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eClerx posted a softer-than-expected operating performance in 2Q. Revenue grew 1.6% qoq CC, lower than our expectations of 2%. EBITM increased by 50bps qoq to 19.2%, missing expectations, owing to rupee depreciation. New deal ACV stood at $30.8mn in 2Q; on TTM basis, ACV fell ~9% qoq. Per the management, delayed decision-making, clients’ selective buying behavior with tighter budgets, and a smaller deal mix are weighing on deal ACV. Automation and Analytics continues to grow 2-3x faster than the company average and now accounts for ~21% of the revenue base. eClerx has a healthy pipeline across Hi-tech, CMT, Emerging, and BFSI. Management expects growth to accelerate in 2H, contingent on pipeline conversion, and has maintained its FY27 EBITDAM guidance of 24–28% despite headwinds from the PF wage ceiling hike (~20bps) and higher D&A (~20bps) in 2H, while continuing to invest in AI and new delivery locations. We cut FY27-29E EPS by ~5-6%, factoring in the 2Q performance. We retain REDUCE while revising down our TP by 7.5% to Rs1,850 from Rs2,000, on 18x Sep-28E EPS.

Results summary

Revenue grew 1.5%/10.6% qoq/yoy to $127.7mn in 2Q (1.6% CC qoq), below our estimate of $128.4mn. EBITDAM expanded by 90bps qoq on the back of improved delivery cost, mainly driven by rupee depreciation (110bps), higher legal and professional fee (14bps), and S&D (10bps). Revenue growth was led by Emerging industries (8.9% qoq in USD terms) and BFSI (2.8%), offset by weakness in Fashion, Luxury, and Retail (-7.3%), while CMT, Hi-tech, and M&D was flat. Automation and Analytics revenue rose 5.0% qoq; BPaaS revenue rose 1.5%. North America revenue rose 7% qoq, whereas that for Europe and RoW fell 8.1% and 41.5% qoq, respectively. Top-5/10 clients increased 2.1%/1.7% qoq and Emerging clients grew 1.1%. Total headcount was 23,269, up 3.4% qoq/8.7% yoy. Offshore voluntary attrition increased by 530bps qoq to 23.4%. What we like: Strong cash conversion (OCF/EBITDA: ~95%), continued momentum in emerging industries. What we do not like: Margin miss, softness in Europe, Retail.

Earnings call highlights

1) Clients remain cautious amid tight budgets and longer decision cycles.

2) BFSI grew sequentially on the back of short-term engagements. The growth is constrained by AI adoption and easing US FCC regulations, which are reducing client refresh volumes.

3) The company is expanding into payments (AML/KYC) and mortgages to offset the weakness.

4) Emerging grew to 12.6% of revenue (from 11.7%), led by FAO.

5) CMT was flat sequentially, with Cairo and Manila continuing to grow and new voice programs ramping up.

6) Hi-tech demand remains strong on agentic AI and transformation services.

7) Fashion, Luxury and Retail declined seasonally due to the holiday season in Europe and luxury demand being weak in China and Europe, with a seasonal rebound expected in 3Q. 7) 2H margin headwinds: The PF wage ceiling hike and higher D&A are expected to weigh on margins by ~40bps (~20bps each).

8) 2H capex is expected to remain near 1H levels (Rs919mn), with seat additions slowing next year.

9) Utilization fell to 74.9% (from 75.5%) as headcount grew ~3.4%, ahead of revenue growth of 1.5%, reflecting hiring ahead of delayed deals.

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