eClerx Services Limited (ECLERX) Earnings Call Transcript & Summary

Good day, and welcome to the Q1 FY '27 Earnings Call of eClerx Services Limited. Please note that this webinar will be recorded. To take us through the results today and to answer your questions, we have with us the top management of eClerx, represented by Kapil Jain, Managing Director and Group CEO; and Srinivasan Nadadhur, Chief Financial Officer. We will start the call with brief opening remarks by Kapil, which will be followed by Srinivasan, who will be sharing the financial update, and then we'll open the floor for a Q&A session. As usual, I would like to remind you that anything that is mentioned on this call that gives any outlook for the future or which can be construed as forward-looking statements must be viewed in conjunction with the risks and uncertainties that we face. These risks and uncertainties are included, but not limited to what we have mentioned in the prospectus filed with SEBI and subsequent annual reports, which you can find on our website. Having said that, I will now hand over the floor to Kapil. Over to you, Kapil.

Thank you, Harsha, and good evening, everyone. Q1 operating revenue was USD 125.9 million, up 15.2% year-on-year with 2.8% sequential growth, our 12th consecutive quarter of sequential growth, reflecting consistent execution even in a mixed operating environment. INR revenue for the quarter was INR 11,524 million, up 23% year-on-year. Operating EBITDA was INR 2,652 million at a margin of 23%; PAT stood at INR 1,643 million at a margin of 14%. The sequential margin decline was driven mainly by wage increases. Strong revenue growth absorbed much of this impact, and we delivered healthy profitability while continuing to invest in our people and technology. New deal wins were USD 41 million, up 25% year-on-year, reflecting the momentum built over recent quarters. Client conversations remain healthy across the business and our service lines, which gives us confidence going forward. Analytics and automation grew 7% sequentially, well ahead of the company average, and has now crossed USD 100 million annual run rate, an important milestone for us. Our goal is to steadily increase the share of technology-led services in our business and stay relevant for our clients. I'll also give a brief overview of the vertical updates and some of the client wins. On the high-tech side, the outlook remains positive. Clients continue to invest in transformation programs. Demand for our AI and technology capabilities remains strong in this vertical. Emerging business, led by finance and accounting, has delivered strong growth for the fourth consecutive quarter. For one of our clients, we are expanding F&A support into the APAC region. Our combination of domain expertise and technology resonates strongly with SMB clients looking to automate their finance processes. On the communication, media, and telecom side, we saw growth across our international centers, Cairo, Manila, and Fayetteville, supported by strong delivery and execution. We are adding new inbound sales capabilities and seeing growing client interest in diversifying delivery across these locations. In the BFSI segment, our compliance manager in the FCC space continues to receive a positive response. We are in discussions with several banks and asset managers, with some pilots completed successfully and others at various stages of evaluation. We won an engagement to set up a contact center for a banking client in our Fayetteville center in the U.S., one of our first examples of cross-selling CX services into BFSI. We also won work in the mortgage area, an area where we have had limited presence so far. And we have started operations in Coimbatore, which strengthens our delivery network and positions us to pursue larger opportunities and tap talent from the Coimbatore area. M&D and retail: these verticals remain relatively soft. Clients continue to face supply chain challenges from the prolonged Middle East conflict, resulting in more cautious spending, longer decision cycles, and some delays in discretionary projects. Even so, client engagement remains active. Fashion and Luxury revenue was flat sequentially and up 2% year-on-year. We see some early signs of recovery and expect gradual improvement to continue in Q2. Technology and Analytics: AI demand continues to grow, especially in high-tech and BFSI. We see strong demand for data preparation and exploratory data analysis, which is a foundation for implementing AI. And these are often the first steps before clients move to larger agentic AI programs. In BFSI, we are deploying AI across document digitization, KYC screening, process workbench, and financial spreading, among many other areas as well. In CMT, we completed a successful QA 360 pilot with one of our large clients, which is going live in Q2. At full scale, it will audit around 0.5 million interactions every month across sales integrity, retention, and credit compliance. In creative services, our AI-powered creative platform, Fluid 4, now supports several of our clients in high-end fashion and retail. In terms of awards and recognition, we received several during the quarter. At the Economic Times Future Skills Award, we won a Silver for Excellence in Industry, Alliance Skilling Infrastructure, and a Bronze for Excellence in learning platforms and business impact measurement. Forrester featured eClerx in its business process outsourcing services landscape report, recognizing our strength in AI, consulting, analytics services, and industry AI services. At the Indian CSR and Sustainability Awards, we received the CSR Excellence in Education Award for our long-standing partnership with Sampal, which supports education in tribal and rural communities around Pune. The macroeconomic environment remains mixed, and clients continue to be selective in their spending. Even so, we expect another quarter of sequential growth. We have also crossed an annualized revenue run rate of over USD 500 million, an important milestone for the company. While quarterly growth will naturally vary, we see good client conversations, a healthy pipeline and encouraging momentum. Over the last 3 years, we have made good progress possible because of the trust of our clients, the commitment of our people and the strength of our partners. We believe we are well positioned for the next phase of growth. Finally, we plan to host an Investor Day later this quarter, giving investors a deeper understanding of our capabilities, strategy and the leadership team. We will share details soon with you all. Thank you. Over to Srini.

