eClerx Services - Revenue in Line; Margin Downtrend Continues ::Edelweiss

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eClerx Services’ (eClerx ) Q3FY15 revenue at USD38.9mn (up 2.1% QoQ) was in line with Street’s estimates, while EBITDA margin at 33.6% declined by 160bps QoQ on higher SG&A expenses. EBITDA margins have declined ~690bps over Q3FY14-Q3FY15 as the contribution of low-margin Cable Services (CS) has surged. The company expects growth to be driven by the CS over next few quarters, while growth in top-5 accounts is likely to be muted. We lower our FY15/FY16 revenue estimates to 11%/13% (13%/15% earlier) and have built in 13.0% growth for FY17. This leads to 7% cut in our earnings estimate for FY16, despite revision in our USD/INR assumption to INR62 from INR59 earlier.

Revenue in line; margin disappoints

eClerx reported revenue growth of 2.1% QoQ in USD terms, and 3.1% QoQ in constant currency (CC), in line with Street’s estimate. The top-5 clients declined by 3% QoQ (flat in CC), while their contribution stood at 66% (68% in Q2FY15). Management does not expect revenue growth from top-5 clients to improve in ensuing quarters. However, non top-5 clients grew 7.3% QoQ in USD terms.

Margin headwinds on increasing cable contribution

EBITDA margin dip by 160bps QoQ to 33.6% was below estimate of 35.5% due to higher growth in the lower-margin CS segment and higher S&M expenses. CS has been the fastest growing segment and the company expects this trend to continue in ensuing quarters as well, leading to margin headwinds. eClerx is also seeing more onshore-led opportunities, which typically have lower margins. We have cut our FY16 EBITDA margin estimate to 36.4% from 37.5% earlier

LINK
https://www.edelweiss.in/research/eClerx-Services--Revenue-in-Line;-Margin-Downtrend-Continues;-Result-Update-Q3FY15/28188.html