Investment conclusion: We believe significant margin
erosion in 2010e is already in the price. The stock trades
at 9x 2011e EPS, which is at a steep discount to the
leading vendors and the broader market. This
reasonable valuation should provide support for the
stock at current levels, and we believe any positive
surprise in operating margins performance could be a
positive trigger for the stock. Maintain Overweight.
What's new: Hexaware revised its 3Q revenue
guidance from 7.5% QoQ to 9% (US$60m). We forecast
2010 revenue of US$227mn and US$274mn (+21%) in
2011e (1% above our previous estimates).
Margin recovery is needed for the stock to break
out: Having stabilized its revenue, we believe the next
target for Hexaware is to improve its operating margins
from low single digits to at least sustained low double
digits. Hexaware has achieved this in the past and with
an improving revenue outlook, we expect margins to
recover steadily. We have lowered our 2011–12e
margin assumptions due to lower-than-expected margin
rebound in 2010. We now expect margins to recover to
9.1% in 2011 and 10.2% in 2012 (~6.4% in 2010e).
What’s next: We expect Hexaware to meet its 3Q
revenue guidance. We forecast 4Q and 2010 revenue of
US$63mn (+5% QoQ) and US$227mn (+6% YoY).
Overall we expect revenue and earnings CAGR of 18%
and 40%, respectively, over 2010–12e.
Key downside risks: Slower-than-expected revenue
growth and margin improvement over the coming
quarters, unfavorable currency movements (GBP/US$,
Euro/US$, US$/INR).
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