Expleo Solutions (EXPLEOSOL) Q1 FY26: Is Revenue Growth Hiding a Profitability Problem?

As a seasoned financial analyst, I constantly scour earnings reports to unearth the true story behind the numbers. Today, we’re diving into Expleo Solutions Limited’s (NSE: EXPLEOSOL) Q1 FY26 earnings, a period that reveals a classic tale of revenue growth battling significant margin pressures.

Expleo, an IT services player, operates in a global market currently facing headwinds, as reflected in the broader Indian IT sector’s performance (underperforming due to soft global demand). So, how did Expleo navigate these choppy waters? Let’s peel back the layers.

Sales Performance: A Modest Uptick Amidst Industry Headwinds

First, the top line. Expleo Solutions reported operating revenue of Rs 2,596 million in Q1 FY26, marking a modest 1.5% quarter-on-quarter (QoQ) growth and 3.0% year-on-year (YoY) growth. While any growth is welcome in the current IT climate, this isn’t the kind of aggressive expansion seen from fast growers.

What’s driving this growth? Interestingly, the number of delivery employees decreased both QoQ (3,563 to 3,560) and more significantly YoY (3,717 to 3,560). This suggests that the modest revenue growth might be coming from increased productivity per employee or a slight price increase, rather than volume expansion through new hirings. Given the employee cost increase (2.5% QoQ, 11.5% YoY), it’s likely a mix of factors, including wage inflation.

Looking ahead, while the company maintains a steady revenue stream, the overall market trend for IT suggests that aggressive sales forecasts might be challenging to achieve. It points to Expleo being more of a ‘slow grower’ in the current environment, rather than a fast or super grower.

Operational Shifts: A Deeper Dive into Business Mix

Digging into the operational metrics reveals some important shifts:

Industry Focus: BFSI Dominance Solidifies

Expleo’s reliance on the BFSI (Banking, Financial Services, and Insurance) sector continues to strengthen, with its contribution increasing to 80.8% in Q1 FY26 from 80.4% QoQ and 77.3% YoY.

While BFSI is often a stable sector, such high concentration can be a double-edged sword. Any slowdown or disruption in this single sector could disproportionately impact Expleo’s overall performance.

Geographic Footprint: Shifting Towards North America

A notable shift is observed in regional revenue: North America’s contribution surged to 51.6% in Q1 FY26 (from 48.3% QoQ and 46.4% YoY), while Europe’s share declined significantly (from 38.8% to 36.3% QoQ and 41.4% YoY).

This pivot to North America is crucial, especially when the broader economic context suggests caution in export-linked sectors. However, if this shift is strategic and sustainable, it could unlock new growth avenues for the company.

Client Concentration & Acquisition: Fewer Clients, More Revenue from Top Ones?

The contribution from Top 5 clients increased to 34% (from 30% QoQ), and Top 10 clients now account for 54% (from 49% QoQ). This increasing concentration is a concern. While it might indicate deeper engagements with key clients, it also exposes the company to higher client-specific risk.

Compounding this, the active client count slightly decreased to 199 in Q1 FY26 from 201 QoQ and 207 YoY. This suggests that while existing large clients are contributing more, the company might be struggling to acquire new logos or losing smaller clients, a trend that warrants close monitoring for future revenue sustainability.

Digital Revenue: A Steady, but Slower Growth Engine

Digital revenue grew to Rs 1,218 million from Rs 1,209 million QoQ and Rs 1,156 million YoY. Its percentage share, however, slightly dipped QoQ (46.9% vs 48.2%). This indicates that while Expleo continues to grow its digital capabilities, the pace of transformation might be slowing, or traditional services are still growing at a faster rate proportionally this quarter.

The Profitability Puzzle: Where Did the Margins Go?

Here’s where the plot thickens. Despite modest revenue growth, Expleo’s profitability took a notable hit.

• Adjusted EBITDA plummeted by 17.1% QoQ and 16.5% YoY to Rs 331.8 million.
• The Adjusted EBITDA margin contracted significantly to 12.8% from 15.6% in Q4 FY25 and 15.8% in Q1 FY25. Ouch! 📉
• Consequently, Basic EPS also declined by 15.2% QoQ and 14.6% YoY to Rs 13.16.

