Hexaware Technologies - Weak Q2 guidance; Growth likely to be back-ended - BRICS

HEXW's revenue grew 1.7% qoq to $94mn and met lower end of its guidance. Operating margin expanded 240bps qoq to 17.5%, surpassing guidance of 150-200bps, led by better utilisation. Management has guided for weak revenue growth of 0-2% for Q2 & back-ended growth in CY13. HEXW is likely to miss its annual revenue growth guidance of 10% (for which it will need to record CQGR of 6.5% over Q3/Q4CY13, assuming it achieves upper end of Q2 guidance). We have lowered our CY13/14 revenue estimates by 3%/4% to account for a weaker H1CY13. Raise TP to Rs100 (from Rs95), as we rollover to CY14 estimates, based on unchanged target P/E multiple of 9x. Maintain Add.

Revenue in-line, margins & earnings surpass estimates: Revenue grew 1.1% qoq to Rs5.07bn, on back of volume growth of 2% qoq and stable pricing. EBITDA margin expanded by 242bps qoq to 19.3%, led by improvement in utilization (+ve250bps) and onsite-offshore ratio (+ve70bps), while H1B cost (-ve70bps) and SGnA (-ve80bps) acted as a drag. Earnings at Rs793mn (up 19.8% qoq) beat our expectation due to higher forex gains of Rs23mn.

Q2 growth guidance of 0-2.1% qoq: Management has guided for a weak revenue growth of 0-2.1% qoq (to US$94-96mn), owing to closure of number of projects in Q2, but expects margins to improve. HEXW could miss its CY13 revenue growth guidance of 10%, as any delay in project re-start or ramp-up in H2CY13 will impact its ability to deliver CQGR of 6.5% over Q3/Q4CY13 required to achieve its annual guidance.

One large deal win, stable deals pipeline: HEXW signed one large deal (worth $30mn) with an existing client and added 11 new clients. HEXW is pursuing 2-3 large deals in the pipeline worth $25mn+ and expects to close at least one deal by H2CY13 end. The launch of PeopleSoft 9.2 is likely to boost its deal flow in CY13 and drive growth in CY14.

Valuation: Stock trades at P/E of 8x CY13 and 7.3x CY14 estimates. Maintain ADD with TP of Rs100 (based on 9x P/E multiple on CY14 earnings), after factoring in weak growth trajectory in near term, stable deals pipeline and valuation upside.

Source : Equity Bulls

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