ECLERX Q1: Revenue Up; Margins Fall

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00:00Hello and welcome to the Small and Mid Cap show. My name is Rucha Somaiya and today we

00:13are going to talk about Eclog Services which has reported its Q1 FY25 results. But to talk

00:19to us more about this, we have the CFO, Mr. Srinivas Nadaduru. Welcome to the show, sir.

00:24Thanks for taking out the time. What is your first take on the results that came out yesterday?

00:30So we are pretty pleased with how Q1 has turned out for us. So revenue, as you mentioned,

00:36came in decently. Margins were down. However, this is not unusual for Q1 in any quarter because

00:43we just paid out our wage hikes and that's a major component of the margin drop. We've also invested

00:50in hiring business development leaders in our client geographies and that's the other major

00:57contributor to the reduction in margin. So overall, we are fairly pleased with the results

01:03and we think there is significant growth potential given what we see of the deals

01:12that we have signed in the quarter plus what we see of the pipeline that we have.

01:18Right. As I can see, the margins actually took a hit which came in at about 17% versus 21% in the

01:24last quarter. So you also attributed this to the wage hikes and senior management hires that you

01:31made out in the current quarter. So how do you expect the margins to fare in the coming quarter?

01:36Do you see second quarter to be subdued as well? Is any impact of wage hikes going to come in the

01:42second quarter? There will be no further impact of wage hikes. In fact, we expect margins to

01:49increase from Q2 to Q4 as happens every year. And broadly, the reasons are that we are able to

01:58replace attrition with staff at the bottom of the pyramid. So we do expect that to continue

02:04this year as well. Right, right. Okay, moving on to the geographic breakup. North America,

02:11which contributes 75% of the revenue, had pretty decent growth about 3%. But do you expect this

02:18growth to continue? And also talking about Europe, largely muted growth over here of about

02:241.5%. So how do you expect these geographies to pan out in the second quarter and the rest of the

02:30year? So we see a lot of the pipeline that I talked about is in fact in North America. So we

02:36do see that North America will continue to remain strong for us. Most of our luxury clients are based

02:42in the Europe region and we see some softness in that subsegment. So going forward, I think the

02:50situation is likely to remain similar with North America doing well and Europe being subdued.

02:57Right, okay. But are you also seeing green shoots in the financial markets is what you had mentioned.

03:02But financial markets was largely subdued for most of the IT companies even in the last year.

03:08And most of the IT companies, even as you mentioned, are talking about green shoots

03:12in financial services. So do you expect financial services to be the growth leader going ahead?

03:19Yeah, we see a lot of most of the pipeline that we see currently is in financial services.

03:26That has been the growth leader for us in Q1 as well. And we expect at least in the next couple

03:31of quarters that trend to continue. Okay, okay. So let's talk about the demand environment.

03:37How do you expect the demand environment? Are clients still seeing deferral or even cancellation

03:43of deal wins? You know the problem which most of the IT companies had around the last year. So how

03:48do you expect the deal wins to foray? Are you seeing longer time leads in closure of deals?

03:55In one of our businesses, that is a digital business, we see that delays in deal closure.

04:02We see that larger deals especially are taking time to close. So yeah, I would say it's not

04:09secular across the board, but we do see it in pockets. So what kind of deal size are you

04:16looking at? And in what geography? As you mentioned, Europe is likely to be soft largely

04:22because of the luxury segment. But as you mentioned about the longer lead times for

04:26closure of deals. So this would be largely in which geography or which sector?

04:30This is in our digital business and it is across both Europe and North America.

04:35All right, all right. Got that. Okay. So again, as coming back to the demand environment,

04:43do you expect clients or are you seeing clients still tight on their budgets and

04:48you know, not spending on transformational deals or are they still going on for vendor

04:53consolidation deals? We have not seen widespread

05:00trends in either vendor consolidation or a reduction in transformation.

05:06As I think depending on the value proposition, some of these deals do continue to get signed.

05:12But as I mentioned, it does take a lot of time. It seems to be taking

05:16time, especially when the ticket size is larger. All right. Okay. Got that.

05:24Okay. Moving on to talk about the business process as a service segment, that is the BPAS

05:29segment. So talking about this segment, it constitutes about 21% of the total revenue.

05:34However, the revenue declined about 10% on a quarter on quarter basis. So are you seeing

05:39weakness over here? Again, demand environment not pretty great over here?

05:44So there is some seasonality because some of the work that we do is in the KYC segment that

05:49contributes to the BPAS revenue. And usually Q4 is the high watermark for KYC transactions. So

05:56there is some seasonality impact. Having said that, it is also somewhat of a maybe small change

06:04in direction from the new CEO. And I expect that maybe what constitutes BPAS for us will probably

06:12emerge and what the stable direction for that may probably emerge in two or three quarters from now.

06:18So you still expect two or three quarters to be muted for BPAS?

06:23Yeah, I would think so. Okay. Right. Got that. Okay. Moving on to

06:28your guidance, the EBITDA margin guidance, the adjusted EBITDA margin guidance of 24%

06:34to 28% for FY25. Do you still stick to that? We are sticking to that.

06:39And what would be the margin levers? Because as you said, wage hikes will not come

06:44into Q2. So Q2 likely expected to be good in terms of margins?

06:48Yeah, I think we should see an improvement sequentially in margins.

06:54Pipeline conversion. So for us and for most IT companies, revenue growth is the single biggest

06:59driver for improvements in margins. So as long as we are able to convert and deliver well,

07:04that should lead to margin improvement as well. Right. Got that. Okay. So in terms of revenue

07:11growth, can you give any guidance for FY25? So we don't usually give guidance, but our

07:17aspiration, maybe we have stated this earlier as well, is to try and hit double digit growth,

07:22low double digits. So let's see where we end up. Right. But again, moving back to margins,

07:28as I see your onsite offshore revenue is already at 20 to 80. So what kind of margin levers,

07:34again, reiterating back to my previous questions, if you can pick out any particular margin levers

07:39that you expect to help sustain those kinds of margins going ahead?

07:46Maybe an improvement in utilization is what we expect, plus more growth offshore. Those

07:53will be the two major levers. Right. Right. Got that. Got that. Thank you so much for taking out

07:59the time for NDTV Profit. It's time to slip into a short break. But on the other side,

08:05we have a lot more. Do stay tuned.

08:23Transcribed by https://otter.ai

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