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Balance Sheet analysis based on eClerx Services Standalone annual reports of 2011 PL statement analysis Balance Sheet based on eClerx Services Standalone annual reports of 2011 CF statement analysis Balance Sheet based on eClerx Services Standalone annual reports of 2011 Checklist based on www.safalniveshak.com report Intrinsic Value eClerx Shareholder Value Creation Model Financial & Market Snapshot Should I Buy eClerx? Checklist About eClerx

Balance Sheet 1. Source of Funds This consists majorly of Share Capital and Reserves and Capital. a. Share Capital Share capital has been issued as bonus shares resulting in a reduction in Reserves and Surplus (95.39). Share capital increased from 190.31 to 288.54. Since the issue is mainly bonus shares it doesnt look like a cause of concern. Majority of the share capital 261 is due to bonus shares. Bonus shares are a way of rewarding the share holders instead of providing dividends. But in this case the company is providing dividends and bonus shares. b. Reserves and Surplus It increased from 1802 to 2047. General Reserves and Profit and Loss account is constantly increasing. 33% of the general reserve is due to securities premium received. The general reserve is reducing due to stock options being issued. The securities premium is increasing due to additional shares being issued. But it is consistently reducing due to bonus shares being issued. General Reserves 438.1 Securities Premium 666.57 PL Account 942.37 The stock options and the additional shares being issued even though negligible is a cause of concern. 2. Application of funds a. Fixed Assets The existing fixed assets have already been depreciated by 50%. The major component of fixed assets is computers (45%). Leasehold improvements (properties?) constitute 20%. The net block has increased by 50% due to purchase of computers last year.

The net fixed assets is 360.7 b. Investments At a glance this looks like a concern area since it saw considerable reduction from 908.6 to 285.8. One part is due to diminution in value of investments for the acquisition of igentia travel solutions. Need to find why this diminution. But when we look at the CF statement it becomes apparent that it has sold it investments and the money has gone into cash and bank balances. c. Deferred Tax Assets Nothing to really addressed here. d. Current Assets Sundry Debtors There has been a substantial increase from 392 to 660, but since the revenue also has increased by 40%, this wont be a concern. e. Current Assets Cash and Bank Balances This has substantially increased from 453 to 1492. Cash has increased due to the cash flow from operating activities (1000) and due to sale of investments (500). This is not a cause of concern as the company may convert it into investments. Majority of this will be utilized for dividend for next year. But it would be a cause of concern whether such balances are an optimal use of cash. f. Current Assets - Loans and Advances Major component of this is unbilled revenues. The unbilled revenues constitute 13% of the revenue for this year. As per the report the unbilled revenue is due to fixed income projects, which would be recognised in coming quarters. This is not a cause of concern as it is not a major component and as the revenue is on fixed income project. On the other hand, fixed income projects are a good sign as it shows the maturity of the organization. g. Current Liabilities Liabilities This increased from 226 to 364. The major component of the sundry creditors is to companies under its management in US and UK. This would explain the business model in which the company works and may be a cause of concern. h. Current Liabilities Provisions There is nothing major to be considered here. The provision is for dividend. Assets = Liabilities + Owners Equity Fixed Assets + Investments + Current Assets + Deferred Tax Assets = Long term liabilities + Current Liabilities and Provisions + Owners Capital + Reserves and Surplus 361 + 286 + 2842 +7 = 0 + 1157 + 289 + 2047 = 3490 Observation/Conclusion/Analysis based on Balance sheet data: Positive The company has no debt The company is regularly providing dividends and bonus shares All the investments are in marketable securities Negative

Metrics

The company doesnt seem to have optimal working capital management. The cash from activities is residing in Cash and Bank Balances. This could also affect the metrics that we calculate using the data. The company is constantly issuing additional shares.

