IGI Logo

eClerx’s Q2 operating performance came well ahead of estimates. Revenue grew 4.4% QoQ to USD87.6mn, on the back of traction in financial markets and customer operations. EBITDAM expanded by 390bps QoQ to 28.4%, driven by revenue-growth-led operating leverage and stable delivery costs (on account of change in offshore employee mix and lower tech headcount). Subsequent to the impressive Q2 margin performance, the management now expects adjusted EBITDAM to register its targeted range of 28-32% for FY24; it had earlier estimated that Company will miss the target post Q1. Despite the macro headwinds, eClerx remains cautiously optimistic and expects to see sequential growth in Q3. The stock has rallied over 23%/59% in the last 3M/6M. While valuation is undemanding, the stock is likely to take some breather in the near term, as investors await clarity on the medium-term growth plan under the new CEO. We upgrade FY24E-FY26E EPS by 1.5%-7.2%, to factor-in the Q2 beat; we raise our target multiple to 18x (from 16x), considering the better earnings growth trajectory; retain BUY, with revised TP of Rs2,400 (18x Sep-25E EPS).

eClerx Services: Financial Snapshot (Consolidated)

Results summary

eClerx’s revenue grew 4.4% QoQ to USD87.6mn (4.4% CC), above our estimates. BPaaS revenue grew 0.4% QoQ in Q2. EBITDAM expanded by 390bps QoQ to 28.4%, above our estimate of 25.7%, on the back of strong revenue growth-led operating leverage, flat delivery costs due to change in employee mix and reduction in tech headcount, and Rupee depreciation. Adjusted EBITDAM (incl. other income) expanded by 440bps QoQ to 29.7%. Geography-wise, North America and RoW each grew 5.9% QoQ, whereas Europe declined 1.8% QoQ. Offshore voluntary attrition inched up, to 23.8% vs 21.0% in Q1. Total headcount was up by 607 QoQ to 16,333 employees, at 3.9% QoQ. Top-5 clients grew 8.0% QoQ. Top 6-10 clients stayed subdued sequentially, and their combined revenue remained within the narrow range in last four quarters. Emerging clients’ revenue grew 3.0% sequentially, in Q2. Onshore revenue grew 12.5% QoQ, while offshore revenue grew 2.6% QoQ. Staff utilization (delivery) inched up by 60bps QoQ to 75.4%. What we like: all-round operating beat in Q2 performance, steady cash conversion (OCF/EBITDA at ~78%), and guidance of growth continuity in Q3. What we do not like: Continued softness in Europe (-1.8% QoQ).

Earnings call KTAs

i) The management indicated that there has been no marked change in the deal pipeline, nor in the deal conversion cycle, over the last few months. ii) Management is cautiously optimistic about Q3 and expects sequential revenue growth in Q3 while prefer to wait for a few weeks before commenting on the Q4 growth outlook, as clients finalize their budgets. iii) Hitech remains tepid and the management continues to be cautious in this segment. iv) Company retains caution in the luxury segment, as some key clients in the segment have been hit post the pent-up demand after the pandemic; this is normalizing. v) Company does not plan any structural change under the leadership transition, and continues to invest in sales and marketing. New MD&CEO Kapil Jain will present his medium-term plan at the end of FY24 which will outline his 3-year growth strategy. vi) The management expects adjusted EBITDAM in H2 to track levels similar to those in Q2 (~29.7%). vii) Growth in the Delivery headcount has been largely at the bottom of the pyramid. Further, headcount in Tech has reduced due to planned streamlining of the bench since the last two quarters. Both factors have led to flat delivery cost sequentially. viii) Company is witnessing an increased number of active discussions related to GenAI and is in 55 active discussions, with most in areas of content operations, care ops and insights on demand. ix) Company is open to an attractive acquisition opportunity, in the absence of which, it will continue with its past distribution policy.

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf

& SEBI Registration number is INH000000354