Thank you, Kapil, and good evening, everyone. I will recap some of the revenue and margin numbers and offer more color specifically on margin and other operating metrics. So INR operating revenue, which includes the gain/loss on our hedge book, was INR 11,524 million at an implied FX of INR 95.1 per dollar for the quarter. In constant currency terms, operating revenue is up 2.9% sequentially and 15% year-on-year. Including other income of INR 179 million, total revenue is INR 11,702 million, up 3.1% sequentially and 24% for the full year. Other income is lower during the quarter because of lower investable surplus. The net operating cash flow for the quarter is INR 1,073 million. The OCF to EBITDA ratio is 38%, and as you must be aware, Q1 is lower than the average, as the annual variable payout for FY '26 is paid out in this quarter. Operating EBITDA Q-on-Q is down 260 bps, primarily because of wage increments, which contributed 210 bps out of the 260, spend on computers and network infrastructure contributing 40 bps, and this was partially offset by a reduction of 60 bps in S&D. On a Y-on-Y basis, operating EBITDA is down by 96 bps. EBITDA, including other income, is down 330 bps Q-on-Q and 64 bps Y-o-Y. Utilization in Q1 is 76.5%, which is higher than what we saw in Q4. Total headcount is down by 0.6% Q-on-Q, but headcount billed to clients was up because of the higher utilization. In this quarter, there is a slight reduction in seat count as some production seats were refitted. We are, in fact, adding additional capacity across our delivery centers in India, that is Mumbai, Pune, Chandigarh, Mohali and Boimatur. These facilities will become operational in a staggered manner over the next 3 to 4 months and increase seat count by about 1,600 seats in aggregate. This is also the reason for the increase in Ind AS depreciation and interest costs for this quarter. On other key metrics, DSO is at 79, attrition is at 21%, which is about the same as the previous quarter. For a few quarters now, our tech and analytics book has grown faster than the firm average. As you are aware, we set up operations in Cairo and Lima 12 to 15 months back, and we are very pleased to see the growth in these new locations. Manila also has performed very well. Headcount there has doubled in the last 15 months. As you may be aware, these locations operate at a lower gross margin than India, and the change in revenue mix will have some downside on margin. We are also seeing an uptick in G&A cost, especially for computers, servers, and networking infrastructure. Despite all of these, we are confident of meeting the stated EBITDA range of 24% to 28% for the full year. Thank you, everyone. And with this, we conclude our prepared remarks, and we can now move on to the Q&A. Back to you Harsha.

[Operator Instructions] We have the first question from the line of Yash.

This is Yash from Aura Capital. My first question is on growth for the BFI segment, which has been lagging behind the company growth. So is this an area of concern? And by when do you see it catching up with the company growth or even going ahead of it?

Thanks. So yes, as you would see, this quarter, if you compare against Q4, it's a flattish growth. We are flat. And Q4 compared to the previous Q3 of the previous fiscal year was, I think, negative 3%, 3.5%. So if you see the gradient is moving in the positive direction and with the pipeline and the discussions we are having, we are confident to change the tide and bring it to the positive territory.

Any timelines on that?

I think we should see momentum build up and give us benefits starting in H2.

And second would be there is an increase in tech services headcount. So is this an investment which you're making? Can you talk more about this? Which part of the business is this for? And by when do you see it paying off?

So, yes, it's a mix of investments in AI, creating an AI COE, doing a lot of pilots, also enhancing the functionality of our products, as I've been saying in the previous earnings call. We are constantly looking at it in terms of the value it is giving to our clients, both in terms of the wins on tech and analytics as well as in terms of the conversions that we are having. And as you would see, our tech and analytics business, which is a primary surrogate for the investments that we are making on AI, is around 7%, which is higher than the company overall growth. That's number one. And number two, in all our discussions, we are pivoting and leading it with AI and generative AI. So I think it's hard to say, look, if I have put in x number of people, will I get Y? I think the growth momentum, the conversions, and staying in the margin range of 24% to 28% are all the factors that will ensure that we are looking at the ROI and we are getting the right benefit. And what is the mind share you are getting with the clients when they are having discussions on AI, and how do they implement which process or area they should pick? Can we help them accelerate their AI implementation? So that's the metrics that we are looking at.

