Eclerx Services Ltd

NSE:ECLERX

Earnings Call Analysis

eClerx Services Reports Strong Q2 Growth Amid Industry Challenges

eClerx Services reported Q2 FY25 operating revenues of $98.8 million, reflecting a 12.8% year-on-year increase, driven by robust performance in financial markets. EBITDA rose to INR 2,288 million, showing strong margins at 27.1%. Despite challenges in the digital sector, particularly fashion, overall demand in analytics and customer operations remains positive. The company sees mid-teens growth potential and plans to maintain a 24% to 28% EBITDA margin moving forward. Notably, they anticipate some revenue roll-offs but are confident about their strong deal pipeline, particularly in financial markets.

Strong Revenue Performance

eClerx Services Limited reported strong operating revenue of $98.8 million for Q2 FY '25, marking a 6% sequential increase and a 12.8% rise year-on-year. This growth was primarily fueled by the financial markets business and the customer operations segment, with revenue in rupee terms reaching INR 8,318 million, corresponding to a 15% year-on-year growth. The rise in revenue is a positive signal for investors, indicating increased demand in their key business areas.

Improvement in Margins

The company experienced strong sequential improvement in margins, with EBITDA reaching INR 2,288 million and an EBITDA margin of 27.1%. The net profit after tax was INR 1,402 million, translating to a PAT margin of 16.6%. The margin expansion is attributed to robust revenue growth, improved utilization rates, and certain one-off events from the previous quarter, which contributed to approximately 85 basis points in margin enhancement.

Diverse Business Segments and Mixed Outlook

Within their diverse business segments, financial markets witnessed exceptional growth, particularly in their client life cycle management. However, the digital segment experienced mixed results with growth in data operations offset by a slowdown in the creative side due to declining demand from key markets like China. This presents a mixed outlook, as while the financial services segment remains strong, the digital segment requires close monitoring for emerging trends.

Client Concentration and Pipeline Growth

eClerx's top 10 client concentration has risen to 63%, illustrating a successful strategy in expanding their footprint among key clients. The annual contract value (ACV) for newly won deals stood at a robust INR 28.9 million. However, the company experienced higher roll-offs compared to the previous quarter, which are short-term projects coming to completion. Management asserts that despite these roll-offs, the overall pipeline remains strong and is likely to support sustained growth in the medium to long term.

Guidance on Future Growth and Margins

Looking ahead, eClerx has provided guidance stating that EBITDA margins for the full financial year should be in the range of 24% to 28%. The company anticipates a sequential growth trend in EBITDA and expects to maintain a position in the top quartile of peer group growth. This is a key takeaway for investors, indicating a focus on profitability alongside growth.

Sector-Specific Opportunities

Market opportunities continue to expand in the financial services sector, particularly in compliance and regulatory roles. eClerx's management expressed confidence in their ability to penetrate adjacent markets and cross-sell services effectively. However, they indicated that customer operations may face challenges, even as they successfully leverage existing relationships for growth.

Employee Dynamics and Operational Capacity

The company reported that attrition rates have reached 22%, higher than expected, while their employee base has increased to 18,227 people. Furthermore, new office spaces are set to open in Q3 and Q4, which could lead to increased general and administrative costs. This indicates that eClerx is not only focused on growth but also on ensuring that they have the right resources to support their expanding operations.

Market Recognition and Competitive Edge

eClerx continues to gain accolades, having been recognized at multiple industry awards, which speaks to their operational excellence and market position. This recognition can strengthen their brand equity and potentially attract new clients.

Earnings Call Transcript 2025-Q2

[Operator]

Hi, everyone. Good evening, participants. Welcome to the Q2 FY '25 Earnings Call of eClerx Services Limited. Please note that this webinar will be recorded. To take us through the results and to answer your questions, we have with us the top management of eClerx represented by Kapil Jain, Managing Director and Group CEO; and Srinivasan Nadadhur, Chief Financial Officer.

We will start the call with brief opening remarks by Kapil, followed by Srinivasan, who will be sharing the financial update, and then we'll open the floor for Q&A session.

As usual, I would like to remind you that anything that is mentioned on the call that gives any outlook for the future or which can be construed as forward-looking statement must be viewed in the [indiscernible] with the risk and uncertainties that [Indiscernible]. These risks and uncertainties are included, but not limited to what we have mentioned in the prospectus filed with SEBI and subsequent annual reports, which you can find on our website.

With that said, I will now hand over the call to Kapil. Over to you, Kapil.

