eClerx Services - Revenue in Line; Margin Disappoints Again; Result :: Edelweiss

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eClerx Services’ (eClerx ) Q2FY15 revenue at USD38.1mn (up 5.1% QoQ) was in line with Street’s estimates, while EBITDA margin at 35.2% declined by 160bps QoQ versus 38.5% estimate. Higher growth by cable segment (CS) and G&A spend led to margin dip. The company reiterated FY15 revenue growth will be in line or marginally lower than FY14 and expects growth to be driven by cable segment in H2FY15. However, the recent client wins will aid the growth momentum in FY16. eClerx’s H1FY15 EBITDA margin at 36.0% is ~650bps lower versus H1FY14. The weak H1FY15 margin performance and higher growth by cable segment leads us to prune our FY15E EPS estimate by 6%, though revision in our FY16 USD/INR assumption to INR59 from INR56 earlier leads to 3% upward revision in FY16E EPS.

Revenue in line; margin below estimate

Revenue growth of 5.1% QoQ was in line with estimate, while the EBITDA margin dip by 160bps QoQ at 35.2% was below estimate of 38.5%. Higher growth clocked by the lower-margin cable segment along with higher G&A expenses due to CSR spend, led to the fall in margin. CS has been the fastest growing segment and the company expects this trend to continue over the next two quarters. The top-5 clients grew marginally by 0.8%, while their contribution stood at 68% (71% in Q1FY15); non-top 5 (strategic clients) grew 16.1% QoQ.

Cable growth driver but marring margin

Lower-margin CS (mid twenties versus company’s average of mid thirties) though the growth engine for eClerx, pulled down H1FY15 margins. H1FY15 EBITDA margin was ~650bps lower than H1FY14. With CS expected to be the prime growth driver in H2FY15 as well, we lower our FY15E and FY16E EBITDA margin by 200bps and 70bps to 36.6% and 37.5%, respectively.

LINK

https://www.edelweiss.in/research/eClerx-Services--Revenue-in-Line;-Margin-Disappoints-Again;-Result-Update-Q2FY15/27402.html