eClerx Services Limited (ECLERX) Earnings Call Transcript & Summary

So hi, everyone. Good day, and welcome to Q2 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, followed by Srinivasan, who will be sharing the financial update, and then we will open the floor for 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 the 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, Asha, and good evening, everyone. Welcome to our Q2 FY '27 earnings call. We continue to grow in a mixed demand environment while sustaining margins and investing in our AI and technology capabilities. Q2 operating revenue was USD 127.7 million, up 10.6% year-on-year and 12.9% in constant currency and 1.5% sequentially. This was our 13th consecutive quarter of sequential revenue expansion, demonstrating the underlying resilience and consistency of our operating model. INR revenue was INR 11,887 million, up 18% year-on-year. Operating EBITDA was INR 2,839 million at a margin of 23.9%. PAT was INR 1,804 million at a margin of 14.9%. EBITDA margin improved 90 basis points sequentially, supported by disciplined cost control, a more efficient offshore delivery mix and operational improvements across business units. First half EBITDA margin remained about 190 basis points below last year, reflecting continued investments in new locations, technology and AI. In absolute terms, first half EBITDA grew 11%. Headcount increased 3.4% compared with revenue growth of 1.5%. Utilization declined slightly to 74.9%, while attrition rose to 23.4%. New deal wins were USD 31 million compared with USD 41 million last quarter. First half deal wins totaled USD 72 million compared with USD 78 million in the same period last year. Clients remain selective with tighter budgets and longer decision cycles as spending shift towards AI-related investments. Analytics and automation grew 5% sequentially and 27% year-on-year, more than twice the company's growth rate. The business now has an annual revenue run rate of about USD 109 million and accounts for approximately 20% of revenue. Our technology team has 2,300 people, and we continue to invest in GenAI technology services and process automation to strengthen our capabilities. Vertical updates and client wins. Emerging business, this segment now accounts for 12.6% of revenue, up from 11.7%. Our FinOps offering spans the full finance cycle, and we continue to see opportunities for growth. Communication, Media and Telecom revenue was broadly flat sequentially. Cairo and Manila continued to grow, and we deployed QA 360 at a large client. The pipeline remains healthy. BFSI revenue grew about 3% sequentially, supported by short-term engagements. Easing financial crime compliance regulation in the U.S. has reduced refresh volumes at existing clients. We continue to see traction with new clients, including a payments company where we have begun providing AML and KYC services. Interest in document digitization and related services continues. HiTech and M&D, we continue to see traction in HiTech driven by agentic AI and transformation services. Fashion, luxury and retail revenue was flat year-on-year. Q2 is seasonally lower because of the August holiday period in Italy. The luxury market continues to face headwinds with weak demand in China and Europe. Technology and Analytics. The growth in analytics and automation reflects the progress we are making with our investments. We continue to expand our AI team in the EU and the U.S. with a near-term focus on placing engineers closer to clients. More than 280 of our people have been -- have got Claude AI certifications. Awards and recognition. We won 2 awards at the NASSCOM BPM Excellence Awards 2026 in the medium-sized organization category. The first was for talent for building future-ready talent and ecosystems and the second for customer experience for transforming and delivering business outcomes. For the second consecutive year, we have been recognized as a Great Place to Work in India based entirely on employee feedback. This recognition reflects our continued focus on our people. We also received CSO100 and CIO100 recognition for our agentic AI use cases. The outlook in terms of the environment remains mixed and clients continue to be selective. We see momentum in emerging business and HiTech, new voice programs ramping up in communication, media and telecom and a seasonal recovery in fashion and luxury. These are offset by volume pressure in few BFSI accounts. Our client relationships continue to deepen. We now have 25 clients above USD 3 million, up from 20 a year ago. We remain focused on disciplined cost management and cash conversion. I would like to thank our clients for their continued trust, our employees for their dedication and our investors for their support. 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 on other operating metrics. INR operating revenue, which includes the gain/loss on our hedge book was INR 11,887 million at an implied FX of INR 93.1 for every dollar. In constant currency terms, operating revenue is up 1.6% sequentially and 12.9% year-on-year. Including other income of INR 240 million, total revenue is INR 12,126 million, up 3.6% sequentially. Other income is higher this quarter because of higher revaluation income. For the first half, USD operating revenue is USD 253.6 million, up 12.8% year-on-year. The net operating cash flow for the quarter is INR 2,694 million. OCF-to-EBITDA ratio is 87.5%, a recovery from the 38% in Q1, which, as you will recall, is seasonally low because annual variable payouts are made in that quarter. Cash and cash equivalents stand at INR 14,318 million. EPS for the quarter is INR 19.6 and return on equity is 24.7%. Operating EBITDA margin is up 90 bps quarter-on-quarter to 23.9%. Delivery costs improved by about 110 bps, primarily because of the INR depreciation. This was partially offset by an increase of about 14 bps in G&A, largely because of legal and professional fees and about 10 bps in S&D. On a first half basis, operating EBITDA margin is 23.5%. EBITDA including other income is up 120 bps Q-on-Q to 25.4% and PAT is INR 1,804 million, up 9.8% Q-on-Q. Utilization in Q2 is 74.9% compared with 75.5% in Q1. EBITDA, including other income for the first half is 24.8%. Total headcount is up 3.5% Q-on-Q with 724 additions in offshore delivery. India seat count is up by about 1,400 to 16,824 seats as capacity added in Mohali and Chandigarh became operational. CapEx for the quarter was INR 585 million, taking the first half total CapEx to INR 919 million. On other key metrics, DSO is unchanged at 79 days. Attrition is marginally up, as Kapil pointed out, because Q2 is generally up because of following the wage increments in Q1. Top 10 concentration is unchanged at 60%. Our Analytics and Automation revenue continues to drive the growth along with emerging growth. I also want to mention a couple of items which will impact H2 margin. One is that the government has revised the statutory PF wage ceiling from INR 15,000 per month to INR 25,000 per month effective September 17, 2026. This will have a 20 bps impact on margin. Depreciation, including rent under Ind AS 116 is up to INR 558 million or 4.7% of operating revenue from 4.3% last quarter, reflecting the new facilities. We expect to add additional seats in Mumbai and Pune in H2. So D&A will remain elevated. We expect it to further increase by about 20 bps in H2. Having said all of this, we remain confident of remaining in the 24% to 28% range for the full year. Thank you, everyone. And with this, we conclude our prepared remarks. We can move on to the Q&A. Back to you, Asha.