[Kapil Jain, executive]

Thank you, Asha. And good morning, everyone. It's been an excellent quarter for us, and I'd like to share highlights of our performance for FY '25 Q2.

Operating revenue in Q2 was $98.8 million, up 6% sequentially and 12.8% year-on-year, driven by exceptionally strong growth in our financial markets business and supported by customer operations business. In rupee terms, Q2 operating revenue was INR 8,318 million, up 6.4% quarter-on-quarter and 15% year-on-year.

Margins have shown a strong sequential improvement as well. This is attributable to 3 key reasons: Strong revenue growth, improved utilization and some one-offs. Srini will cover the one-offs in some more detail. EBITDA for Q1 was INR 2,288 million at a margin of 27.1%, while PAT for the quarter was INR 1,402 million at a margin of 16.6%. Our analytics and automation business is INR 19 million this quarter, up 10% sequentially, which is a positive sign.

Our Financial Markets business had an exceptional Q2 with strong offshore and onshore growth in the client life cycle business contributing to most of the growth. The momentum in this business continues to be strong, and we see demand in both change and BAU areas of this business. The growth in customer operations was driven by the Care business. Digital had a mixed quarter with growth in Data Operations segment, but offset by a slowdown in the Creative business. In client geographies, growth in North America was strong, while Europe for us continues to remain challenging.

ACV of the deal wins for the quarter was a strong INR 28.9 million. Roll-offs in Q2 were higher than Q1, and the full impact of these roll-offs will be felt in Q3. These roll-offs are related to short-term projects, which have come to a plan win. However, the pipeline continues to be strong, our delivery remains strong. Our value proposition continues to resonate well with clients and the medium- to long-term growth momentum remains intact.

Let me also provide commentary and outlook for each of our 3 businesses. We continue to see broad opportunities in financial markets in KYC, onshore consulting and delivery. We are in conversation with broad set of potential clients and are working on several active RFPs with some of our clients, we are also starting to uncover opportunities in tech and change area. And given our strong domain, strong delivery, we believe we can meaningfully grow our presence in the change area.

In the digital business, fashion and luxury saw a decline with global fashion houses reporting less client demand particularly out of China. This is likely to continue for the next couple of quarters. We see budget outlook improving on high-tech, retail, manufacturing and distribution. We have also seen initial success in cross-selling our MarTech and data engineering services to some of our clients in financial services space, which we see as a positive sign.

In customer operations, the industry continues to see pressure around revenues and subscriber growth. Despite this, because of our strong delivery, we see continued strength in existing client growth and client diversification. We have combined technology and analytics under single leadership. This will help us position our services better, improve agility and enhance the value proposition for our clients. As I mentioned earlier, we are seeing a pickup in demand for change and transformation services in our financial services space.

Finally, I'll conclude with awards and recognition and hand it over to Srini for more detailed commentary. In customer operations, we were recognized by one of a large clients as a most insightful and innovative partner in their Annual Partner Summit. Our QA 360 quality as a service platform used for call monitoring, scoring and auditing in the customer operations business won the CIO 100 India award.

We won a silver award at the 2024 Brandon Hall Awards for excellence in learning and development in the category of best custom content. Our award-winning entry was a transformative learning and development project designed to enhance the communication skills of analysts and senior analysts in financial market operations, the win marks our 7th consecutive year of winning at the Brandon Hall Awards.

I think people are key assets, and this really differentiates how we are delivering services to our clients. Industry analysts have started to recognize our market leadership across products and services. In the last quarter, eClerx was rated as a major contender in [indiscernible] products and in customer experience management services Americas and as an aspirant in finance and accounting peak metrics assessments by the Everest Group.

I'd like to thank all our clients, employees and stakeholders for their support and confidence in us. And over to you, Srini.

[Srinivasan Nadadhur, executive]

Thank you, Kapil, and good evening, everyone.

Let me provide you a little more detail on our financial performance. So as Kapil mentioned, operating revenue was $98.8 million, sequentially, it grew by 6% in USD terms and 5.7% in constant currency terms. On a year-on-year basis, revenue increased by 12.8%. Total revenue for this quarter was INR 8,447 million, up 5.2% sequentially and 14.8% year-on-year.

Other income for the quarter was INR 128 million, lower than the previous quarter since we completed the buyback in July. The EBITDA of INR 2,288 million is up 22% sequentially and 4.5% Y-o-Y. The PAT of INR 1402 million for the quarter is up 26% sequentially and 3.9% Y-o-Y.

