Hexaware Technologies - Endurance testing underway - 1QCY20 Result Review - HDFC Securities

Maintain ADD on Hexaware based on lower rev/margin, offset by higher PAT (forex-led) and strong NN wins. Steady cash generation, marquee accounts limiting risk on high-impact verticals, and IMS recovery/BFS & HTPS outperformance ahead will mitigate near-term volume/pricing headwinds. Our TP is Rs 300, at 13x CY21E EPS (~1% change). Hexaware's rev stood at USD 211mn, -1.1/+18.2% QoQ/YoY CC with COVID-19 impact at -2 to 3% QoQ (largely dd-led). Mgmt indicated similar-to-slightly better than industry impact on rev for Jun-qtr (indicative of <5% QoQ decline), but suspended its earlier guidance of 15-17% rev growth for CY20.

Strong NN wins, BFS and HTPS vertical outperformance. Hexaware posted its strongest NN deal wins with TCV at USD 69mn (vs. USD 130mn in CY19) and strongest (organic) client adds. BFS (36.8% of rev) rebounded supported by recovery of large account following a QoQ decline over 3Q4Q. BFS and HTPS verticals (aggregating to 52.5% of rev) are expected to outperform.

Marquee logos and limited systematic risks mitigates near term dent. Sequential decline was led by Travel & Transportation vertical at -5.5% QoQ, Healthcare & Insurance vertical at -5.9% QoQ and Manufacturing & Consumer vertical at -6% QoQ. Despite the QoQ decline, segmental profitability improved for Travel & Transportation. Marquee logos in the impacted verticals as well as limited systematic risks of client bankruptcies are offsets to the temporary near-term volume & pricing impact.

IMS recovery ahead. Apps and BI & Analytics services grew whereas steep decline in services was led by IMS (expected to recover ahead) and ES. Supply factors impacting growth are limited with 99% of Hexaware's IT workforce and 80% of BPS workforce is in WFH currently (97.4% of rev being delivered WFH).

Forex boost to PAT. EBIT margin came at 11.8%, -158bps QoQ impacted by lower volume, utilisation (-60bps QoQ impact), increments (-40bps) and COVID-19 impact (-100bps) offset by lower SG&A. APAT came at Rs 1.75bn aided by forex gain of Rs 0.43bn.

Valuation and view. We remain constructive on Hexaware based on (1) Stronger sales hunting engine (NN wins), (2) Lower client concentration risk and stability in T-10 (including largest BFS ac) with continued momentum in T6-10, (3) Improvement in Travel & Transportation profitability despite the declining trend, and (4) Steady cash generation (73% OCF/EBITDA) supported by stable DSO (including unbilled) at 89 days (87 in 4Q). Factored CY20 rev growth at 3.4% (~2% organic decline) and -190bps lower EBIT%. Valuations are at 12.9x CY21E (10-yr avg. at 14x).

Shares of HEXAWARE TECHNOLOGIES LTD. was last trading in BSE at Rs.295.95 as compared to the previous close of Rs. 287.15. The total number of shares traded during the day was 255076 in over 6308 trades.

The stock hit an intraday high of Rs. 306 and intraday low of 283.35. The net turnover during the day was Rs. 74811713.

Source : Equity Bulls

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