We have the next question from the line of Sandeep Shah from Equirus Securities.

The first question is, generally, our coming quarter's growth is dependent on the headcount. This headcount has marginally gone down. So is it to a slightly softer quarter in the coming quarters, or is it more to do with an effort to improve and AI-led employment?

So Sandeep, I think quarter-on-quarter, as I said, we are looking for sequential growth. There could be quarter-on-quarter variations. I think for the full year, we are very confident of delivering the top-quarter growth. The headcount, if you see, yes, the total headcount has come down, but the headcount has increased, and so that's the reason for the headcount reduction. On the quarter, I think I said in the beginning that we are confident of delivering sequential growth. Quarterly quarter-on-quarter variations will continue, but with the discussions and the momentum we are seeing, we are confident for the full year in achieving the top quartile growth of the industry segment.

And just the second question is in terms of ACV. This quarter, there has been a 26% growth. Do you believe this kind of a Y-o-Y growth momentum based on pipeline may continue in the coming quarter? Or can you comment on the whole year target.

Yes. So Sandeep, for the full year last year, we delivered around $170 million ACV. And I think what we are aspiring for is to definitely do at least what we did last year and grow on that number because that will give us a good tailwind as we enter '27, '28. So that's what we are expecting. And I think at this stage, I see no reasons as to why we are not marching towards the goal that we have set ourselves for.

We have the next question from the line of Rahul Jain from Dolat Capital.

In terms of segments, you articulated one for BFSI; you added mortgage as one of the new pieces. So if you could articulate what kind of a subsegment opportunity in terms of market, customer size, or geographies, all of that, which you are trying to chase within this subsegment?

So Rahul, I think on BFSI, we are seeing opportunities across the regions, APAC, EMEA as well as in the U.S., across FCC, across trade, and all of them, like in the trade life cycle, we are looking at AI in terms of how they can use AI because we understand the front to back of the process and we understand the clients' business. So that's where the discussions are leading. As I said, we also won a CX engagement for FS clients, which is the first cross-sell because CX was predominantly for our communication, media, and telecom, and we will continue to focus on that as well. So we will continue to see how we cross-sell and upsell our existing offerings into the FS segment. So broadly, that's the composition. I hope I've answered your question.

One piece, which I think you also mentioned that you are changing mortgage as an area within BFSI, if I heard it right. So my question was more specific to the mortgage customer opportunity.

Sorry. So let me take that, and Rahul, thanks. So what we mentioned is that we've had a couple of clients talking to us about mortgages, and we have some momentum in that area. We will start doing work on that. Now, as it becomes meaningful, we will have to then decide who we go after and which clients do we pitch to. But at the moment, I think our focus is on making sure that these initial 2 engagements are successful. So I think anything beyond that will come later.

Okay. And this is in the U.S.; is that understanding right?

That's correct.

And it's refinance origination; anything if you would like to add?

I'll have to check on the servicing side. Yes, yes.

The reason I was trying to understand is that we have seen the volatility in the origination side of it is extremely high for the BPO companies, while servicing is definitely far more annuity-like in behavior. So that's the reason I was trying to understand.

We have the next question from the line of Shradha Agarwal from AMSEC.

Just 2 questions. One is on margins: when you call out the puts and takes for this quarter, rupee depreciation was not called out. So did we see any mitigating impact of currency movement on margins?

Yes. So excluding FX, I think the impact on quarter-on-quarter delivery would have been 330 bps, of which the majority would have been increments. G&A, S&D would largely have set themselves off. So I think the impact of FX for us would have been 0.5% or so, 50 bps or so quarter-on-quarter.

And secondly, I think, Kapil, last time you had indicated that there is a U.S. government regulation on offshore call operations that was being monitored. So what is the status on that? And in relation to that, we've seen some softness in our CMP vertical. So is it to do with some regulation change in the U.S.?

Shradha, no. I think there is no further change in either direction from what we reported in the last quarter. And I think it's more a quarterly aberration if you see the growth in CMP business in Q1 over Q4 sequential growth from 7% to 1.3%. It's just a quarterly aberration. It's nothing to do with the regulatory environment.

And just last question, if I can squeeze in. The top 5 accounts have been relatively slow for some time now. So is it some particular client-related weakness? Or what is happening actually in the top 5 client category?

So I think it's not slow because what is happening is that, like I have said in earlier quarterly earnings call that, if clients are implementing technology, AI, we are not going to shy away from it. So the fact that we are able to capture the demand and a lot of work that we do in the FCC area is also dependent upon in terms of how and when you are doing client refreshes, and it's linked to the regulatory environment. And that, I think, has slightly come down because of the overall regulatory environment. I think the overall regulatory environment for financial services in the U.S. is slightly less onerous than it used to be, let's say, 2 or 3 years back. So that's the reason. Otherwise, there is no other reason for growth in the existing top 5 clients.