As Kapil mentioned, the reasons for the margin expansion are threefold. One is the increase in revenue, meaning to operating leverage. The second is the higher utilization in the quarter. So the excess bench that we were carrying in Q1 in anticipation of future work became billable in Q2. The third is because of some one-offs in the previous quarter, such as sign-on bonuses, higher 401(k) contributions and a change in the calculation of provision for LEAP. The impact of these one-offs on margin is about 85 bps.

The exit headcount has increased by about [indiscernible] to 18,227. Attrition is at 22%, which is higher than Q1 as we had anticipated.

On the key business metrics slide, the top 10 client concentration is now up to 63%, a result of the strong growth in top clients in financial markets and customer operations. DSO is 77 days compared to 81 in the previous quarter.

Our new office spaces in Chandigarh and Pune will go live in Q3, and the new space in Mumbai will go live early Q4. So there will be an increase in seat count and G&A and depreciation costs will go up in Q3 and Q4.

Thank you, everyone. With this, we conclude our prepared remarks. We can now move to the Q&A. Back to you, Asha.

[Operator]

First question comes from the line of Yash Bhartav.

Another question is from the line of Sandeep Shah from Equirus.

[Sandeep Shah, analyst]

Yes. Can you hear me?

[Kapil Jain, executive]

Yes.

[Sandeep Shah, analyst]

Congratulations on a superlative performance, both on revenue as well as margins and even free cash flow. So the first question, despite a strong growth, the demand commentary looks slightly mixed where we are bullish on BFSI, but we are also slightly cautious about the other segments. So can you elaborate in detail how the second half will look like with all the comments, which you have given on tailwinds and headwinds? And you also commented the roll-offs being higher in 2Q versus 1Q, and we'll have a full quarter impact in 3Q. So directionally, how do you see the growth in the near term and its impact on the margins.

[Kapil Jain, executive]

Yes. So Sandeep, thanks for the question. Like I had said in the beginning that the strategy that we had put in place was to see how we can cross sell and upsell in our existing set of clients, so that seems to be working well. In terms of the overall guidance that we had given was that 3 things. We had said that we will be in the range of 24% to 28% on EBITDA for the full year, which we are saying we will.

Second, we had said we will show sequential growth year-on-year on the absolute EBITDA number. And third, we said that we would be in the top quartile of the growth amongst our peer group. And the medium-term outlook -- short to medium term, the H2 outlook is in line with what I had just stated and what we had stated earlier as well. The overall strategy in terms of tech and change, which I alluded as well as cross-sell as well as growth on the back of strong delivery, that all is continuing, and we are seeing green shoots in that area as well as in terms of some of the analyst rankings.

[Sandeep Shah, analyst]

Okay, okay. So what is the nature of these rollouts? Is that project completion or these are customer-specific issues?

[Srinivasan Nadadhur, executive]

No, these are project completions. So they are -- they were short-term projects that we started sometime earlier in the year and which have now come to [Indiscernible].

[Kapil Jain, executive]

So there is no roll-off that we have had, which is on because of delivery issues and this is as part of the business.

[Sandeep Shah, analyst]

Okay. Sir, if I understood correctly, in Q3, Q4, we may do well, but you said on Y-o-Y. Even on a Q-on-Q directionally, it should be a positive growth?

[Kapil Jain, executive]

See, I think to expect the same growth that we have delivered in Q2, I think will not be appropriate. I think -- and we don't give forward-looking guidance, but in terms of medium- to long-term outlook stays positive, which is backed by the good pipeline that we have as well as in terms of some of the success we have seen on the initiatives that we had embarked on, which I had alluded to at the start of the year.

[Operator]

Next question comes from the line of is Aayush Rastogi. He's from B&K.

[Aayush Rastogi, analyst]

So a couple of questions. So on G&A side that you mentioned that, that it would be on the higher side, what we have seen in 2Q. So what's the comfortable band that we are eyeing for the 2H or maybe like for the full year, if you can just guide us in terms of percentage of revenue? That's the first question.

Second question is on acquisition front. So what sort of capabilities or in terms of implementation of those capabilities? Are we sort of eyeing for or is it more of a less like that we are looking for the customer operations side of the business, maybe to the near shore. So these are the couple of questions, and then I'll have a follow-up.

[Srinivasan Nadadhur, executive]

Right. Thanks. So on the G&A thing, we expect about -- max about 50% to 70% impact -- a mix impact as a percentage of revenue in Q3 and Q4. On your second question on M&A. So our priorities remain unchanged. So we continue to look for assets, which can meaningfully add to what the capabilities that we have. So in financial markets, we are extremely strong in delivery of KYC service. But something upstream to that in terms of consulting or advisory would be of interest to us.

