Hexaware Technologies - Muted results; Maintain Add - BRICS

Hexaware reported muted Q3CY12 results, with revenue up 1.5% qoq to Rs5,075mn and net earnings down 5.8% qoq to Rs840mn. The growth of 1.8% qoq in US$ revenue to US$92.8mn was slightly ahead of the lower end of management's guided range of 1.5%-3% qoq. The company added 12 new clients, including one large financial services client in Europe. We have lowered our target price to Rs124 (from Rs130 earlier), as we have made a downward revision of 1.3%/11.4% to our earnings estimates for CY12/13, to account for the weakness in Q3CY12, slow project starts among Top 5 clients, momentum in large deal wins tapering off, and Rupee appreciation. Maintain ADD.

Q3CY12 results weaker than expected: Revenue growth was weak at 1.8% qoq to US$92.8%mn, as a cluster of projects among Top 5 clients came to an end. Revenue from Top 5 clients declined 2.3% qoq (down 5% qoq excluding Top client). EBITDA margin declined 130bps qoq to 21.6%, due to the impact of onshore salary hike (hike of 4% resulted in an impact of 70-80bps) and increased SGnA efforts, though pricing remained largely stable. Earnings declined by 5.6% qoq to Rs840mn.

Revenue growth guidance of 2-4% qoq for Q4CY12: Hexaware maintained its CY12 revenue growth guidance of at least 20%, while guiding for revenue of US$94.7-96.5mn for Q4 (implying a growth of 2-4% qoq). However, even after achieving the upper end of the guidance for Q4, Hexaware will still fall marginally short of its CY12 revenue guidance. The impact of "Hurricane Sandy" in the US has not been factored into the guidance for Q4 and could impact revenue growth by around 0.5%.

Outlook and valuation: The stock trades at a P/E of 9.4x CY12 and 9.6x CY13 estimates. We maintain our P/E of 10x assigned to the stock and arrive at our revised target price of Rs124 based on average of CY13-14 revised earnings. Maintain ADD rating, in view of uptrend in margin being largely over, large deal wins tapering off, and decline in revenue of Top 2-5 clients (i.e. Top 5 clients excluding Top client) for second consecutive quarter (down 5% in Q3CY12 and 1.1% in Q2CY12).

Source : Equity Bulls

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