eClerx Q3FY17 Concall Summary

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Financial Highlights

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  • USD Operating Revenue for Q3 FY17 stood at $47.2mn declining by 3.5%, while it declined 2.6% on a constant currency basis
  • For 9MFY17, USD Operating Revenue declined by 1%, while INR Operating Revenue increased by 3%
  • The continued revenue softness since start of the year has been mainly on account of in-sourcing, automation and M&A activity in the client base, especially among some of the top-10 clients. The company expects this softness to continue into Q1 of FY18 as well
  • The pricing for FTE based business has been fairly stable on y-o-y basis irrespective of the revenue pressures
  • Forward hedge book stood at $136mn, maintained at 2.9x Revenue, with an average strike price of Rs.72.4/dollar(improved by Rs.60ps/dollar) and the company expects to convert $29mn worth operating revenue at Rs.71.5/dollar in Q4FY17

Margins

  • The operating margins for 9MFY17 have been >30% due to excellent cost management in a challenging revenue environment
  • Operating margin has significantly dropped to ~28% during the quarter on account of increased employee cost for delivery on a disproportionate basis
  • The company wishes to improve its on-shore delivery capabilities over next few quarters from a very small base currently, hence the employee costs may remain at an elevated level. However, the company expects to see margins at ~30% for the next year as well
  • Except the elevated CSR expenditure(Rs.5.4 crore for 9MFY17), rest all the expense items have remained flat on q-o-q basis
  • PAT for the quarter stands at Rs.86 crore and other income stood at Rs.11 crore, which was more than double compared to previous quarter on account of revaluation gains from favorable forex movement
  • Net Operating Cash Flow for 9MFY17 stood at Rs.250 crore, a decline compared to previous year due to working capital changes
  • Capital Expenditure has declined for 9MFY17, however it is expected to increase in the next few quarter due to investments in building on-shore capabilities
  • Effective tax rate for 9MFY17 was lower than usual level at ~19% mainly due to recognition of tax credit. The effective tax rate is likely to go in 23-25% range during next year.

Segmental Trends

  • Compared to Digital and Cables, Telecom, the new sales for 9MFY17 have been the strongest in Financial Services segment, which is a very positive sign
  • Digital pipeline has also significantly increased in the first 9 months compared to previous year with good large wins in the Asia-Pacific Region
  • The geographical share of Americas and currency share of USD have fairly remained stable except for minor fluctuation in Digital EU business

    Business Metrics

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    •  Days of Sales Outstanding stood at 78 days at the end of Q3, staying within the historical range of 70-80 days

    Employee Metric

    • Employee Strength has increased marginally to 8,648 with Sales and Business Development staff increasing to 81
    • India attrition has slowed down to 33% in Q3 compared to 41% in Q2, declining even on y-o-y basis and the attrition at the beginning of Q4 is also lower compared to Q4FY16. However, staff utilization has decreased by 50bps and the trend might continue in the next few quarters

    Clients Related Update 

    • Client counts in the top two buckets have increased and decreased by 1 each due to downward movement of a top 10 client
    • The revenues from top-10 clients and emerging clients in Q3 have declined by 8.8% and 2.6% respectively on an y-o-y constant currency basis
    • The softness might extend into the next few quarters as well due to client specific reasons especially from 2 or 3 clients in top-10 segment
    • The problems are from clients in all the verticals and not specific to any vertical as such. Changing environment in US has also been contributing to this softness and especially when M&As are happening, difference of opinions on local contracts vs offshore contracts between previous and new management are also causing challenges
    • The company expects to see growth in the range of -2% to +2% until Q1FY18 in light of the above stated issues and once the issues are sorted, there might be accelerated growth
    • The company’s book can be broadly divided into trade life cycle and client life cycle. It is seeing growth on both the directions. But the crucial part is that company is getting a lot of growth in Tier II clients which might grow into large clients due to longer term engagements. However, at this moment, this growth is not sufficient to offset the reduction in project work from larger clients

    Impact of Automation

    • With the increasing complexity in the remaining work left, the company expects least impact due to automation on the business in the short and medium term
    • The company has trained 600 employees in Robotics, which has been deployed to many of the top 10 clients, including the service through the proprietary ROBOWORX platform as well. The company is not doing standalone license sale and is using it to ease its current work and foray into newer areas wherever possible
    • ROBOWORX is being deployed in all the verticals as either principal solution or tool. In sectors like banking, where it is being used towards BOT like solutions, it is getting better traction

    Impact of H1B Regulation

    • The company does not have any dependence on H1B for revenue generating work as they mostly hire locally and looks to continue the same in future. So, there won’t be any significant impact by either a potential downsizing of H1B grants or the proposed wage hikes on that

    Impact of Dodd Frank Repeal

    • It might reduce the cost of capital for clients and make it easy for them in terms of being able to trade at higher volumes which would potentially drive up their revenue. However, the company feels it is too early to assess the impact of such repealing

    Buyback and Dividends

    • The company made a buyback of Rs.234 crore at Rs.2,000/share which contributed to 2.7% rise in EPS and as a result Cash balance decreased to Rs.553 crore

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