On the digital side, something on analytics would be of interest as would something in the creative space. On the technology side, we have -- we are users of Salesforce and Adobe platforms from the operations side, and we'd like something that gives us an edge on the implementation side of these products. So we're looking for assets on -- in those areas. And on the customer operations side, something on nearshore might be of interest for us. The priority is broadly the same that we had listed out last quarter, we haven't changed.

[Aayush Rastogi, analyst]

Yes. Okay. Next question is like basically for if we eye for that we have commented in the last earnings call that we are eyeing for the double-digit kind of a growth, that's an aspiration. So it seems easily achievable for them. So is it fair to assume if you see the ACV trend for us for the 1H, it looks pretty strong. So fine to assume that we would be eyeing almost like for mid-teens kind of a growth, which is kind of doable for the full year?

[Kapil Jain, executive]

So Aayush, we don't offer a forward-looking guidance, but the overall progress is good. And I think we continue to state what we had stated when I had presented overall strategy for this year and the future. And I think our outlook stays positive for medium-to-long term. Quarter-on-quarter aberrations may happen, but the full year, what we are saying, we still stand with it. On the growth, I had said top quartile. So unless something happens, what you're saying should be achievable. And then on the margins as well as on the sequential growth in EBITDA.

[Operator]

Next question is from the line of Shradha Agrawal. She's from from AMSEC.

[Shradha Agrawal, analyst]

Congratulations to the team on an exceptionally strong quarter. 2, 3 questions from my side. Just again persisting on the guidance, if at all, you can indicate for 3Q given that ACV this quarter has been relatively soft. And then on a Y-o-Y basis, it is actually declining. So from that perspective, how should we look at growth trends in the second half of the year?

[Kapil Jain, executive]

So I think quarter-on-quarter, Shradha, aberration may happen. I think if you look at sequentially, we have shown a marginal increase Y-o-Y, yes, because I think in terms of -- sometimes it does take time. And also the clients are taking longer in decision-making. That's what we have seen because the overall market is volatile, and we are cautious However, given the pipeline growth, the momentum we are seeing in the business, I still feel in terms of restating what we had said earlier. And as I had said earlier, the forward-looking guidance we have not provided. So I'll reserve my comments on that. But for the full year, we continue to stay positive and in line with what we have stated earlier.

[Shradha Agrawal, analyst]

And so just again, again, insisting on the same thing. Generally, employee addition has been 1 lead indicator of revenue growth for us. And despite a good uptick in utilization, our employee count is almost up -- almost 2.5%, 3% on a sequential basis. So is it reasonable to assume a 2%, 2.5% kind of sequential growth going into 3Q.

[Kapil Jain, executive]

I'll repeat the same.

[Shradha Agrawal, analyst]

Okay, okay. No worries, no worries. And again, on the growth, if you look at growth this quarter was driven more by the top accounts and the emerging clients were relatively soft. So any demand trends or variance in demand between the top and the emerging clients, that would be helpful.

[Kapil Jain, executive]

So I think what we are trying to do is also look at new buying centers in our top clients. And like I said earlier, we have seen some success. It's only been 6 months from the time when we had formulated our strategy and thinking. So that gives us confidence that there is still an opportunity in taking our service offerings, product type services into our large clients as well as in emerging markets, there is an opportunity for cross-selling some of our product type services in customer operations as well as in finance and accounting. And that's really where we have to double down and focus on as we move into H2 as well as for next year.

[Shradha Agrawal, analyst]

Right. And just last bit on financial markets. We've been showing strong growth in this segment for 2, 3 quarters in a row now. And given the expectation of further lowering of interest rates, do you think traction in this segment can further pick up or demand should get further strengthened in this segment for us going ahead?

[Kapil Jain, executive]

So I think our financial markets growth is driven primarily from a compliance and regulatory perspective. So that, I think, is a big driver. And second is the overall activity in the product classes that we support in the global market operations. And we don't anticipate a slowdown, but compliance and regulatory, I think SEC and FCC, I think, is something that we'll continue to see in terms of whatever the growth we have seen, there is a little amount of volatility on the compliance space because, let's say, someone has got one of our clients, some clients will get, let's say, a time line by when they have to complete, certain regulatory requirements, and that's really where we support our clients, which drives the demand and growth.

[Operator]

Next we have follow-up question from Sandeep Shah.

