Maintain REDUCE on Hexaware Technologies - Protracted recovery path - HDFC Securities

Mr. Apurva Prasad & Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities.

We maintain REDUCE on Hexaware, following a better-than-expected 2Q, offset by a relatively slower recovery path. Key positives include the following: (1) BFS vertical strength supported by a recovery in large BFS account (mortgage); (2) continued strength in the Professional Services vertical, and market-share led gains in cloud transformation (launch of 'Amaze' solution). Key risks/negatives include the following: (1) weakness in Travel & Transportation and Manufacturing & Consumer verticals (~24% of rev) expected to continue, (2) lower discretionary spend and supply-side factors can continue to impact Application Transformation Management service-line and BPS service-line respectively. While business dynamics exhibit protracted recovery, stock price performance will trail developments around the delisting proposal. The shareholder approval for delisting (10-Aug) and the subsequent developments on offer price are likely to drive the near-term stock performance. Our target price of Rs 360, 14x Jun-22E EPS, follows ~3% EPS estimate increase for CY21E.

1QFY21 highlights: (1) Revenue performance was better than expected at -0.9% QoQ CC with supply-side impact at -0.6% QoQ. (2) Travel & Transportation vertical posted a steep decline of 27% QoQ and the BPM service-line declined 10.5% QoQ. (3) Margin outperformed with EBIT margin at 13.2%, +144bps QoQ, supported by higher utilisation and INR depreciation, offset by lower bill-rate. (4) Revenue outlook of flat to small volume growth in 3Q/4Q and 2H margin outlook at 1H margin actuals +/-30bps.

Outlook: We have factored in CY20E revenue growth at 6.7% (1.2% organic) and CY21E revenue growth at 8.9%; EBIT% factored at 12.6% each for CY20/21E translating into EPS CAGR of 11.7% over CY20-22E. At CMP, Hexaware trades at 17.0x and 15.6x CY20/21E (10-year average at 14x).

Shares of HEXAWARE TECHNOLOGIES LTD. was last trading in BSE at Rs.382 as compared to the previous close of Rs. 377.25. The total number of shares traded during the day was 109077 in over 1925 trades.

The stock hit an intraday high of Rs. 385 and intraday low of 378.5. The net turnover during the day was Rs. 41650300.

Source : Equity Bulls

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