Hexaware - 4QCY12 result update - Motilal Oswal

Hexaware's 4QCY12 results were in line with our estimates. Revenues were USD92m (v/s est of USD92.4m), down 0.4% QoQ due to a project cancellation in top client. EBIT margin declined 480bp QoQ to 15.1% (v/s est of 430bp QoQ decline). PAT was at INR637m, adjusting for the tax write-back (in-line).

- For CY13, company guided for "double digit" USD revenue growth. This still implies a 4% CQGR over 2Q-4Q, considering 1Q revenues at the midpoint of USD94-95m guided band (1.7-2.8% QoQ). On the back of cost levers, it guided for 150-200bp QoQ recovery in margins in 1QCY13.

- HEXW cited recovery in a top account despite a blip in 4Q (down 21.3% QoQ to USD10.8m). The account is expected to grow YoY in CY13 and top 10 clients should continue to contribute over half of the revenues. Oracle is expected to release its new version of Peoplesoft in CY13. However, revenues from upgrades are anticipated to accrue to HEXW largely from CY14.

- We have lowered CY13E EBITDA margin estimate by 140bp to 18.3% as the margin slide in 4Q is expected to be recovered only gradually. Lower margin estimate in CY13E drives 9.7% cut in EPS estimate for CY13E. We model conservatively and estimate CY13E USD revenue growth of 8.5%.

Valuation and view: We expect HEXW to post USD revenues at a CAGR of 10% over CY12-14E and EPS CAGR of 7%. Lower CAGR is on account of 120bp decline in EBITDA margin estimate in CY14E (19.7%) over CY12. Guidance of 4%+ revenue growth over 2Q-4Q, growth in top account and likely revenue uptick from Peoplesoft are positive cues on growth. However, failure to close large deals and high client concentration are key risks. With utilization at significantly low levels, we expect HEXW to be able to drive better margins, going forward. From valuation perspective, the healthy cash pile, board's decision to stick to ~50% payout policy and 25%+ return ratios are positives. Our target price of INR120 discounts CY14E EPS by 10x. Buy.

Source : Equity Bulls

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