[Sandeep Shah, analyst]

Just wanted to understand how to look at the ACV conversion, which we have started reporting 2, 3 quarters back, in terms of conversion to revenue. So because last year, we were at $90 million, $92 million. This time, we could be close to $100 million. And that on our top line looks like a bigger jump in the next year. So can you give us color in terms of how to arrive at an approximate growth rate based on ACV, keeping in mind the roll-offs will continue year after year.

[Srinivasan Nadadhur, executive]

Yes. So basically ACV minus roll off should be the net addition to revenue in any year.

[Sandeep Shah, analyst]

Okay. So Srini, just the normalized business or demand environment, what could be the annualized roll-off figure.

[Srinivasan Nadadhur, executive]

Normal figures -- normal value is about 15% to 20% in a year.

[Sandeep Shah, analyst]

15% to 20% of the top line?

[Srinivasan Nadadhur, executive]

That's right.

[Sandeep Shah, analyst]

Okay. And Srini, in the first quarter, if I recollect in the earnings call, we said we will pull up margin on a Q-on-Q basis from 2Q [indiscernible]. So now with new facts, do you still stay by that statement where 3Q margin higher than Q2, Q4 margin higher than Q3 with some amount of headwinds you called out.

[Srinivasan Nadadhur, executive]

Yes. So if you remove the impact because of new facilities going live and if you remove the impact of the one-offs in Q2, then I think we -- and then based on that, if revenue growth continues to happen, then we believe that what you are saying holds good. So if you remove the -- then the key determinant of margin is basically revenue growth.

[Sandeep Shah, analyst]

Okay. Even revenue growth happens even with one-off, we can be still better on a Q-on-Q in Q3 over Q2?

[Srinivasan Nadadhur, executive]

Yes, removing the one-off.

[Sandeep Shah, analyst]

Okay. Okay. And can you explain the nature of one off sign-on bonus, and why you believe those are one-offs will not come in the Q3 as a whole?

[Srinivasan Nadadhur, executive]

Of course senior management sign on bonuses, so we will not come again. So that was one. The second is usually after bonuses are paid, the contribution to 401(k) increases in that quarter. So that's why it's high. I'm talking about the U.S. So that will be other one-off. And the third one is that when we make provisions for leave encashment every quarter, we use the approximate calculation for that. And in Q4 every year, we do an actuarial valuation. But this time, we did an actuarial valuation in Q2 itself, which led to a reduction in the closure.

[Operator]

[Operator Instructions] We have next question from the line of Debashish Mazumdar. He is from Svan Investments.

[Debashish Mazumdar, analyst]

Congrats on a very good set of numbers. I have 2 questions. First is related to the vertical exposure that we have from the numbers of your exposure to geography and clients, it seems to be the large part of the growth is driven by financial services, which has definitely grown much more than what is our overall company growth would be in this quarter and the luxury segment must have been significantly impacted. So if you can give us some amount of indication that how the financial services, customer segment and the digital segment growth going forward over the period of next 2 to 3 quarters? And what are the opportunities you are seeing there? So that is the first question.

And second question is for Srini. If you can quantify of the 85 bps Q-o-Q one-offs that you were talking about, how much of that is related to that bonus signing and change in accounting policies and how much is driven by your higher utilization and higher revenue growth?

[Srinivasan Nadadhur, executive]

So the 85 to 90 is entirely because of bonuses and leave provisions. There is no -- it does not include the higher utilization or the revenue.

[Debashish Mazumdar, analyst]

Okay, okay.

[Kapil Jain, executive]

So, Debashish, in terms of, like I had said earlier, in financial markets, the demand is driven on the back of compliance and regulatory work as well as increased activity in different asset classes that we support on the market side. On the customer operations, the demand is driven on the back of existing clients as well as cross-sell opportunities in other verticals. And on digital, we are seeing, again, cross-sell opportunities of MarTech Analytics into financial services clients. The softness we are seeing is in the creative side on the CLX business, which is primarily due to the low demand that is coming in from China.

[Debashish Mazumdar, analyst]

Great. Kapil 1 more question, if I can add. If you can also help us to understand, since you joined how the structure of the business changed in terms of focusing on existing top 10 clients or the annuity business or the focus more on maintenance business. So is there -- what are the kind of changes that you have implemented? And where are the benefits that we are seeing today? If you can help with that.