[Operator Instructions] First question comes from the line of Saurabh Dhole.

Just one question. When you talk about the contracts that you sign with new clients, et cetera, how are the parameters on which they evaluate you? How has that changed in the last 12 to 24 months? I'm just trying to understand this in the context of the shrinking ACV numbers that you've been reporting for at least the last 2, 3 quarters.

So thanks, Saurabh. Saurabh, I think in terms of the contracts we are signing are not materially different than what we were signing before. If you look at our ACV in H1, it's around INR 72 million against H1 of the prior year, which was INR 78 million, so about 10% decline Y-o-Y. And as I had said that given the -- our overall base of revenue clients, short-term volatility may exist. So it's nothing to say that you have had a decline in terms of the ACV. The only thing I would say is that the clients are taking longer in making decisions. And the reason for that is because there's a lot of money that's getting invested in AI. So clients are taking longer and the deal value, typically, which would be large, clients are starting with smaller deal value as opposed to starting with larger ones to test the waters, test the AI, the efficacy of the technology and then go for the larger programs. So those are some of the changes we are seeing. But in terms of writing of the contract, materially, nothing has changed.

And also, if I may chip in another question. When you look at the number of seats that you've deployed and that you plan to deploy in the coming quarters, is it possible to club it up with the cost that you incur on productivity tools and then tell us that how much does the seat cost in this new era versus, let's say, 1 or 2 years back?

Sorry, could you elaborate what you mean? Club the seat cost with productivity tools?

So let's say you have certain coders inside your system, and they have been using productivity tools like Anthropic and OpenAI. When you club it -- when you club those costs along with the seats that you provide those tools to, how does the cost actually compare with, let's say, a completely human environment maybe 2 years back? I'm just trying to understand that.

Saurabh, I think, see, as I've been saying, our unique value proposition is our ability to bring domain/consulting tech and process together. So I think it's -- and clients don't look at it the way you are describing that, look, give me FTE is this and so on and so forth. So we have always sold a blended value proposition because domain is our unique strength, which has been built over the last 26 years. So I'm not -- if you tell us what you're trying to get at in terms of asking this question, then maybe we can perhaps help you. But this is not how we internally track or this is not what our clients are asking of us.

