17E FY18E Net Sales 8,410 9,421 12,994 15,074 17,540 Growth (%) 27.3 12.0 37.9 16.0 16.4 Employee Costs 3,466 4,398 6,297 7,297 8,467 SG&A and Other Operating Exps 1,408 1,867 2,086 2,454 2,961 EBIDTA 3,536 3,156 4,611 5,323 6,111 EBIDTA (%) 42.0 33.5 35.5 35.3 34.8 EBIDTA Growth (%) 38.8 (10.7) 46.1 15.5 14.8 Other Income 110 324 362 236 207 Depreciation 330 500 494 584 648 EBIT 3,316 2,979 4,478 4,976 5,670 Interest 0 0 0 0 0 PBT 3,316 2,979 4,478 4,976 5,670 Tax 759 683 1,127 1,244 1,474 PAT 2,557 2,297 3,351 3,732 4,196 Minority Int & associate profit 0 0 7 8 8 EO items (net of tax) 0 0 0 0 0 APAT 2,557 2,297 3,358 3,740 4,204 APAT Growth (%) 49.0 (10.2) 46.2 11.4 12.4 EPS 82.8 74.1 107.9 120.2 135.2 EPS Growth (%) 45.5 (10.5) 45.6 11.4 12.5 Consolidated Balance Sheet Year ending March (Rs mn) FY14 FY15 FY16E FY17E FY18E SOURCES OF FUNDS Share Capital - Equity 302 304 310 310 310 Reserves 5,588 6,845 8,594 10,369 12,253 Total Shareholders Funds 5,890 7,149 8,904 10,679 12,563 Long Term Provisions & Others 185 233 233 233 233 TOTAL SOURCES OF FUNDS 6,074 7,382 9,137 10,912 12,797 APPLICATION OF FUNDS Net Block 1,548 1,670 3,571 3,591 3,469 CWIP 11 11 11 11 11 Investments, LT Loans & Advances 674 720 720 720 720 Debtors 1,799 2,266 3,195 3,882 4,517 Cash & Equivalents 3,560 4,419 3,504 4,670 6,132 ST Loans & Advances, Others 322 505 505 505 505 Total Current Assets 5,681 7,190 7,204 9,057 11,154 Creditors 11 17 92 134 157 Other Current Liabilities & Provns 1,829 2,192 2,278 2,334 2,402 Total Current Liabilities 1,839 2,210 2,370 2,467 2,558 Net Current Assets 3,842 4,980 4,834 6,590 8,596 TOTAL APPLICATION OF FUNDS 6,074 7,382 9,137 10,912 12,797 Page 6

Consolidated Cash Flow Year ending March (Rs mn) FY14 FY15 FY16E FY17E FY18E Reported PAT 2,557 2,297 3,344 3,724 4,188 Non-operating & EO items 0 0 (419) (8) (8) PAT from Operations 2,557 2,297 2,924 3,716 4,180 Interest expenses 0 0 0 0 0 Depreciation 330 500 494 584 648 Working Capital Change (797) (678) (769) (589) (544) OPERATING CASH FLOW ( a ) 2,090 2,119 2,649 3,710 4,284 Capex (539) (624) (520) (603) (526) Free cash flow (FCF) 1,550 1,494 2,129 3,107 3,758 Investments 0 0 0 0 0 INVESTING CASH FLOW ( b ) (539) (624) (520) (603) (526) Debt Issuance 0 0 0 0 0 Interest expenses 0 0 0 0 0 FCFE 1,550 1,494 2,129 3,107 3,758 Share capital Issuance 3 2 6 0 0 Dividend (880) (1,240) (1,595) (1,949) (2,304) FINANCING CASH FLOW ( c ) (877) (1,239) (1,589) (1,949) (2,304) NET CASH FLOW (a+b+c) 673 256 541 1,158 1,454 Non-operating and EO items 0 0 (1,868) 8 8 Closing Cash & Equivalents 3,022 3,278 1,951 3,117 4,579 Key Ratios FY14 FY15 FY16E FY17E FY18E PROFITABILITY (%) EBITDA Margin 42.0 33.5 35.5 35.3 34.8 APAT Margin 30.4 24.4 25.7 24.7 23.9 RoE 49.8 35.2 41.7 38.0 36.0 RoIC or Core RoCE 56.8 39.6 38.5 40.8 43.8 RoCE 48.1 31.4 38.4 36.3 34.8 EFFICIENCY Tax Rate (%) 22.9 22.9 25.2 25.0 26.0 Asset Turnover (x) 1.1 1.0 1.1 1.1 1.1 Debtors (days) 78 88 90 94 94 Payables (days) 1 1 4 5 5 Cash Conversion Cycle (days) 77 87 86 89 89 Net Debt/EBITDA (x) (1.0) (1.4) (0.8) (0.9) (1.0) Net Debt/Equity (x) (0.6) (0.6) (0.4) (0.4) (0.5) Interest Coverage (x) N.A. N.A. N.A. N.A. N.A. PER SHARE DATA EPS (Rs/sh) 82.8 74.1 107.9 120.2 135.2 CEPS (Rs/sh) 95.3 92.3 126.7 142.2 159.6 DPS (Rs/sh) 25.3 35.0 45.0 55.0 65.0 BV (Rs/sh) 194.4 236.0 293.9 352.5 414.7 VALUATION P/E 21.9 24.4 16.8 15.1 13.4 P/BV 9.3 7.7 6.2 5.1 4.4 EV/EBITDA 14.7 16.5 11.5 9.7 8.2 OCF/EV (%) 4.0 4.1 5.0 7.2 8.5 FCF/EV (%) 3.0 2.9 4.0 6.0 7.5 FCFE/mkt cap (%) 2.8 2.7 3.9 5.7 6.8 Dividend Yield (%) 1.4 1.9 2.5 3.0 3.6 Page 7

Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 ECLERX SERVICES: RESULTS REVIEW 2QFY16 RECOMMENDATION HISTORY 2,400 eclerx 2,200 2,000 1,800 1,600 1,400 1,200 TP Date CMP Reco Target 31-Jan-15 1,282 BUY 1,420 22-Sep-15 1,651 BUY 2,056 8-Oct-15 1,674 BUY 2,190 2-Nov-15 1,812 BUY 2,050 1,000 Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period Page 8

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