Add eClerx Services Ltd for the Target Rs.2,700 by Emkay Global Financial Services Ltd
eClerx reported revenue growth of 1.5% QoQ to US$93.3mn (1.6% CC), mainly driven by momentum in financial markets. EBITM fell by 390bps QoQ to 17.2% due to wage hike and full-quarter impact of leadership hiring. The demand environment maintains status quo, per the management. The company has seen positive momentum across three segments in Q1. It is seeing green shoots in financial markets. It is also witnessing early signs of improvement in the digital business, with a healthy pipeline, though it is still seeing longer lead times for closure of deals. Healthy deal pipeline and pace of conversion, progress on cross sales, average size of deals, inbound flow, etc grant confidence to the management on its overall growth strategy and momentum sustainability. The mgmt expects margin to improve Q2 onward (improvement path in line with FY24) and reiterated its adjusted EBITDAM guidance of 24-28% for FY25, factoring in the planned investments in S&M and leadership augmentation. We cut FY24-26E EPS by 8-12%, building the Q1 performance and margin reset. We retain ADD on the stock and TP of Rs2,700/share at 20x Sept-26E EPS.
suResult mmary eClerx’s revenue grew 1.5% QoQ to US$93.3mn (1.6% CC). BPaaS revenue declined 10.5% QoQ in Q1 due to lower transaction volumes due to seasonality. EBITDAM declined by 430bps QoQ to 21.2%. Adj. EBITDAM (incl. other income) declined by 440bps QoQ to 23.3% due to wage hike and full-quarter impact of leadership hiring. Geography-wise, North America and Europe grew 2.2% and 1.1% QoQ, respectively, whereas RoW declined 4.4% QoQ. Offshore voluntary attrition moderated to 18.1% vs 22.7% QoQ. Total headcount was up by 395 QoQ (2.3% QoQ) to 17,749 employees. Top-5 clients grew 1.6% QoQ, while the top 6-10 clients declined 2.2% QoQ. Emerging clients’ revenue grew 3.1% sequentially. Onshore revenue grew 7.2% QoQ, while offshore revenue remained flat. Staff utilization (delivery) declined by 140bps QoQ to 72.1%. What we like: Broad-based revenue growth momentum, positive momentum in financials, healthy deal intake, and double-digit revenue growth aspiration for FY25. What we do not like: Margin miss.
Earnings call KTAs
i) eClerx saw healthy conversions in Q1, indicating positive growth momentum continuing in Q2. Growth was led by financials, followed by customer operations, while early signs of momentum build-up were seen in the digital business.
ii) Financial markets segment is seeing healthy demand led by both, the client life cycle and trade life cycle. It has seen demand for remediation work, driven by regulatory needs. It continues to see rise in demand for onshore and nearshore staffing, across the change and BAU books.
iii) Customer operations and Digital grew QoQ, albeit slower than financial markets. Growth in customer operations was mainly driven by field tech ops and the care business. eClerx is seeing early signs of improvement in Digital, with a healthy pipeline, though lead time for closure of deals is still longer. High-end fashion and luxury segment continues to be pressured due to headwinds from the China market.
iv) Revenue from Analytics and Automation was US$16.9mn in Q1, seeing QoQ/YoY growth, which is encouraging. v) Seat-count rose by 364 QoQ in Q1 owing to temporary facilities going live in Mumbai and Pune. eClerx is creating permanent seating capacity in all 3 locations, likely to go live in Q3.
vi) G&A costs inched up by 30bps QoQ due to higher rent/electricity cost of temporary facilities.
vii) Roll-off ratio historically tracked in the 15-17% range. eClerx does not expect any uptick in FY25.
viii) Focus areas for M&As include: a) creative agency in Digital, b) salesforce implementation capabilities on the tech front, as the company is effecting sizeable operational work on enterprise platforms like Adobe and Salesforce, c) expanding presence outside India (e.g. in LatAm) on the customer operation front, and d) adding onshore consulting capabilities in financial markets or areas like fraud and antimoney laundering which augments its client lifecycle business.
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