[Kapil Jain, executive]

So, Debashish, I think our delivery was very strong and then our ability to offer productized services as well as embed technology and everything we are doing was a unique differentiator. That gave a very strong platform to go and take this value proposition to the clients and drive the growth momentum, and that is what we are seeing. I think the opportunity to cross-sell, upsell. I think we are seeing that. And the overall strategy of 1 eClerx that we are driving, I think, is helping us in front of the clients as well as with our sales engine as well as on the employee side because instead of 3 individual businesses, it's one eClerx $350 million, 18,000 people, I think, it resonate well with the client. And so that's really what we are embarking on. And I think what we are seeing is the green shoots that we are seeing of the strategy that we have laid out.

[Debashish Mazumdar, analyst]

Okay. So just to understand 1 more thing here. Before you joined, we were significantly focusing on clients beyond top 10 so that our exposure to a few of the clients get reduces. At least from the last 2 quarters numbers, it seems to be that the focus on the top 10 client has come back. So the point that I'm trying to understand that, is it because the top 10 clients have started growing because of the initial green shoots that we see, or it is the incremental proposition that we are taking to those clients that is helping us to win new businesses?

[Kapil Jain, executive]

It's a combination of both, Debashish, and that will also help us derisk the risk in our top 10 clients because we are looking to see how we can find newer buying centers in our top 10 clients. And it's not that the focus is not there outside of top 10 clients. I think the focus continues in outside of top 10 clients as well on taking our productized services and cross-selling or, let's say, which I mentioned, our customer operations, financial -- finance and accounting as well as our MarTech and analytics business. And we are seeing good traction on the change, tech and change side, which is what I had alluded even in the earlier earnings call that given our strong delivery, domain and productized services, renders well with the client's agenda unchanged.

[Debashish Mazumdar, analyst]

Okay, okay. And 1 last question, sorry. So we are hiring the senior leadership over the last 2, 3 quarters aggressively. So do we think that the senior leadership hiring is done and the large part of the employee cost escalation is behind us?

[Srinivasan Nadadhur, executive]

The senior leadership under Kapil, that hiring is done. That is done. But under the senior leaders, we will decide on a case-to-case basis on whether we need to strengthen in certain areas, add more sales muscle in other areas and so. So that continues to happen on a case-to-case basis.

[Debashish Mazumdar, analyst]

Okay. So broadly, what I'm trying to understand that employee cost, as a percentage of revenue, is it like at the level that we are today, will we be able to see that falling trend going forward apart from the salary high quarters that we see? Apart from that, is there any possibility that our employee cost as a percentage of revenue will keep on coming down from here?

[Srinivasan Nadadhur, executive]

That is a little hard to say. And the reason maybe, Kapil -- maybe I will comment and then you can add.

[Kapil Jain, executive]

Yes.

[Srinivasan Nadadhur, executive]

The reason I say that is if we are moving into more change and analytics kind of work, then the employee cost in those areas is higher. So it's kind of hard to say definitively that the employee cost has peaked.

[Kapil Jain, executive]

So Debashish, I think we will continue to add sales engine, right, sales bandwidth and in terms of -- I think I said earlier as well, what -- when we are looking at hiring sales bandwidth, leadership hiring, we look at in terms of what is the contribution we will have both on the top line and the bottom line. And I have said that, yes, absolute margins are important. For me, what is important is the overall EPS accretion and sequential growth on EBITDA.

And that continues to be the focus, and we will continue to be in the band of what I had stated between 24% to 28%. So all the decisions that we are making is taking that into consideration, not in terms of, okay, let's -- like, yes, there are a lot of input metrics that we monitor and measure. But at the outset, these are the 3 guiding like sort of a north pole that we have, which we look at when we are making some of these decision.

[Operator]

We have a follow-up question from Sandeep Shah.

[Sandeep Shah, analyst]

Just a clarity. Srini, you are saying because of the new facility Q3 and Q4, each will see a 50, 60 bps Q-on-Q increase in G&A cost as a percentage to revenue?

[Srinivasan Nadadhur, executive]

Q3, for sure, Q4 may be a little lower than that.

[Sandeep Shah, analyst]

Okay. And how the depreciation will look like?

[Srinivasan Nadadhur, executive]

I think about the same. I think it will go by about the same percentage.

[Sandeep Shah, analyst]

In terms of 50, 60 bps higher?

[Srinivasan Nadadhur, executive]

Yes. That's what I estimate, I've not looked into it in more detail.

[Sandeep Shah, analyst]

Okay. And looking at the strong growth in Q2, especially in the top 10 clients and BFSI, there could be a follow-up impact because those projects might have started in between the quarter end of the quarter, may have some impact in terms of a positive growth in Q3 as well. Is it a right way of looking at it?

