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eClerx reported strong results in Q2FY25; revenue growth and margin were both better than our estimates. Revenue growth was led by Financial Market supported by Customer Operations, whereas Digital saw mixed performance. The strong margin performance was aided by: i) Stronger revenue growth, ii) Higher utilizations, and iii) One-offs to the tune of 85bps. New deals ACV was down 1.7% YoY, attributable to longer decision making by clients, particularly in the digital segment. While the overall market remains volatile, pipeline remains healthy and broad-based. Roll-offs increased in Q2, compared to Q1, and its full impact should be seen in Q3. Management has maintained its guidance for top quartile growth among its peer group, 24-28% adjusted EBITDA margin, and absolute EBITDA growth for FY25. We increase our FY25- 27E EPS 2.3-4%, factoring in Q2 performance. We also hike our TM to 25x (from 23x) given stronger growth profile and steady execution. We retain ADD on the stock and revise TP to Rs3,500 at 25x Sep-26E EPS.

Result summary

eClerx’s revenue grew 6% QoQ to USD98.8mn (5.7% CC). BPaaS revenue grew 0.8% QoQ. EBITDAM surprised positively with expansion of 480bps QoQ to 26%. Adj. EBITDAM (incl other income) expanded by 380bps QoQ to 27.1% on account of operating leverage, improved utilization, and few one-offs (85bps impact). Geography-wise, North America and RoW grew 7.4% and 7% QoQ, respectively, whereas Europe declined slightly by 0.4% QoQ. Offshore voluntary attrition increased to 22.8% vs 18.1% QoQ. Total headcount was up by 478 QoQ (2.7% QoQ) to 18,227 employees. Top-5 clients grew 9.3% QoQ and top 6-10 clients grew 6.1% QoQ. Emerging clients’ revenue grew 1.9% sequentially. Onshore and offshore revenue rose 5.7% and 6.1% QoQ, respectively. Staff utilization (delivery) grew by 200bps QoQ to 74.1%. What we like: Broad-based revenue growth momentum, margin expansion, and cash conversion (90% OCF/EBITDA). What we do not like: Europe remains under pressure.

Earnings call KTAs

1) The strong growth in financial markets division was driven by offshore and onshore growth in the client lifecycle business, particularly from the compliance and regulatory perspective. The company continues to see broad-based opportunities and is also seeing a pickup in demand for transformational services in this segment. 2) Customer operations growth was primarily driven by execution as the industry continues to face pressure in revenue and subscriber growth. 3) Digital division had a mixed Q2 as growth in data operations was offset by slowdown in the creative business. 4) The company is seeing initial success in cross selling its Martech and data engineering services to its existing clients. 5) The QoQ margin was impacted to the tune of 85bps by few one-offs in Q1 of sign-on bonuses, higher 401K contributions, and change in calculation method for leave encashment provision. Hence, margins in Q3 are expected to be lower sequentially. 6) The new offices in Chandigarh and Pune will be operational in Q3 and the Mumbai office will be operational in Q4. As a result, G&A are expected to increase in H2 (50-70bps impact in Q3 and lower in Q4). 7) The management expects improvement in budget outlook on hitech, retail, manufacturing, and distribution. 8) Roll offs (pertaining to shortterm projects which have come to an end) were higher sequentially in Q2, and its full impact should be seen in Q3. 9) Focus areas for M&As include: a) adding consulting capabilities in financial markets, b) creative and analytics in Digital, c) salesforce implementation capabilities on the tech front, and d) near-shore presence on the customer operation front. 10) The company has combined technology and analytics under a single leadership for better positioning.

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