Hexaware Technologies - Hexaware 3.0 - Strategy towards goal of USD1bn revenue; Maintain 'BUY' - TP Rs125 - PINC Research

Analyst Meet Update - Hexaware Technologies

Hexaware 3.0 - Strategy towards goal of USD1bn revenue

Focus on large clients - The large deals won during the last 4-5 quarters are from the top customers. In line with Hexaware's focus on account mining, the company has been cross selling end to end business solutions to its key clients. For 2012, ramp up in large deals provide visibility on revenue growth. However, we believe the S&M expenses will increase as the management looks beyond top 20 clients for future growth.

Focus on select services – As a strategy, Hexaware wants to focus on selected service lines where they have expertise like ERP (PeopleSoft), Testing, BI & Analytics. Emerging service line of IMS was launched in 2009 and now contributes 4% of revenue. The management has guided for 6% revenue contribution from IMS in 2012. The large deal of USD25mn won in 2011 has started to ramp up. PeopleSoft's new version 9.2 is likely to be launched in 2013 which will provide opportunities in case of upgrades.

Carved out Healthcare and Insurance vertical – Due to its synergies in the eco-system, these verticals have been clubbed together. It now contributes 16% of revenues. The regulations are driving the healthcare market, particularly in the US.

Large deals on schedule – Out of the 6 large deals won in last 4-5 quarters, 3 were from US (USD177mn deal won in July 2011, USD110mn won in July 2010 & annuity deal for USD10-15mn in April 2011). Most of the projects have started ramping up. The largest deal won to date worth USD250mn has started ramping up in Jan 2012.

Outlook and Valuations

Hexaware aspires to achieve USD1bn revenues by leveraging the recent transformations and key client relationships. By CY2013-14, the company expects to have an annual revenue run rate of USD500mn. For the near term, company has guided for 20%YoY revenue growth for CY12 and EBITDA margin of Q4 (23%) at constant currency. However, due to rupee appreciation from Q4 levels and expectation of increase in S&M expenses, we believe they will likely fall short in margin. But the sustained growth momentum and healthy deal pipeline, provides confidence of robust performance going ahead. We maintain 'BUY' rating on the stock, with a target price of Rs125 based on 12x CY12E EPS.

Source : Equity Bulls

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