Net worth 2339 Net working Capital 1686 Net Fixed Assets 361 Investments 286 Capital Employed 2047 Book Value 81. As a metric this may be ok, but since most of the assets of the company are its employees the book value may not represent a true picture of the company. Current Ration 2.5

Income Statement 3. Income Revenue has grown from 2570 to 3420 an increase of 35%. Other income is negligible. Other income mainly constitutes FD interest income and dividend received. 4. Employee Expenses They form the major part of the revenue 1189 (33%). Directors remuneration is 17.43. 5. General and Administration expenses They form 18% of the revenue. 661 The major component is contract for services, which is the contracts given to self employed people, where the company doesnt have an employer employee relationship. 437.15. There has been a foreign exchange gain which has reduced the expenses compared to previous year. Otherwise the expenses would have been 826. Last year there was a foreign exchange loss which increased expenses. 6. Selling and Marketing expenses 80.4 The major component of which is travelling expenses 7. Depreciation and Amortisation The costs maps with the balance sheet 8. Profit before exceptional items and taxes 1474 Comparable with last year even though there has been a foreign exchange loss last year which increased the expenses while there has been a foreign exchange gain of almost the same amount. 9. Exceptional Items The diminution in value of the purchase of igentia travel solutions. 126. 10. Profit Before Tax (Operating Profit) 1348. The operating profit margin being 40%. 11. Profit After Tax

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1185. Taxes are around 13%. Net profit Margin is around 30% Dividend and Dividend Tax The dividend is twice of last year. Last year interim dividend + final dividend was (142+190) 330. This year the dividend is 650. The tax on dividend (33%) is very high this time compared to last time (16%). Why is it so? Transfer to General Reserve 131 Balance carried to balance sheet PL account 942 Earnings per share Basic - 41.3 Diluted - 39

Observation/Conclusion/Analysis based on PL statement data: Positive The company is able grow revenues at more than 30%. The operating margins are around 40% which is a very good number The net profit margins are around 30% which is also good. The return on capital employed is around 55% to 74% which is a good. Negative Capital turnover ratio which is a measure of capital intensivity is around 1.5 to 2 which is not a great measure.

Metrics Capital Turnover ratio = Revenue / Capital Employed = 3419 / 2047 = 1.5. It would be 2 if we reduce the capital employed due to the capital and bank balance increase due to the investment sales. Du Pont Analysis involves dividing the return on capital employed to two components. Margin and Capital Turnover ratio. Operating Profit Margin = Operating Profit/ Revenue = (1348 -75) / 3419 = 37 % Return on Capital Employed = Operating Margin * Capital Turnover ratio = 55 (1.5) to 74 (2) The operating profit of the company from PL statement is 1273. From the Cash flow statement the cash generated from operations is 1176 which is almost same as the figure from PL statement

Cash Flow Statement 16. Trade receivables Trade receivables have increased from 392 to 660. This 268 has been reduced from the cash flow 17. Loans and advances This has increased from 497 to 690. This 195 has been reduced from the cash flow 18. Current Liabilities and Provisions

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This has increased from 252 to 400. Dividend wont be considered here for calculating provisions as it is part of cash flow from financing activities Cash Generated from Operating Activities It has increased from 702 to 1176. The cash increase in operating activities is in tandem with the Net Profit. When net profit has increased from 813 to 1348 the amount of that which has contributed to cash flow is 80%. Net Cash Generated from Operating Activities The net cash is 1015 after considering the income tax paid. Sale and Purchase of Investments The purchase and sale of investments tally with the balance sheet. 909 + 2644 3140 = 413 For the diminution we reduce 127 from the 413 resulting in the current investment of 286. Also from the CF statement it looks like it didnt make any money on the purchase and sale of investments. But it could have received interest income from the same. Sale of fixed assets Negligible Purchase of Fixed Assets Tally with the balance sheet. The cash for the same has come from the sale of investments. Net Cash generated from Investing activities This (334) has increased mainly due to sale of investments and reduced to purchase of fixed assets. Net Cash used in Financing Activities The cash has been used to provide dividends (287+148). Cash has been raised by issuing new equity (25). Even though small this is a cause of concern. Net Increase in Cash and cash equivalents from 264 to 1040 Cash and Cash Equivalents at the end of the year 453 to 1493 This figure maps to the cash and bank balances under current assets.