[Srinivasan Nadadhur, executive]

Yes, that is fair.

[Operator]

[Operator Instructions] Next question is from the line of Krish Beriwal.

[Krish Beriwal, analyst]

Am I audible?

[Kapil Jain, executive]

Yes.

[Krish Beriwal, analyst]

So just 1 question. Can you share some details around our current pipeline [indiscernible] against, let's say, start of the year in terms of size or average tenure and nature of these?

[Kapil Jain, executive]

So I think our pipeline pressure is up from when we started the year. And it's broad-based. We -- as the pipeline involves the opportunity that we had seen in the beginning, which is cross-selling. So there are opportunities on that front. We are also seeing a pipeline which is of larger deals compared to what we had seen earlier. So that's another good sign. And as well as it's across the 3 businesses, that is financial markets, customer operations and digital and in tech and change. So overall pipeline momentum is positive. Like I said, in digital, we are seeing a little bit longer time lines in terms of decision-making.

[Krish Beriwal, analyst]

Got it. And just 1 follow-up on our top 5 accounts. They have done very well this quarter. Is that growth broad based within those top 5 accounts or driven by 1 or 2?

[Kapil Jain, executive]

Sorry, is it broad -- what is the question? Is it broad-based or?

[Krish Beriwal, analyst]

I mean, is the growth broad based within those top 5 accounts, or traded more by 1 or 2 accounts?

[Kapil Jain, executive]

No, it's more broad based. It's not just dominated by 1 or 2 accounts.

[Operator]

We have next question from the line of Rahul Jain. He's from Dolat Capital.

[Rahul Jain, analyst]

Is my line audible?

[Kapil Jain, executive]

Yes.

[Rahul Jain, analyst]

Yes. So 2 questions. Firstly, our margin outlook that we have shared earlier. Since we might see our growth actually pick up better this year versus the previous year, do you see that once the growth is back, this band would get narrower towards the upper end in the year to follow, or you think this is more of a strategic thought process so you would continue to regress back into the business and stay in this broadband [indiscernible].

[Srinivasan Nadadhur, executive]

So, at the moment, I think the commentary that we have given on the band is for this year, for FY '25. For FY '26, I think we really need to evaluate the situation, which we are just in the process of starting. So we need to evaluate whether the band will change upwards or downwards. But we haven't come to any decision on that yet.

[Rahul Jain, analyst]

Sure. And secondly, you highlighted about the opportunity that we see in the analytics as well as MarTech side, it would be great if you could share some thought process. What is the size for this practice [indiscernible] at this point, and how the competitive landscape this year? My understanding is that this is very standard market. So any color on this [indiscernible]?

[Kapil Jain, executive]

So I think our analytics automation was -- what we did was we combined as I had stated earlier, the analytics and technology we brought it together, which has resonated well with the clients and in terms of the overall value proposition that we are able to take. And in terms of overall competitiveness, we have a good roster of clients. And I think a very strong referenceable client set. So we continue -- we are positive in terms of the momentum that we will be able to drive on the analytics side.

[Rahul Jain, analyst]

Anything more on the size of the business and also any seasonality that you have within your portfolio in the MarTech business, if that could...

[Kapil Jain, executive]

So I think in the creative businesses where it is where we see the -- where we have said that we are seeing softness in demand. On the campaign management and performance analytics, we continue to see good demand. And I think in terms of size of the business, we don't give individual split of the businesses. So I'll reserve, but like I said, we -- from what we are seeing in the market and from our clients, we are competitive, and we have a good value proposition for our clients.

[Rahul Jain, analyst]

So, Kapil, what I'm trying to understand is generally these kind of businesses, they do have spike both up and down. So is there a way to understand the seasonality like Q2, Q3 to be a bigger quarter for such business, or there is no such trend that we have identified in the past?

[Kapil Jain, executive]

I think it's a little difficult to identify the trend in quarter-on-quarter. I think we look at anything we are doing. We are looking at how we create medium- to long-term value, both for our clients and shareholders. So I think in terms of quarter-to-quarter seasonality, we haven't seen or identified a trend.

[Operator]

Next question we have from the line of Varun [Indiscernible].

[Unknown Analyst]

Congratulations on strong performance. Just 1 question. So within the [indiscernible] verticals, can you explain on the cross-sell and upsell opportunities in retail? Maybe if you can give or state 1 or 2 examples to explain how we are upselling and cross-selling?

