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Hexaware Technologies
Sep10 Results: A Mixed Bag
Quick Comment: Hexaware reported double-digit
revenue growth in line with its revised guidance.
However, the low operating margin of 6.5% remains a
concern in our view. We note that management expects
margins to approach double digits in 2011.
Sep10 quarter results: Hexaware reported revenues
and EBIT ahead of our estimates. Revenues of US$61m
(+11% qoq, +12% yoy) were ahead of revised guidance
of US$60m. EBIT margins improved to 6.5% (+204bps
qoq, -1466bps yoy) despite onsite wage hikes during the
quarter. Management indicated that transition costs
related to large deal won in 2Q dragged margins by
~120bps in 3Q. Net income of Rs168m (-2.3% qoq,
-59% yoy) was below our expectations.
4Q revenue guidance: Hexaware has guided for 4Q
revenues of US$64-65m (+4.8% qoq to +6.4% qoq)
based on current rates of US$1.58/GBP and
US$1.38/Euro. Based on 4Q guidance, CY10 revenues
would be ~US$230m (+7% yoy). Annualized 4Q
guidance implies growth of ~12-13% yoy in CY11e. We
forecast CY11e US$ revenue growth of 21% yoy. So far
Hexaware has achieved EBIT margins of 5.5% in
9mCY10. We forecast margins of 9.1% for CY11e – in
high single digits instead of the double digit guidance
given by management.
Fx losses are behind us: Hexaware reported Fx loss of
Rs76m in 3Q and Rs343m YTD in CY10. The old
hedges which were taken at Rs40-41 expired in the
Sep10 quarter. Currently Hexaware has MTM Fx gains
of Rs220m in its balance sheet, which should help lower
the Fx loss in coming quarters.
Risks: A significant rupee appreciation, rising tax rates
and management inability to scale up margins are the
key risks to the stock in our view.
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