Observation/Conclusion/Analysis based on Cash Flow statement data: Positive The company generated good amount of cash from operating activities. The company has been able to purchase new fixed assets by selling of existing investments The company is consistently providing dividends The cash flow return is good. Negative Metrics The sources of cash has been o Operating activities o Sale of Investments o Interest/Dividend Received o New Equity issue

The company has used the cash mainly to o Purchase of fixed assets o Payment of Dividends Cash flow return = Cash generated from operations / Capital Employed = 1015 / 2047 = 50%

Checklist 1. Market Capitalization The objective is to avoid companies which are very small or not discovered by the markets. The cutover market cap depends on the sector. The market cap is around 17866 million. 2. Operating Profit The objective is to avoid companies which have not generated operating profits or dont have consistent profits on the positive side. 3. Consistent Cash Flow from Operations Consistent increasing cash from operating activities 4. Consistent RoE or RoNW above 10% generated with reasonable/minimal leverage The company has not taken any leverage/debt and has high RoNW. 5. Earnings/Sales Growth Consistent or Erratic Earnings/ Sales growth rates are consistent. 6. How clean is the balance sheet The objective is to avoid companies whose debt and financial position is questionable. The company doesnt have any debt 7. Free Cash Flow The objective is to avoid companies whose cash flow is bad and that have to spend too much of the cash flow into capital expenditures. The company always had free cash flow and the same has been increasing year on year. 8. How much other is there? The objective is to avoid companies who constantly write off expenses. Extra-ordinary items have occurred only during 2011. Otherwise the balance sheet is clean. 9. Shares Outstanding Is that increasing or shrinking? The objective is to avoid companies which increase shares outstanding unnecessarily. This is a concern area as the company is constantly issuing new shares. Business Performance 10. Is it in my circle of competence? 11. Is it a low risk business? We need to discuss this question itself more. 12. Is it a good business? From the above data it seems to be so. 13. Is there room for future growth? Yes. The company has grown consistently in the past. The future may be good as KPO business still has got the employee cost advantage. 14. Is management shareholding > 10%?

Yes 15. Can I, in one sentence, say exactly what the company does? 16. Does the business have high uncertainty? Not really. Yes, business is largely dependent on business and political conditions prevailing in the western markets of the US and Europe. 17. Has the business got an enormous moat? That is one of the concern areas. The business doesnt seem to have any moat. There seems to be big competition in this space. 18. Does the business generate strong free cash flow? Yes. 19. What is the bargaining power of suppliers and buyers? It doesnt seem to have any bargaining power. Financial Performance 20. Does the business have consistent sales and profit growth history and is there room for future growth? Yes. The sales and net profits have grown consistently. The growth has come without much volatility. The company takes up fixed income projects, which is a good sign of moving up the value chain. 21. Are EBIDTA margins higher than 15%? Yes. The margins are high. Even though the margins are inconsistent, it seems to be ok. 22. Is its operating cash flow higher than net profits? No. There is only a small difference between the operating cash flow and net profits. 23. Is the debt to equity below 0.5 times? There is no debt. 24. Is the current ratio greater than 1.5? Yes. The current ratio is managed well. The only concern is the excess cash being kept in the cash and bank balances which is causing the current assets to be high. 25. Does the company have a good dividend history? Yes. The company has consistently given out more than 50% dividend. 26. How capital intensive is the business? While the business is more labour intensive than capital intensive, the company still needs to spend money on fixed assets. 27. Has it got a high and consistent return on equity? Yes. Management Quality 28. Is the management known for its capital allocation skill and integrity? No Idea 29. Has there been any substantial equity dilution in the past? Yes. The company is always issuing new equity even though small, is a cause of concern. The bonus shares are not a cause of concern.

30. Are managements salaries too high? No. 31. What has management done with the free cash in the past? It provides dividends and reinvests in the business. Competition 32. Does the business face high competition? Yes. There seems to be a lot of companies in this space. The company doesnt have any major brand name. The management also doesnt seem to be familiar names in corporate circles. Competition can easily setup companies in this space, due to the low barriers of entry. 33. Has the management focused on market share or profitability in the past? No Idea.

Intrinsic Value