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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