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All-round performance

* eClerx delivered a better-than-expected operating performance in Q3FY22. Revenue grew by 5.8% QoQ and 37.7% YoY to USD73.4mn (5.9%/40.4% QoQ/YoY in CC). EBITDAM fell by 70bps QoQ to 30.8% and came in 30bps ahead of our estimates.

* Management remains confident of sustaining the revenue growth momentum in the near term on the back of broad-based demand, anticipated lower churn among top clients, healthy deal wins, and traction in new client acquisitions and a widening client portfolio.

* Revenue from emerging clients grew by 5.2%/49.6% QoQ/YoY to USD29mn in Q3. The company has steadily scaled up revenues from emerging clients (non-top 10 clients) in the last few quarters as part of the broadening and diversification of growth performance.

* We raise FY22-FY24E EPS by 3.3-5.4%, factoring the overall beat in Q3. We maintain Buy with a TP of Rs2,860 (20x Dec’23E EPS), considering near-term demand tailwinds, the overall execution capabilities of the company and steady cash generation.

What we liked? Broad-based growth (sixth quarter of sequential growth). Growth in Top-10 clients (6.2% QoQ) and emerging clients (5.2% QoQ), and progress across client buckets.

What we did not like? Slow growth in the Europe region (2.5%/14.3% QoQ/YoY).

Growth momentum sustains: eClerx’s Q3FY22 revenues grew by 5.8% QoQ (5.9% CC) and 37.7% YoY (40.4% CC) to USD73.4mn. Revenue growth was led by analytics, managed services, customer engagement, campaign management and digital marketing. The company mentioned that over 50% of new sales are coming from the focus areas outlined by it, laying down healthy a growth trajectory for the future. Management is confident of sustaining the revenue growth momentum on the back of broad-based demand across three segments (Customer Operations, Digital and Financial Markets), anticipated lower churn among top clients, healthy deal wins, and traction in new client acquisitions and a widening client portfolio. Revenue growth was led by North America (6.3% QoQ), Europe (2.5%) and the RoW (12%). The Personiv acquisition continues to see healthy growth momentum, and the company provided additional earn-out consideration of Rs49.5mn in the quarter, owing to the better-than-anticipated financial performance of Personiv in CY21 (current trends indicate that CY22 earn-out consideration should also be higher). Revenue from Top 5/10 clients continues to trend well and grew by 5.9%/6.2% QoQ. Management expects sustained revenue performance in Top-10 clients in the near term. eClerx’s client mining activities have also yielded desired results in the past few quarters, with the company adding 5 and 2 clients each in USD1mn-3mn and USD5-10mn client buckets.

Adjusted EBITDAM came closer to upper end of guided 28-32% range: EBITDAM declined by 70bps QoQ to 30.8% due to higher G&A and S&D costs, which were partly offset by revenue growth-led operating leverage and the offshore shift. Adjusted for the Personiv-related additional earn-out consideration, adjusted EBITDAM was up 20bps QoQ to 31.7%, closer to the upper end of the guided range. Management maintained EBITDAM guidance range of 28-32% and indicated that Q4FY22 margins will be closer to the upper end of the guided range. It expects FY23E EBITDAM to remain within the guided range. Headwinds from the higher-than-usual wage hike plan for FY23 (effective April) and the normalization of travel and other discretionary costs are expected to be partly offset by revenue growth-led operating leverage and the offshore shift.

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