Hexaware Technologies Limited - Consistency in revenue / margins key for re-rating - Antique

Hexaware 2Q revenues grew by 0.9% QoQ to USD95mn in line with our estimates and within its guided range of 0-2% QoQ. EBIT margins however expanded by 450bps QoQ to 22% helped by currency depreciation, one off reversals in SG&A and non recurrence of visa cost incurred in 1Q.

As highlighted in our 10th July note "Likely strong 2nd Half" management expects revenue growth to accelerate and has now guided at revenue growth of 3.5%-5.5% QoQ for 3Q with margins likely to be in a band of +/-100bps. While we raise our earnings for CY13E and CY14E by 10-11% to factor 2Q margin beat, we believe volatility in revenues/ margins likely to weigh on valuations. Consequently value the stock at 9x CY13E for target price of INR112. Retain HOLD for now.

Inline revenue growth

Revenues grew at 0.9% QoQ to USD95m, in line with our estimates and within its guided range of USD94-96mn revenues. Volume growth stood at 1.5%QoQ vs. 1.9% reported in 1QCY13. Growth was led by BFSI vertical, which grew by 4% QoQ. Revenues from top client increased by 7% QoQ, contributing 13% to revenues vs.12% in previous quarter.

Likely strong 3Q

Management reiterated its stance of potential recovery in revenues during 2nd half. Uptick in new projects from existing clients, potential deal closures and revenues from PeopleSoft 9.2 upgrade opportunity likely to drive growth. It now expects revenues to grow at 3.5-5.5%QoQ during 3Q. Deal pipeline continues to be robust with two large deals in final stages of negotiation.

Margins expansion higher than expected

During 2Q EBIT margins expanded by 450 bps QoQ to 22%, 300 bps higher than our estimates. Margin expansion was largely driven by rupee, one off reversals in SG&A and non recurrence of visa cost incurred in 1Q. It now expects margins to be in the range of +/- 100bps for 3Q given depreciating rupee, leverage from higher revenue growth, partly offset by impact from wage hike for offshore employees to be implemented over 3Q and 4Q. We expect 3Q margins to decline 157bps QoQ given our assumption of 4.5% QoQ growth in USD revenues and INR / USD of 59 vs. 59.7 assumed by management.

Valuations

Stock trades at 9xCY13E and 8.6xCY14E at lower end of trading band of 8-12x. Company has retained its policy of 50% dividend payout. Consequently dividend yield at 5% is attractive. While we raise our estimates by 10-11% for CY13E and CY14E we believe volatility in revenues/ margins likely to weigh on valuations. Consequently value the stock at 9x CY13E for target price of INR112. Retain HOLD for now.



Shares of Hexaware Technologies Ltd was last trading in BSE at Rs.106.70, up by Rs.1.25 or 1.19%. The stock hit an intraday high of Rs.109.10 and low of Rs.100.65.

The total traded quantity was 12.18 lakhs compared to 2 week average of 4.18 lakhs.

Source : Equity Bulls

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