No, I'm just trying to understand that whatever people cost that you have, when you club it with whatever productivity tools that you're providing them on a per seat basis, there is obviously one is an employee expense that you have and there is a productivity tool expense that you have, you will possibly do a costing of that productivity tool on a per employee basis. So I'm just trying to understand that when you combine both these 2 costs, on a per dollar of revenue versus the amount that you spend on that employee and on the productivity tools that the employee uses, how does the cost compare with a complete -- when you compare it with, let's say, the employee expenses plus whatever tools that you had maybe 2 years back?

So we are providing productivity tools like AI, et cetera, to our employees. Having said that, we are also closely monitoring what the usage of it and to how many people down the levels, how many people have actually the access, whether they are using it, how many people are exceeding limits and so on and so forth. So that cost today is not very significant.

And we are absorbing that cost. Yes. So...

So compared with, let's say, the INR 250 million or so of delivery cost, which is about half the revenue, the cost on AI tools is not significant. Is that what you are asking?

Yes, yes, yes. The final delivery cost is what I'm trying to get to.

It's not significantly up. So we monitor that cost very closely. There is no unlimited usage, that's what I was trying to get at.

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

A couple of questions. First, about just want to get deal intake clarity. So deal intake, if I look H1 seems to be a bit softer. Even on Y-o-Y basis, it is soft. Are we witnessing, let's say, in terms of some of the deals which we might have expected to be signed in quarter 2 get slipped to quarter 3? So any right shifting is the reason which explains some of the slippage? And if that is the reason we have closed some of those deals by now? So if you can give some sense about how to look this deal ACV number. And if I put that into context of the headcount addition which we have done in this quarter, it seems to be a reasonably healthy number. So if you can help us understand reconciling these 2 element. Second question is on the EBITDA margin. Partly you tried to give some sense, but just on Y-o-Y basis, last year, our usual expectation is we will be closer to midpoint of the guidance. So far, we are tracking towards more like lower end rather than midpoint. So if you can give some sense how you expect margin trajectory to be for the full year? And last question is on the CapEx. CapEx remained elevated in H1. How to expect it to be for the full year and more importantly for next year as well?

So I'll answer the question on CapEx and EBITDA.

I will take the -- yes.

So EBITDA margin is going to be a function of revenue growth. We do expect that margin will continue to move up as we are able to replace at the bottom of the pyramid. However, the incline will depend on what the revenue growth is, how the revenue growth will lead to more significant improvement in margins. Secondly, on CapEx, we expect CapEx spend to roughly double for H2 over H1. And as I mentioned in my opening remarks, we have some facilities coming live in Mumbai and Pune in Q3 and Q4. And D&A should go up by about 20 bps in Q3. And regarding right shifting of deals and how to look at that in the context of headcount.

So Dipesh, I think, yes, as I have said earlier that clients are taking longer in decision-making and also the deal sizes that initially they are signing are marginally lower than they were signing earlier. So yes, shift right is happening. In terms of the headcount, I think what we think we have been able to achieve is the margin within the band despite of us investing in tech and AI. And as you see, our tech and AI business, the analytics business has grown almost 2.5, 3x than the company growth as well as I had indicated that roughly 280 to 300 people have earned Claude AI certification. So I think we have to continue to invest where the future is. And despite that, we are able to maintain the margin. So I think we are very proud of it.

Just one clarification. On CapEx part, you indicated, so let's say, H1 CapEx is roughly double Y-o-Y. You indicated H2 to be double of H1 CapEx. So on a full year basis, it would be substantially higher. That's what you indicated?

Last year CapEx was lower than usual, yes.

So roughly around INR 200-odd crores is what we expect in H2?

That's correct. Roughly -- no, no, no. I'm saying H2 CapEx will be same as H1 roughly.

Okay. Not the double one. Okay. Okay.

INR 90 crores plus INR 90 crores, yes.

And how to expect it for next year?

Next year, I think we are still in the budgeting process, but I expect that seat headcount addition will not be as strong because I think we have now added about 1,400. We will add another maybe 800 to 1,000 more in the next couple of quarters. So while the full picture will be visible after the budget, but we don't expect to add CapEx at this pace.

We have next question from the line of Moksh Mehta from AMBIT Capital.