We have the next question from the line of [indiscernible]

So Vineet, as I mentioned, our FA, we started with SME, and then we are gradually moving into the mid-market segment. We have also built a financial workbench, which is resonating well with the clients in automating their processes. So we expect to see... Good momentum in the emerging markets business on the back of our F&A capability.

If you look at Q4, I know we were coming on the back of a very strong quarter of Q3. We had 0.6% growth, and this Q1 versus Q4 is about 2.9%. If you look at Financial Services was negative 2.8%, and this quarter, it's negative 0.1%. And as I said in the beginning, we do expect to turn the curve and see how we can deliver positive growth from H2 onwards. And I think we are seeing good momentum and traction in FS. On the CMT side, it's more quarterly volatility we are seeing in our international centers, Tyro as well as in Fayetteville. And Hi-Tech and M&D, I think, saw a good growth turnaround. So I think I'm not worried in terms of the overall growth of 2.8%, 2.9% that we delivered. And FS, like you rightly said, is a large area for us, and H2 we should start looking good from H2 onwards.

CapEx, we are slightly higher. We are probably running at something like --let me check.

INR 130 crores. Yes. On the revenue growth, the guidance stays the same. We are confident, given our capability and industry mix, to stay in the top quartile growth.

I think you can look at the top 20-odd companies that are listed in India with a similar market cap, and you should be able to work out some of that number. We think even in Q1, we have delivered top-quartile growth. Some of them have not released results yet. I think a couple of them are today. So we have to wait for that picture to emerge.

We have the next question from the line of Dipesh Mehta from Emkay Global.

[indiscernible]

So on CLX, you are right that Q2 is soft. But if we look at Y-o-Y comparison for H1 to H1, we think that we will still be up for fashion and luxury. I think full year for CLX is probably around 0% to 2%. I think we should be able to do a little better this year. Your first question was whether we are seeing any change in roll-off trends. So generally, roll-off tends to be volatile because if you're doing some short-term work and that ends, then that will show up in the roll-off. So it tends to be volatile. It is not fully predictable. There are quarters where not much roll-off happens, and there are quarters where there is a lot of roll-off. But generally, if you look at it in a 4-quarter period, then it is generally between 15% and 20% of revenues for the year. And we expect that, that should broadly hold up this year as well.

We have the next question from the line of Rohit from Axis Capital.

So the first question is regarding growth in non-top 10 clients. So for the past few quarters, your non-top 10 clients are actually growing at a faster rate compared to your overall company growth. However, this quarter, that cohort has seen some slowdown. So can you give some color on what's causing that during this quarter? And how is the outlook going forward for this cohort?

So I think, as I had said earlier, that given the size of our business and top 10 outside of top 10, quarter-on-quarter volatility will exist. Directionally, there is a strong focus on growing outside of top 10. It's not to say that we are not looking to grow in top 10 or looking to get a larger share of wallet of top 10. But I think we are confident in delivering higher growth outside of the top 10 as we continue because that's a significant focus area for us to see how we can reduce the top 10 client concentration. I don't think there's anything to read on quarter on the basis of whether it's a trend or something slow or anything we are seeing, nothing of that sort.

The second question is related to other operating expenses, which are there in your exchange filings, the P&L in exchange filings. So that has also seen some substantial increase quarter-on-quarter. So what's causing that?

[indiscernible] some amount of facility buildout. So it's all G&A-related.

And is it expected to go down as a percentage of revenue going forward or in the next 2 to 3 quarters or --

Consing and networking expenses, I think the trend generally is not expected to go down. I think equipment has become more expensive. I think some of it is also dependent on when we make the purchase. So I think CapEx has been a little higher this time around. Some of the OpEx also has been higher. So we should see some goodness as revenue growth goes up.

We have the next question from the line of Chirag Shah.

I'm Chirag from White Pine. Just one question on the non-FTE model or outcome-based model, or what you term the technology analytics part of the business. So any light you would like to share on it- what kind of interaction are you having? What is the pace of interaction versus the last 3, 6 months? I presume BFSI would be more active on this kind of discussion, where an outcome-based model becomes more prominent at least from some part of [indiscernible]

So I think the discussions are centered around AI-led deals in our client life cycle, SEC, transaction monitoring, fraud, and selling both new services to existing clients as well as capturing and onboarding new clients. We have also had some industry recognition, which is also helping with inbound inquiries. So, in terms of the momentum that we are seeing is definitely higher than what we have seen in the previous 2 or 3 quarters, the question that you're asking. And I think we are also looking and having discussions on the retail mortgages and the payment side of the business as well. Those are the broad areas where we are seeing comments in the financial services space.