So, what caused this steep decline in operational profitability? Let’s look at the expenses:

• Employee Cost: Increased by 2.5% QoQ and 11.5% YoY. This suggests higher compensation or increased hiring in specific areas, outpacing revenue growth.
• Other Expenditure: This category saw a massive 16.5% QoQ increase, rising from Rs 549.1 million to Rs 639.6 million. This is the primary culprit behind the margin erosion. Understanding the breakdown of “Other Expenditure” is critical – whether it’s travel, rentals, or other operational costs. A significant jump here, combined with modest revenue growth, directly impacts profitability.

The PAT Paradox: A Deceptive Recovery?

Despite the severe hit to EBITDA and EPS, Profit After Tax (PAT) including Other Comprehensive Income (OCI) actually increased by 4.7% QoQ and 4.2% YoY. At first glance, this looks positive, but it’s important to understand the components:

• Other Income regular: This surged by 48.2% QoQ and 104.6% YoY to Rs 44.9 million. This suggests significant non-operating income, possibly from interest on cash balances or other investments. While welcome, earnings growth heavily reliant on ‘Other Income’ rather than core operations is less sustainable and of lower quality.
• Tax Expenses: A significant 30.7% QoQ decrease in tax expenses (from Rs 114.5 million to Rs 79.3 million) also played a major role in propping up PAT. This could be due to changes in tax provisions, benefits from deferred taxes, or lower taxable profits.
• Other Comprehensive Income: This was a positive contributor, moving from a negative (Rs -4.6 million) to a positive (Rs 42.9 million) QoQ, further boosting the total comprehensive income.

In essence, Expleo’s Q1 FY26 earnings paint a picture of operational profitability under severe pressure, with the PAT figure being salvaged by external factors like higher other income and lower tax outgo. This makes the earnings growth appear less robust than a first glance might suggest, and future earnings will depend heavily on the ability to reign in operational costs and drive core business growth. Based on this, Expleo appears to be in the “slow grower” or potentially “cyclical” category, given the broader IT sector’s current challenges.

Working Capital: The Growing Debtors Dilemma

Working capital management is crucial for any business, and Expleo’s Q1 FY26 report raises a red flag here. Debtors Days jumped significantly to 104 days in Q1 FY26, up from 96 days in Q4 FY25 and 97 days in Q1 FY25.

This indicates that the company is taking longer to collect payments from its clients. If this trend continues, it could strain cash flow, requiring more working capital to fund operations, even with a strong net cash position (Rs 2,382 million, slightly down YoY). A rising debtors figure, especially when sales growth is modest, suggests potential issues in billing cycles or client payment discipline. This is definitely a metric to watch in coming quarters.

Financing & Capital Expenditure: What’s Next?

Regarding financing, Expleo’s finance costs were low at Rs 6.4 million, showing a slight decrease from previous quarters. The company’s net cash position is healthy, though it declined YoY. The presentation does not provide specific details on new capital expenditure plans or how they intend to fund them. Given the current profitability challenges, any significant CapEx would need careful consideration for funding, ideally through internal accruals to avoid increasing debt.

The Bottom Line: A Quarter of Headwinds and Strategic Shifts

Expleo Solutions’ Q1 FY26 results reflect the challenging environment for the IT services sector. While revenue saw a modest uptick, largely driven by a strategic pivot to the North American market and continued BFSI dominance, profitability took a significant hit. The sharp decline in Adjusted EBITDA and EPS is concerning, with the PAT figure appearing healthier only due to non-operational income and lower tax expenses.

Key Takeaways for Investors:

• Profitability Pressure: The erosion of EBITDA margins due to increased ‘Other Expenditure’ is the biggest red flag. Investors need clarity on the nature of these costs and management’s plan to bring them under control.
• Working Capital Strain: The rising Debtors Days signals potential cash flow challenges that need proactive management.
• Client Concentration: Increased reliance on a smaller set of top clients, combined with a declining active client count, raises questions about long-term diversification and growth.
• Strategic Shifts: The pivot to North America and deep focus on BFSI could be strategic positives if executed well, but the concentration risk bears watching.
• Earnings Quality: The significant contribution of ‘Other Income’ and reduced tax expenses to PAT improvement suggests that core operational performance needs improvement for sustainable earnings growth.

In line with the broader Indian economy context, the IT sector faces global slowdown challenges. Expleo’s performance aligns with this trend, indicating it’s not immune. Investors should focus on management’s ability to improve operational efficiency and diversify client acquisition, rather than just revenue growth. Stock-picking is indeed critical in this environment, and while Expleo has a solid cash position, its current earnings trajectory suggests it’s in a consolidation or “slow growth” phase, requiring careful monitoring for any positive “changes” in its key metrics.

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