So my question first is in terms of margins. So majority of the incremental revenue for us this quarter came from the emerging F&A vertical. And if I'm not wrong, it's largely serviced from our nearshore centers. So as we see the shift from offshore to nearshore the skew moving towards nearshore, how do you see the pressure on margins even going forward? So that's my first question. And the second is that how are we from a roll-off perspective this quarter, this year and the kind of deals that we are signing, how do you expect the roll-off to progress going ahead?

I'll take both questions. So the roll-off in Q1, Q2 is more or less on par with what we usually see about 15% to 20% of revenue. So there is no significant or higher pressure in terms of roll-off. On margins, you are right, nearshore locations do have lesser margin than India. India BPO has the highest margins and then Philippines, Egypt, et cetera, are lower than India. So that does put pressure on margins. It is something that I've called out in the previous earnings call as well. However, we feel that, that can be mitigated if India growth continues to sustain positively. And what is actually happening is that the overall -- the revenue mix contributes to a downside in margin. However, the centers themselves are increasing in margin from the base of Q1. So the Q1 margin, obviously, because it was -- sorry, the FY '26 margin because it was the first year of investment was very low, even negative. So center to center, each center is improving profitability, but obviously, there is a drag because of the revenue mix. So if the margin outlook for us changes in FY '28, then we'll be sure to let you know.

Okay. And second was in terms of the luxury vertical, now 3Q typically is a seasonally strong quarter from a sequential perspective. Do you expect that to play out? Or are you seeing some additional pressures that will come in, which will also drag the entire company growth a little lower?

We do expect that seasonal bounce back to happen.

We have next question from the line of [ Pulkit Chawla ] from [ BNK Securities ].

Kapil, first question for you. How do you -- I mean, how has the quarter been according to your own assessment? Were there any sort of negative surprises that you did see during the quarter? Second, from a full year perspective, how are you looking at the ACV to pan out? Because earlier you had guided that you probably want to keep ACV similar to what you did in FY '26. Now that at the end of H1, you are down slightly, how are you looking at the full year ACVs? The third question would be the AI-led deals that you really spoke about. How are the ramp-up in those -- these sort of deals? And what sort of margins are you looking at here? And Srini, finally for you, subcontracting costs seem to be slightly higher in this quarter. If you could explain why is that so?

Yes. So one is on ACV. One is on how is your assessment of the quarter?

Yes. So overall, I think -- Moksh, right? No, Pulkit. Pulkit, overall ACV, I think in terms of -- like I said, it's around 10% lower on a sequential -- on a Y-on-Y basis and lower sequentially. And it's because of the delayed times that the clients are taking and as well as the smaller value of the deals because tech-enabled technology-led, AI front-ended with AI, I think clients are looking at smaller deals because there is a lot of mind share that is going in investing in AI. So I think from that perspective. In terms of -- I had said that we will maintain the FY '26. That's what we are working towards still. We are not saying that that's not the goal post we are chasing. And so that's on that front. In terms of were there any surprises in the quarter? I don't think so. The only reason is that the right shift that happened, I think we were not expecting to that extent, if anything. And see, short term, I have said that there will be volatility because there's a lot of money that's getting invested and ROI is still to be seen by the clients. So what will clients do? They also have a quarter-on-quarter results that they are declaring. So they will put pressure on service providers in terms of commercial terms, in terms of consolidation and so on and so forth. However, I still believe that large-scale deployment of AI and ROI realization, it's -- that's where the future is. It will still take some time at an enterprise level. In small pockets, yes, you will see 10x, 20x improvement. But if you look at the enterprise ecosystem as a whole, it will still a little distant from where we are standing today. What that will do is that it will put pressure on clients to outsource more, which is the 101 like table stakes, you deliver cost benefit. So that's one speedboat. The second speedboat is in terms of helping clients on AI enablement and deployment, which is what we had set the organization. [ John ] who used to run our financial services now heads AI across the enterprise based in the U.S. He's building his team, as I mentioned, across U.S., Continental Europe. And we are seeing good amount of conversations. So I'm cautiously optimistic for medium to long term. Short term, there would be volatility, but I think in terms of what we have been able to deliver the overall growth margin and also we are continuing to invest in strategic areas, I think I'm happy with the overall performance.

And I'll cover the subcontracting question that you had. So most of the expenses -- increased expenses in subcontracting is on technology. So because the business is growing so fast, sometimes we have to bring on people as subcontractors. The second is that in some cases, we also have a preference to onboarding subcontractors because we are not entirely sure how people will perform. So we bring them on as subcontractors, if they perform well, then they become employees. So both reasons, but largely the increase is because of technology.

