ETMarkets Management Talk | eClerx eyeing double-digit growth in FY23, says co-founder Mundhra

As the demand across its business seems to be holding up, midcap KPO company eClerx Services is confident of achieving double-digit growth in FY23. “Demand is especially strong for analytics and automation. We have done fairly well in Q1 of FY23, reporting a constant currency growth of 3.9%. Looking at the pipeline and conversions, we are confident of achieving double-digit growth in FY23,” says PD Mundhra, Co-Founder and Executive Director, eClerx Services. Edited excerpts:

Although your revenue grew 29.4 per cent YoY, the total margins declined. Can you explain the factors behind it?
Margins in Q1 are usually lower than the other quarters because of the annual wage increments, which take effect in April each year. This year, there were a few additional factors – firstly, our wage increases this year were higher than usual. Also, our utilization in Q1 was lower as we added substantial headcount to mitigate the impact of attrition and to support growth. Lastly, due to strong Q-o-Q growth of the Personiv business which we recently acquired, we made a one-off provision for the increase in expected earn-out. Adjusted for this one-off item, our EBITDA margin came in at 29.2%%, within our usual band of 28-32%.

Where do you see margins in the next two quarters?
As mentioned, our usual target for EBITDA is between 28-32%. The impact of the wage increase and lower utilization will taper off in the next couple of quarters, but will be counteracted by an increase in travel and return to office costs in the near-term. As a result, we expect margins in the next couple of quarters to continue to be in the lower half of our typical range, i.e. between 28 to 30%.

How do you see the attrition level going forward? How long do you think wage inflation is going to be a headwind?
Our Q1 attrition dipped as compared to Q4, and we believe the pace of competitive hiring may slow down and consequently improve retention over the next 2-3 quarters. However, absolute attrition levels may remain elevated above long term averages even though the trend may be flat to down. On wage inflation, while we rolled out higher than usual increments and promotions this year, we have concurrently made investments by hiring freshers, investing in new hire learning, internal movements and creating a large pool of ready to deploy resources for our growing businesses. I believe this will steadily mitigate some of the wage inflation in the coming quarters.

What are the key growth triggers that you see in FY23? Any outlook you would want to share for the rest of the financial year?
Demand across all our businesses seems to be holding up, although conversions are taking a little longer than before. Demand is especially strong for analytics and automation. We have done fairly well in Q1 of FY23, reporting a constant currency growth of 3.9%. Looking at the pipeline and conversions, we are confident of achieving double-digit growth in FY23.

What is the outlook in terms of deals amid all the talks of global economic slowdown and even recession in the US and Europe markets?
We remain in close touch with our clients regarding the macro-economic environment, and more importantly, the impact to their industries and their end customers. For the most part, our clients are being cautious to assess the economic environment before making large new commitments. In certain pockets, we see the sales cycle has elongated, deals are taking longer to close, and few instances of budget reductions, but it is not widespread and immediate. Nearly half the fiscal year has passed, so I expect the prevailing uncertainty to not materially impact FY23 performance. A slowdown, if at all there is one, may impact growth in FY24 and beyond, however I think we will get a better view a few months down the road.