[Kapil Jain, executive]

So for example, our MarTech stack, [Indiscernible] in the financial services client, so that's 1 thing. Our customer operations in high-tech area, 1 of our product type services. So those are some of the success we have seen, which is -- these are the 2 large ones. And I think on the back of this is giving us the confidence on our ability to cross-sell and upsell. And the reason is I think our delivery, as I had mentioned, again, is very strong. So the internal clients act as reference when we are cross-selling and up-selling to other stakeholders in the same client.

[Unknown Analyst]

And on the upselling side, if you can give an example as to...

[Kapil Jain, executive]

So I think in terms of looking at adjacent areas and on the overall change and tech stack is where we are seeing upselling because we have domain product type services and looking at change, driving, transformation is where we feel there's an opportunity for upsell.

[Operator]

We have next follow-up from the line of Debashish Mazumdar.

[Debashish Mazumdar, analyst]

Srini, am I audible?

[Kapil Jain, executive]

Yes.

[Debashish Mazumdar, analyst]

Srini, 1 follow-up question on margin. So effectively, what we are communicating is, this quarter, our core EBITDA margin is 26%, which has 85 bps of one-off, which will not be there next quarter -- one of benefit, which will not be there next quarter. So is it like we are starting Q3 around 120, 130 bps lesser compared to Q2, or is there something I'm missing?

[Kapil Jain, executive]

How do we get 120, 130?

[Debashish Mazumdar, analyst]

So 85 bps is the one-off and then 50 bps impact you said because of the new...

[Kapil Jain, executive]

Yes, that's the fair statement, yes.

[Debashish Mazumdar, analyst]

Okay. And do we have enough levers available to kind of nullify some of this 120, 130 bps impact that we'll be seeing sequentially?

[Srinivasan Nadadhur, executive]

It's largely based on revenue growth. So if there is revenue growth, then we should be able to do it.

[Debashish Mazumdar, analyst]

So the question that you answered on Sandeep's question on few of the new projects that is getting started because our ACV in Q1 was very, very strong. So is it a fair statement to assume that in Q3 may not be at 5%, 6%, but will have a reasonable amount of handsome growth that we'll be making in Q3 that we'll be able to maintain some amount of margin benefits, I mean, some amount of margin that we'll be closing in Q3.

[Srinivasan Nadadhur, executive]

I think the way you should look at it is put both ACV and roll off together. I think you're only looking at ACV.

[Debashish Mazumdar, analyst]

No. Srini, what I'm trying to understand is, even if you -- so in H1 put together, our average ACV growth is around 35%, 36%. And even if you assume 12% to 15% roll off, I think getting a 12%, 13% growth in this year will not be a very big trouble. And in that case, our sequential run rate is supposed to be -- I mean, the sequential growth ask rate is supposed to be 3%, 3.5%. So is it a fair assumption that in next 2 quarters, [indiscernible] will be 3%, 3.5% to reach a 12.5% number for this year?

[Srinivasan Nadadhur, executive]

The assumptions are fine, but what we don't have is the visibility into there any. I can't really...

[Kapil Jain, executive]

So Debashish I think -- again, I think you're asking in terms of -- I had mentioned that we will be in the top quartile of the industry peer segment that you evaluate us on. Now whether that is 12%, 13%, 15%, 9%, that's something I think -- it's your guess as well as mine, right? So we will be in the top quartile. On the margin in terms of whatever impact one-off, whatever, we will be in the range of 24% to 28%, and we will show sequential EBITDA growth. These 3 things I have said, we will stick to it, and we'll maintain that, and we'll deliver that to you guys.

[Operator]

We have a follow-up question from Sandeep Shah.

[Sandeep Shah, analyst]

Yes. Just a question on capital allocation. We generally prefer a buyback as a method of cash distribution. So with the tax ruling change in the budget, do you believe our priority may be now more towards dividend or priority continues to remain on buyback.

[Srinivasan Nadadhur, executive]

I think we will definitely have to examine it. As you say, there is no difference in buyback and dividend any more other than the reduction [indiscernible]. So we have examined, but there's, I guess, a lot of time for us to do it.

[Operator]

[Operator Instructions] And sir, as there are no further questions, I will now hand over the floor to Kapil for closing comments.

[Kapil Jain, executive]

Thank you, everyone. And once again, I'd like to thank all our clients for having the confidence in us and all employees, my colleagues who have worked very hard to deliver the quarterly performance that we delivered. And thank you all for your support and look forward to talking to you in the next quarter. Thank you very much.

[Srinivasan Nadadhur, executive]

Thank you.

[Operator]

Thank you, everyone. You can disconnect your lines now.