Got it. And Kapil, on these AI deals that you spoke about, given that they're smaller, are the margins on these slightly better? And how is the ramp-up of these specific deals?

I think if you look at margins, I would say better or worse because we are also -- you have to invest ahead of the curve, right? Because like I said, ROI is still yet to be proven. It will take some time at a large-scale level. So see, that's what I'm saying short term, if you -- like, yes, we would invest upfront if we believe that medium to long term, we are going to make money and it's going to help us improve our margin. What was your second question? Our margins better? What was the second -- sorry?

The ramp-ups. Is it faster?

Yes. If you look at the tech and analytics revenue, that's grown almost 2.5, 3x the company revenue. So it is faster. And we've -- with the building blocks that we have been able to build over the last 12 months, I think that will set us up for a good segue for the year -- for the future in terms of helping clients on AI enablement.

We have next question from the line of [ Yash Goenka ] from [ Awriga Capital ].

Hi Kapil, you mentioned that compliance norms in U.S. are getting softer for BFS. You also mentioned that decision-making is slow yet you are going ahead and making investments. So is your view that this is transient in nature?

See, I wish I could predict that whether it's transient or is it permanent. But what we are doing is to derisk or look at other ways in terms of growth engines. A, we are looking at adjacent areas, which I have been saying we were set up to do very complex work by bringing technology. So adjacent areas which are simpler, I think, is where we are looking at, and we are seeing good amount of opportunities. The overall macroeconomic environment in U.S. in terms of relaxation or refresh not being as frequent as it was in the earlier regime, I think that may take some time to change. Also, we had said that we will be upfront and cannibalize our revenue if we have to with AI adoption. And we are seeing some of headwinds on the entire FCC space, AI adoption. However, what we are also seeing simultaneously is new client addition and traction and discussions with prospects and new clients. So I think overall, it's like you're looking at new service areas in adjacent areas. You're also looking at new client discussions wherever you are seeing contraction.

We have next question from the line of Shradha Agrawal from AMSEC. [Operator Instructions] Shradha, we can't hear you. We will go for next participant. We have next question from the line of Sandeep Shah from Equirus.

Just if I'm not wrong, Kapil, you earlier said you expect some recovery in the BFSI in the second half. However, now it looks like the recovery may be delayed beyond 2H. Is it the right way of looking at it?

I think could be. I'm -- like in BFSI, yes, I had said that we should look at recovery in H2. Q3, Q4, I think, is -- I'm hopeful that in Q4, we should see a recovery in BFSI. But as you know, the volatility is high in the overall financial services segment, but I'm cautiously optimistic on recovery in FS in Q4. Earlier, I had thought that we may be able to do it in Q3. I'm now saying we should be able to recover in Q4.

Okay. And beyond BFSI, can you give an outlook for second half for the other segments?

So Sandeep, I think in terms of -- I gave segment-wise overall commentary in terms of HiTech continues to see good demand. Communication Media, we are seeing good demand in the emerging markets. We have a healthy pipeline. BFSI also the pipeline is good. I think the conversion time lines is there. So overall, I think our pipeline continues to be strong. We have good client traction, but like clients are taking a little longer in terms of deciding and decision-making.

Okay. Okay. And in the earlier quarters, you always used to say you are targeting growth in your ACV this financial year. Now looking at the second quarter and the AI-led shrinking value of the deal, you may still require $49 million to $50 million each quarter in the Q3, Q4 to just stay flat on the ACV. So do you expect this year growth in the ACV could be difficult because of what is happening and started witnessing from 2Q in terms of what you said in the opening remarks?

So I think, Sandeep, I would be naive to say that it won't be difficult given what the H1 number is and you yourself are saying to get to the same number as last year, we would be $50 million. But I think what I'm proud of is 13 quarters of sequential growth. And I think we are seeing good amount of momentum with the clients and discussions and pipeline continues to be healthy. And we are working towards achieving the last year number as well as exceeding it. Will it be difficult? The answer is absolutely yes in terms of -- because of the delayed decision time line.

Okay. Okay. And just last 2 related questions. Is it fair to assume the Q-on-Q growth momentum in Q3, Q4 could be better than what we have witnessed in the first and second quarter despite some headwinds?

It really depends on the gross -- and the -- sorry. Why don't you finish?